(Oxford Handbooks) Gianni Toniolo-The Oxford Handbook of The Italian Economy Since Unification-Oxford University Press (2013)

The Oxford Handbook of
THE ITALIAN
ECONOMY SINCE
UNIFICATION
This page intentionally left blank
The Oxford Handbook of
THE ITALIAN
ECONOMY SINCE
UNIFICATION
Edited by
GIANNI TONIOLO
1
3
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Library of Congress Cataloging-in-Publication Data

The Oxford handbook of the Italian economy since unification / edited by
Gianni Toniolo.
p. cm.
Includes bibliographical references and index.
ISBN 978–0–19–993669–4 (cloth : alk. paper)
1. Italy—Economic conditions.
2. Italy—Economic policy. I. Toniolo, Gianni, 1942–
II. Title: Handbook of the Italian economy since unification.
HC305.O94 2013
330.945c09—dc23
2012017352
ISBN 978–0–19–993669–4
1 3 5 7 9 8 6 4 2
Printed in the United States of America
on acid-free paper
Contents
Contributors ix
Foreword: Mario Draghi and Ignazio Visco xi
Map: The Italian Peninsula before Unification (1848) xiii
Map: Italy, present day xiv
PART I AGGREGATE GROWTH AND POLICY

1. An Overview of Italy’s Economic Growth
Gianni Toniolo 3
2. Italy and the First Age of Globalization, 1861–1940
Harold James and Kevin H. O’Rourke 37
3. The Golden Age and the Second Globalization in Italy
Nicholas Crafts and Marco Magnani 69
4. Italy, Germany, Japan: From Economic
Miracles to Virtual Stagnation
Andrea Boltho 108
5. The Italian Economy Seen from Abroad
Marcello de Cecco 134
PART II SOURCES OF GROWTH AND WELFARE

6. National Accounts, 1861–2011
Alberto Baffigi 157
7. Productivity
Stephen N. Broadberry, Claire Giordano, and
Francesco Zollino 187
8. Standards of Living
Andrea Brandolini and Giovanni Vecchi 227
vi contents
9. Human Capital
Giuseppe Bertola and Paolo Sestito 249
10. Migrations
Matteo Gomellini and Cormac Ó Gráda 271
11. Democratization and Civic Capital
Luigi Guiso and Paolo Pinotti 303
PART III INTERNATIONAL COMPETITIVENESS

12. A Long-Run Perspective on Comparative Advantage
Giovanni Federico and Nikolaus Wolf 327
13. Real Exchange Rates, Trade, and Growth
Virginia Di Nino, Barry Eichengreen, and
Massimo Sbracia 351
14. Innovation and Foreign Technology
Federico Barbiellini Amidei, John Cantwell, and
Anna Spadavecchia 378
15. Old and New Italian Manufacturing Multinational Firms
Fabrizio Onida, Giuseppe Berta, and Mario Perugini 417
PART IV FIRMS, BANKS, AND THE STATE

16. Technology, Firm Size, and Entrepreneurship
Franco Amatori, Matteo Bugamelli, and Andrea Colli 455
17. Resource Allocation by the Banking System
Stefano Battilossi, Alfredo Gigliobianco, and
Giuseppe Marinelli 485
18. Public Debt and Economic Growth: Italy's First 150 Years
Fabrizio Balassone, Maura Francese, and
Angelo Pace 516
19. Why the Italian Administrative System Is a Source
of Competitive Disadvantage
Magda Bianco and Giulio Napolitano 533
contents vii
PART V THE REGIONAL DIVIDE

20. Regional Convergence
Giovanni Iuzzolino, Guido Pellegrini, and
Gianfranco Viesti 571
21. Regional Disparities: Internal Geography and External Trade
Brian A’Hearn and Anthony J. Venables 599
Data Appendix—Italy’s National Accounts (1861–2010)

Alberto Baffigi, Stephen N. Broadberry, Claire Giordano,
Francesco Zollino 631
References 713
Index 773
Contributors
Brian A’Hearn: Pembroke College, Oxford

Franco Amatori: Università Commerciale Luigi Bocconi
Federico Barbiellini Amidei: Banca d’Italia
Alberto Baffigi: Banca d’Italia
Fabrizio Balassone: Banca d’Italia
Stefano Battilossi: Universidad Carlos III de Madrid
Giuseppe Berta: Università Commerciale Luigi Bocconi
Giuseppe Bertola: EDHEC Business School
Magda Bianco: Banca d’Italia
Andrea Boltho: Oxford University
Andrea Brandolini: Banca d’Italia
Stephen N. Broadberry: London School of Economics
Matteo Bugamelli: Banca d’Italia
John Cantwell: Rutgers Business School
Andrea Colli: Università Commerciale Luigi Bocconi
Nicholas Crafts: University of Warwick
Marcello de Cecco: Scuola Normale Superiore di Pisa
Virginia Di Nino: Banca d’Italia
Barry Eichengreen: University of California, Berkeley
Giovanni Federico: European University Institute
Maura Francese: Banca d’Italia
Alfredo Gigliobianco: Banca d’Italia
Claire Giordano: Banca d’Italia
Matteo Gomellini: Banca d’Italia
Luigi Guiso: Einaudi Institute for Economics and Finance
x contributors
Giovanni Iuzzolino: Banca d’Italia

Harold James: Princeton University
Marco Magnani: Banca d’Italia
Giuseppe Marinelli: Banca d’Italia
Giulio Napolitano: Università degli Studi Roma Tre
Cormac Ó Gráda: University College Dublin
Kevin H. O’Rourke: University of Oxford
Fabrizio Onida: Università Commerciale Luigi Bocconi
Angelo Pace: Banca d’Italia
Guido Pellegrini: Sapienza Università di Roma
Mario Perugini: Università Commerciale Luigi Bocconi
Paolo Pinotti: Università Commerciale Luigi Bocconi
Massimo Sbracia: Banca d’Italia
Paolo Sestito: Banca d’Italia
Anna Spadavecchia: University of Reading
Gianni Toniolo: LUISS–Roma and Duke University
Giovanni Vecchi: Università degli Studi di Roma Tor Vergata
Anthony J. Venables: University of Oxford
Gianfranco Viesti: Università degli Studi di Bari Aldo Moro
Nikolaus Wolf: Humboldt University Berlin
Francesco Zollino: Banca d’Italia
Foreword
In 2011 Italy celebrated the 150th anniversary of the unification of the peninsula,
previously composed of seven states, into a single Kingdom of Italy.
In 1893, after three decades marked by the coexistence of six issuing banks,
the Bank of Italy was established as the country’s central bank. From its cre-
ation onwards, the Bank played a key role in promoting Italy’s economic devel-
opment and, at times, its modernization. It is therefore not surprising that it
chose to join in the celebrations by organizing an exhibition on the monetary
unification of the country and by promoting an international research project
on “Italy and the World Economy, 1861–2011”. The aim of the project was to
enhance the understanding of Italy’s long-term economic growth. Contributors
to the research included internationally prominent economists and economic
historians, Italian scholars, and members of the Bank’s research departments.
Preliminary results were discussed at a workshop held in Perugia in December
2010; revised papers were presented at a Conference held in Rome in October
2011 and, with further revisions, they are now published in the present volume,
a true handbook of the quantitative economic history of Italy.
Since its unification in 1861, Italy has been one of the ten largest economies
in the world. However, the features of its “modern economic growth” are less
internationally known than those of other countries of similar or lesser size.
We trust that this book will help to bridge the knowledge gap concerning Italy’s
long-term economic development.
A latecomer to modern industrialization, in 1861 Italy was a backward coun-
try at the periphery of Europe’s industrial revolution. In the first three decades
after unification the new Kingdom had to win the trust and respect of its neigh-
bours, while at the same time creating new institutions and a single currency,
and slowly unifying the domestic market. From the late nineteenth century
onwards, the Italian economy largely converged on those of the most advanced
European countries, with which it became increasingly integrated. There are
several reasons why this process of convergence should be of interest to anyone
curious about both the general pattern and the specifically Italian features of
modern economic growth. Among the latter, scores of scholars have empha-
sized the vitality of Italy’s small and medium-sized enterprises, capitalizing on a
secular tradition of widespread craftsmanship, the peculiar institution of formal
and informal industrial districts, and the important role played by state-owned
enterprises in promoting technical transfer, innovation, and managerial culture.
On the negative side, a much studied peculiarity of the Italian economy is the
xii foreword
stubborn persistence of the most pronounced case of regional income inequality

in Europe, the North-South divide.
Perhaps the most important reason why Italy’s economic history since uni-
fication is of interest, both inside and outside the country, lies in the economic
link between Italy and the rest of Europe, which became increasingly tight with
the passing of time. Italy’s economic growth could not have been as successful
as it was in the absence of the progressive integration of the country with the
rest of the continent. When, in the 1930s, autarky tried to shield Italy from its
natural markets and competitors, the economy suffered a serious setback. At the
same time, the sheer size of the Italian economy, together with its rapid growth,
had a considerable impact on the overall development of Western Europe, an
impact that has often been overlooked by scholars and policy makers alike.
Immediately after the end of the Second World War, in the most desperate
political, social, and economic conditions experienced in the last 150 years, Italy
chose to link its future to that of its European neighbours. It was not an easy
choice. It required both courage and vision on the part of the country’s leaders.
The European choice strengthened the re-established democracy, which in turn
fostered both economic growth and further European integration. The partici-
pation of Italy, as a founding member, in the European Economic Community
(later the European Union) had a lasting influence on the culture, the society,
and the political evolution of the country, an influence that went far beyond
the positive impact of economic integration on Italy’s economic development.
For their part Italy’s European partners benefited not only from stronger inter-
relations with a large growing economy but also from the contribution of Italy’s
centuries’ old civilization to the building of Europe.
As in the past, the commitment to a Union of stability and growth is still
the answer to the challenges of the difficult period we are currently facing.
Mario Draghi (President of the European Central Bank

and former Governor of Banca d'Italia) and
Ignazio Visco (Governor of Banca d'Italia).
Frankfurt am Main and Rome, September 2012

MAP 1
Map: The Italian Peninsula before Unification (1848)

MAP 2
TRENTINO A.D.
Trento FRIULI V.G.
V. D’AOSTA
Aosta LOMBARDIA! Trieste
VENETO Venezia
Milano
PIEMONTE
Torino
Bologna
Genova EMILIA R.
LIGURIA
Firenze Ancona
MARCHE
TOSCANA!
Perugia
UMBRIA
L’aquila
ABRUZZO
LAZIO
Roma MOLISE
Campobasso
Bari
CAMPANIA PUGLIA
Napoli BASILICATA
Potenza
SARDEGNA
CALABRIA
Cagliari Catanzaro
Palermo
SICILIA
Map: Italy, present day

the oxford handbook of
THE ITALIAN
ECONOMY SINCE
UNIFICATION
Part I
AGGREGATE
GROWTH AND
POLICY
CHAPTER 1
AN OVERVIEW OF
ITALY’S ECONOMIC
GROWTH
gianni toniolo
On May 5, 1860 when Garibaldi’s one thousand red-shirt volunteers, boarded

the two steamships that would ferry them from Quarto in Liguria to the
Sicilian port of Marsala, the Italian peninsula was a poor and slow-growing
“geographical expression” (in Metternich’s words) at the periphery of Europe.
Less than a year later, on March 17, 1861, this “geographical expression” became
the Kingdom of Italy. In the following decade, the unification process was
largely accomplished with the acquisition of the Venice region (1866) and of
Latium, the remaining territory under the rule of the Roman Pontiff (1870).
A few numbers suffice to describe the new kingdom’s absolute poverty. Its
gross domestic product (GDP) per person was roughly equal to the average of
today’s “richest” 42 African countries (Maddison 2001). Life expectancy at birth
was about thirty years, considerably lower than in any of today’s least developed
countries. Almost one baby out of three did not reach its first birthday. Four
Italians in five were illiterate; recruits were short, averaging only 163 centime-
ters; and income distribution was extremely unequal (the Gini coefficient for
1861 was 50.4; Vecchi 2011, 430; see chapter 8). Income inequality was mirrored
in expenditure (Rossi, Toniolo, and Vecchi 2001) and caloric-intake inequal-
ity. Although around 1861 a daily availability of about 2,500 calories per person
made Italians on average better nourished than citizens of other countries with
similar GDP per person, for as many as 30 percent of Italians the caloric intake
did not reach 2,000 calories per day, making them chronically undernourished
4 aggregate growth and policy
Table 1.1 Welfare indicators: 1861 and 2011

1861 2011
GDP per person (euros at 2010 prices) 2,190 25,668
Life expectancy at birth 30 82
First year death rate (per 1,000) 289 4.5
Income distribution (Gini coefficient) 0.50 0.33
People in absolute poverty (% population) 40 5
Literacy rate (% population) 22 98
Sources: Chapters 6 and 8.
(Vecchi 2011, 12–23; Vecchi and Coppola 2006). About 40 percent of the popula-
tion was close to or below an absolute poverty line defined as “sufficient income
to buy the essentials of life” (Vecchi 2011, 295), equal to 1.5 euros per day per
person at 2010 purchasing power.
In the 150 years since political unification, Italy’s GDP per person multi-
plied by about twelve (see chapter 6). Life expectancy at birth has grown to
eighty-two years (one of the longest in the world); only 0.45 percent of chil-
dren die in their first year (the comparable figure is 0.7 percent in the United
States); income distribution is much more egalitarian (the Gini coefficient is
about 0.33); and absolute poverty has been reduced to 4 percent of the popula-
tion (see chapter 8).
Striking as these figures are (Table 1.1), Italy’s progress in production and
welfare is broadly similar to the progress made by other Western European
countries from the beginning of their “modern economic growth” (Kuznets
1967a) to the present day. Even so, Italy’s case is worth studying for the follow-
ing reasons: (1) despite progress made in the last couple of decades, Italy’s quan-
titative economic history has thus far been underresearched; (2) its long-term
economic history is important to shed light on the country’s poor economic
performance since the beginning of the twenty-first century; (3) Italy’s sheer
size also makes it an important contributor to Europe’s long-term growth; and
(4) its growth pattern and growth factors present similarities to those of other
European countries, but also not entirely understood peculiarities.
This book is the fruit of new research on Italy’s “modern economic growth”
conducted on the occasion of the sesquicentennial of the country’s political
unification. Chapters 2 and 3 provide an overview of Italy’s economic progress
in the period before and after the Second World War, respectively, focusing on
the major policy issues. The other chapters, mostly coauthored by Italian and
foreign scholars, contain the outcomes of their research on specific issues in
Italian economic history. The expert reader will note that the chapters contain
a considerable amount of fresh quantitative findings that advance the knowl-
edge of Italy’s growth experience in a number of fields, including new national
an overview of italy’s economic growth 5
accounting and productivity statistics; welfare (including income distribution)

indicators; and measures of human and social capital, comparative advantages,
real exchange rates, public finance, innovation (patents), firm size, migration
flows, and efficiency of the banking system. Two chapters are devoted to the
thorny issue of Italy’s persistent geographic disparities. The book also contains
a comparison of the post–World War II growth in the three countries who “lost
the war but won the peace,” a view of Italy from abroad, and case studies of
Italian multinationals.
This introductory chapter draws from these research findings to sketch a
“tale of convergence and two tails.” Framed in a standard convergence nar-
rative, Italy’s economic history from 1861 to 2011 is characterized by a central
period of about a century (mid-1890s to early 1990s) of robust catch-up, framed
between two “tails” of sluggish growth (1861–1896 and 1992–2011) when the
country lost ground to the productivity leaders. In the following pages the main
features of Italy’s economic growth since 1861 are outlined and explanations for
the secular rapid growth and for the disappointing beginning and final periods
are advanced.
A Tale of Convergence and Two Tails

To assess the economic performance of united Italy, the country’s initial back-
wardness must be taken into account. Gerschenkron (1962a) argued that, if and
when a “traditional economy” manages to overcome the “stumbling blocks” on
the road of “modern economic growth,” then initial backwardness may prove to
be an “advantage,” allowing for faster growth than in more advanced countries.
Today’s economists talk about convergence of low-income countries on those
with higher income. Since the early 1800s, catch up by lower-income coun-
tries is a key feature of the pattern of “modern economic growth” as described
by Kuznets (1967a). Less developed countries grow faster than the productiv-
ity leaders by borrowing technology from them at a low cost and adapting it
to their own comparative advantages, by cheaply transferring resources from
low-productivity agriculture to high productivity manufacturing, by exporting
labor-intensive products, and by the emigration of their unskilled workers. The
long-run economic performance of a given country must, therefore, be assessed
taking into account its initial relative level of development, as measured by GDP
per person. How economically backward was the Italian Peninsula at the time
of its political unification?
From the thirteenth to the sixteenth century, Northern-Central Italy was
perhaps the most prosperous European region. In 1500 its GDP per person was
about 35 percent higher than Western Europe’s average. From about the middle
of the seventeenth century onward, Italy began to lose economic ground relative
Table 1.2 Italy and the advanced countries: GDP per person, 1500–1870
Italy United France Germany Japan Western Italy as a
Kingdom Europe share of
Western
Europe (%)
1500 1,100 714 727 676 500 796 138
1820 1,117 1,706 1,135 1,135 669 1,245 89
1870 1,499 3,031 1,876 1,876 737 2,088 72
Source: Maddison (2001).

US dollars at 1990 purchasing power parity.
to the faster growing northwestern part of the continent. In the eighteenth cen-
tury output in the Peninsula hardly kept up with population growth. According
to Malanima (2005 and 2006), by the end of the eighteenth century the aver-
age citizen of Central and Northern Italy might have been about 20 percent
worse off than their ancestors had been two or three centuries earlier. During
the Napoleonic wars, Italy’s real GDP per person probably reached its lowest
level since the fourteenth century. This view is somewhat more pessimistic than
Maddison’s (2001), on which Table 1.2 is based. There is broad agreement that
slow recovery started in the 1820s, possibly slightly accelerating in the 1850s.
At the time of unification, Italy’s income per person, allowing for purchas-
ing power parity was roughly half that of Great Britain, the productivity leader
of the time, and about two-thirds that of France, a neighboring and in many
ways similar country to Italy (Maddison 2001). More generally, Italy lagged
behind the Northwestern corner of the continent. Indirect indicators, such as
life expectancy, infant mortality, height of recruits, and literacy rates, are all
consistent with Italy’s relative backwardness. The composition of employment
was typical of a backward economy, with agriculture’s share of full-time equiv-
alent labor accounting for as much as 63.2 percent, followed by the services sec-
tor (19.1 percent) and industry (17.7 percent). The Italian Peninsula also lagged
behind the more advanced parts of the continent in terms of social overhead
capital (infrastructure). In 1861 there were only 2,404 kilometers of rail in oper-
ation, almost entirely located in the northern Po Valley, against 14,603 in Great
Britain (smaller in size than Italy) and 11,603 in the area of the future German
Reich (however almost twice as large as Italy).
At the beginning of 1859, the Italian Peninsula was divided into eight states
(including the tiny Republic of San Marino, which did not become part of the
new kingdom), with varying degrees of backwardness (see map on p. xiii).
Almost two millennia of disunion had produced deeply rooted cultural and
institutional differences across the Peninsula. In particular, around 1861, esti-
mates of the number of persons capable of shedding their local languages or
dialects and communicating in Italian vary from 2.5 percent (De Mauro 1991)
to about 10 percent (Castellani 2009) of the population. French was the working
language of the Sardinian parliament based in Turin. How deep were regional
economic differences at the time of unification? The question is not trivial,
given the persistence of the North-South divide throughout the 150 years after
unification. The issue of “initial conditions” looms large on the never-ending
debate about the “Southern Question.” Was the economy of the Kingdom of the
Two Sicilies (by and large coinciding with today’s Mezzogiorno) substantially
less developed than the country’s northwestern corner? If so, the new state can
only be “blamed” for not closing an already existing gap. Or was Southern Italy
almost as developed as (some say even more developed than) the Northwest? In
this case, the new Kingdom of Italy would be guilty of having actually created
a hitherto nonexisting North-South divide. Despite a new wave of quantitative
research the issue unfortunately remains unresolved.
Estimates of regional GDP for the early years of unified Italy are still ten-
tative; they become more solid from the 1890s onward. Daniele and Malanima
(2007), on the basis of their assessment of national GDP per head in the eigh-
teenth and early nineteenth centuries, argue that when average national income
is close to subsistence, regional disparities cannot be wide. According to Felice
(2007), in 1871 GDP per head for the whole South was about 10 percent below
the national average with a large within-South variance (Calabria being better
off than most northern and central regions). For the same year, the authors
of chapter 20 estimate manufacturing value added per person in the South
to be about 30 percent below the Northwest’s, but only 10 percent below the
nation’s average. Fenoaltea (2007) points to an East-West gap in addition to the
North-South divide.
The notion of an initial relatively small income gap between the northwest-
ern and southern parts of the country is not entirely consistent with the large
gaps revealed by some indicators of well-being, normally quite strongly corre-
lated with GDP per person. In 1861, the average height of recruits was 163.7
centimeters in the Northwest (165.2 in the Northeast) versus 160.9 in the South
(Vecchi 2011, 57). Only 15 percent of the population aged over fifteen years could
read and write in the South versus 47.9 percent in the Northwest (Vecchi 2011,
425). These data are mirrored in a higher incidence of child labor in the South
than in the rest of the country (Vecchi 2011, 147; Toniolo and Vecchi 2007)
and in lower rates of school attendance. Less clear-cut are indications on the
North-South gap coming from measures of life expectancy at birth and infant
mortality. Although a wide regional dispersion in the life expectancy and infant
mortality indicators existed at the time of unification, no precise latitudinal pat-
tern emerges: citizens of Liguria enjoyed the longest life expectancy (thirty-six
years), and those of Basilicata the shortest (28.5), but the second longest life
expectancy was recorded in Apulia (for a map of Italian regions see p. xiv).
Despite the enormous progress recently made in quantifying regional income
and living standards at the time of unification, evidence remains sufficiently
contradictory to settle the long-standing debate on whether or not the new state
2.5
FIN NOR
SWE
2.0 SPA CANAUT
ITA DEN USA
FRA SWI NED
GER
1.5 BEL AUS
UK
1.0
0.5
0.0
6.8 7.0 7.2 7.4 7.6 7.8 8.0 8.2
Log of per capita GDP
Figure 1.1 Unconditional convergence, 1870–2008
Sources: Adapted from Maddison (2001) and OCSE (http://stats.oecd.org/).
is to blame for creating a “Southern Question.” Scholars are still unable to adju-
dicate between Fortunato (1973 [1904])’s thesis, which emphasized the unkind-
ness of nature in the South, the persistence of feudal power, the low level of
physical and human capital, and the trade disadvantages created by geography
(see also chapter 21), and Nitti’s (1958 [1900]) opinion, which instead stressed
the accumulated gold and silver wealth of the Bourbon Kingdom, its low public
debt, and the postunification diversion of Southern savings to the payment of
social overhead capital in the North. On the basis of all available evidence, one
can only conclude that a fairly wide dispersion of regional indicators of income
and welfare existed at the time of unification (not confined to the traditional
North-South representation), and that the North-South divide, although evident
in several dimensions, is likely to have been less pronounced than it became at
later times (see chapter 20).
Starting from the conditions of economic backwardness described previ-
ously, between 1870 (the first year when internationally comparable data exist
for a large number of countries) and 2008 Italy’s real GDP per person grew
at an annual average growth rate of 1.9 percent, slightly higher than Western
Europe’s rate and about the same as the United States’ rate.
Figure 1.1 plots the results of a simple unconditional convergence exercise
for a number of today’s “advanced” countries. Italy’s growth rate, together
with that of Spain and Germany, seems to be somehow lower than expected
given its GDP per person in 1870. Why, over the 150 years after unification, did
the Italian economy slightly underperform with respect to its initial catch-up
potential? In trying to frame an answer, we shall consider the time pattern of
Italy’s growth characterized by a central period of robust catch-up to the more
advanced countries with two “tails” of sluggish growth on each side.
Table 1.3 A tale of convergence and two tails

1870–1896 1896–1992 1992–2010
Italy 0.6 2.4 0.5
France 1.4 2.0 1.0
Germany 1.5 1.9 1.2
United Kingdom 1.1 1.4 1.8
United States 1.4 2.0 1.5
Japan 1.2 3.1 0.7
Sources: Maddison (2001), http://stats.oecd.org/ Chapter 6, and Data Appendix.
From the mid-1890s to the early 1990s, the narrative of Italy’s economic
development can be framed in the catching-up paradigm: one of Europe’s
“peripheral” countries converging to the “core” of the early industrializers. A
backward country at the turn of the end of the nineteenth century, for a hun-
dred years Italy grew faster than the main Western European countries and the
United States (Table 1.3).
Italy’s economic history, in its first and final tails, however, is also proof
that convergence does not necessarily follow from initial backwardness. For
more than a generation after unification, the new country failed to exploit its
“latecomer’s advantages” in a rapidly expanding Atlantic economy to catch up
with its most prosperous Northwestern neighbors. From 1861 to about 1896,
rather than catching up, Italy fell behind the more advanced areas of Western
Europe.
The economic history of the fifteen-odd years before the Great Recession of
2008–2009 is also characterized by slower growth rates than the rest of Western
Europe (itself an area not shining for rapid growth). This is, however, not so
much a story of failing to catch up, since Italy’s GDP per head was then close
to Western Europe’s average, as rather one portraying the more subtle malaise
of a slow, progressive relative decline; malaise already suffered by the Peninsula
in the eighteenth century.
The Years 1861–1896: Tenuous Growth

and Unfulfilled Expectations?
Italy’s political unification took place at a time when the so-called first global-
ization was unmistakably under way, driven by technical change in transpor-
tation and communication and by a steady movement toward free trade, with
“modern economic growth” gaining speed and spreading from the northwestern
cradle of the industrial revolution to the European periphery. After the repeal
of the Corn Laws, European average tariffs kept falling throughout the 1850s
(Findaly and O’Rourke 2007,396). In January 1860, France and the United
Kingdom signed the Cobden-Chevalier treaty, which by incorporating the “most
favored nation” clause opened the way to further reductions of import duties
throughout Europe. As a result, international trade increased. More generally,
in the 1850s and 1860s, Western Europe’s GDP per head grew at a good pace,
particularly in the lands of the future German Reich (1.6 percent per annum
in 1850–1870 versus 0.4 percent per annum in the previous twenty years). Great
Britain and France also grew at relatively good rates.
The timing of political unification, therefore, was not “ill chosen” from the
vantage point of economic growth. International conditions in the so-called
Atlantic economy favored trade, capital inflows, labor mobility, and the transfer
of technology from the more advanced industrial “pioneers.” These conditions
notwithstanding, for about thirty-five years growth-acceleration eluded the
Kingdom of Italy. Rather than forging ahead, the Peninsula lost ground to the
productivity leaders. The secular relative decline continued, despite unification.
If the economy was not the main ideologic and political driver of the
Risorgimento, it was nonetheless present in the minds of its architects (Ciocca
2007, 70–77). A customs union modeled on the Zollverein was proposed in the
1840s, and advocated by France in the wake of the 1859 Villafranca armistice,
which stopped in its tracks the eastward thrust of the French-Piedmontese
armies. The liberals who forged unification saw protectionism, particularly in
the Kingdom of Naples, as an unwise choice for small economies at times of
rapid integration of the Western European economies. In the 1850s, Piedmont’s
free trade coupled with a program of public investment in transport infrastruc-
ture showed that such policies could result in growth acceleration. However, the
idea that unification per se would perform the miracle of raising the welfare of
the Italian people was illusionary in the absence of sufficient “social capability
for growth” (Abramovitz 1989).
From unification to the second part of the 1890s, Italy’s GDP per per-
son grew an annual average rate about half that of the United Kingdom, the
acknowledged economic superpower of the time (Table 1.3). Population grew by
0.65 percent per annum and total GDP by 1.24 percent. The average growth rate
(1861–1897) of value added by agriculture was 0.97 percent per annum, by the
service sector 1.37 percent, and by industry 1.56 percent (all data at present-day
borders; see chapter 6 and appendix).
It is now possible to measure the sources of growth for this period (see
chapter 7). In the first two decades after unification, agriculture led total fac-
tor productivity (TFP) growth (0.6 percent per annum), with industry and ser-
vices lagging behind at close to zero productivity increase. Growth in GDP was
largely driven by labor and capital inputs: the number of full-time equivalent
workers grew faster than total population (on average 0.74 percent per annum).
According to the 1881 population census, labor force participation reached
55 percent, the highest level in the economic history of united Italy. After a
sluggish growth in the 1860s, fixed-investments grew annually by 5.7 percent
between 1869 and 1888, at the peak of a cyclical boom followed by a long and
deep recession.
Slow growth in the thirty-odd years after unification has been variously
explained. The debate was particularly lively in the 1950s and 1960s, when the
first output statistics (GDP and industrial value added) for the period were
compiled (Istat 1957; Fuà 1975). Explanations ran from infrastructure being a
prerequisite for growth (Romeo 1959), to the lack of an agrarian reform (Sereni
1971), to “agents of industrialization” (universal banks) being created only in the
mid-1890s (Gerschenkron 1962a). The debate was framed in the language, fash-
ionable at the time, of take-offs and big-spurts or of Marxian “original accu-
mulation.” Objection to such categorizations led to lines of research focusing
on slow but steady growth acceleration as in the British industrial revolution
(Bonelli 1994), or on the international cycle induced by fluctuations in interna-
tional capital movements (Fenoaltea 1988, 2011b).
In the early 1990s Zamagni (1993, 81) argued that the existing quantitative
evidence only “allowed to postpone” a final judgment on slow growth after uni-
fication: the old question about why, for over a generation, catching up was
precluded to this latecomer to Europe’s modern economic growth remained an
open and interesting one.
To answer this question, a preliminary query must be addressed: in what
ways was Italy’s growth potential enhanced by the political unification that was
almost completed in 1870? Unification entailed two processes, each with its own
economic implication: the fusion of seven states into a single sovereign entity,
and the establishment of independence from foreign domination or influence.
Independence also implied the belated end of absolute monarchies.
From an economic viewpoint, the most obvious result of the establish-
ment of the Kingdom of Italy in 1861–1870 was the emergence in the Italian
Peninsula of the world’s eighth largest economy (Table 1.4). Poor as they were,
the Italians were numerous. In 1870, the population of the new kingdom totaled
about 26 million, whereas the Kingdom of Naples, by far the most populous
among the preunification states, only counted 9 million subjects. The advan-
tages of a large single market had not escaped the moderates, such as Vincenzo
Gioberti, who had advocated a federation of independent states and a customs’
union rather than outright unification in a single sovereign state (Gioberti
1845). A priori, therefore, the most obvious economic benefit deriving from
political unification would come from the creation of a large single market out
of a number of small closed economies, with the attendant improvement in
resource allocation and economies of scale, particularly relevant for the most
dynamic sectors of the so-called second industrial revolution. Although the
degree of openness (import plus exports/GDP) of the Kingdom of Sardinia was
about 40 percent (Graziani 1960), that of Lombardo-Veneto, the two Emilian
Duchies, and Tuscany was only 20 percent. The Papal States and the Kingdom
Table 1.4 The G10 in 1870 and 1998: Shares in world GDP (1990 PPP
dollars) and population (%)
1870 1998
GDP POP GDP POP
China 17.2 28.2 11.0 21.0
India 12.2 19.2 5.0 16.5
United Kingdom 9.1 2.5 3.3 1.0
United States 8.6 3.2 21.9 4.6
Russia 7.6 7.0 3.4 4.2
Germany 6.5 3.1 4.2 1.4
France 6.5 3.0 3.4 1.0
Italy 3.8 2.2 3.0 1.0
Japan 2.3 2.7 7.7 2.1
Spain 2.0 2.0 1.7 0.7
Rest of the world 24.2 26.9 25.3 46.5
Source: Data from Maddison (2001).
of Naples lagged behind with ratios of about 10 percent (Zamagni 2007, 42–43;
see chapter 6). Moreover, the Bourbon Kingdom of Naples (excluding Sicily)
traded almost entirely overseas, with Italian trade accounting only for about 13
percent of its exports (Graziani 1960). Market unification would, therefore, also
imply a considerable amount of trade diversion, particularly considering that
the Austrian Kingdom of Lombardo-Veneto was part of the Habsburg customs’
union.
In addition to market unification, to assess the potential economic impact of
independence from foreign domination and constitutional government, institu-
tions at large must be taken into account: the adoption of civil and commercial
codes, the introduction of checks and balances between government branches,
the diffusion of compulsory elementary education, and increased freedom of
enterprise all spring immediately to mind as potentially growth-enhancing fac-
tors (see chapter 19). In addition, benefits would come from the necessary com-
plements to market unification: single currency, homogeneity of weights and
measures, unified regulation of financial intermediaries, uniformity of taxation,
a single tariff, commercial treaties, and the like. The end of foreign dominance
might also have had a direct impact on growth, in so far as some policy deci-
sions were made more in the interest of foreign than domestic citizens (the port
of Venice, for example, was left with little investment by the Austrians who
instead privileged Trieste, their traditional sea outlet (Toniolo 1977a). Moreover,
one might assume that the government of a large single country would be more
successful in international economic negotiations than those of uncoordinated

individual small states.
If these were the exante potential benefits of unification, expost Italy’s
growth in 1861–1896 showed that they were either too small or not adequately
exploited. Why then did a larger market and new institutions not impact on
growth for a long period of time after 1861?
Part of the explanation is quite simple: political unification was only a pre-
condition to market unification. Its actual implementation took time. The reduc-
tion of transportation costs depended on building railways, roads, and harbor
infrastructures. Italy’s orography made the task expensive and time-consuming
(Fenoaltea 1983, 1984). The new Kingdom was relatively efficient in connect-
ing the main urban centers of the country by rail: if in 1861 trains could reach
only as far south as Ancona on the Adriatic coast and no connection existed
south of Genoa on the Tyrrhenian side, by mid-1864 one could already travel by
train as far south as Bari. In 1870 it was possible to reach Naples from Milan
and Turin and to cross the Peninsula from Rome to Ancona and from Naples
to Bari (Ciocca 2007, 87). However, as was persuasively argued by Fenoaltea, a
consistent reduction in transportation cost derived only from the construction
of the so-called secondary lines, connecting the main to the lesser cities and
spreading from the coast to the interior: a longer task that produced its fruits in
reducing price differentials across the country not earlier than in the 1880s.
The replacement of old monies with the new single currency (the
Piedmontese lira renamed Italian lira) was slow: by 1870 only 57 percent of the
pre-1861 money stock had been changed into lira, and the last large chunk of
Neapolitan minted silver was only brought to the Treasury for change in 1894
(De Mattia 1959). The unification of weights and measures was equally slow.
Financial market integration, as measured by bond price differentials across the
regional stock exchanges, did not take place until the early 1880s (Toniolo, Conte,
and Vecchi 2003). Only by that time can infrastructure and market-institution
be seen as sufficiently advanced for the economy to take advantage of a single
market that was therefore only “announced” in 1861, but took at least two full
decades to materialize.
Institution building was also slow (see chapter 19). A Civil Code of French
imprint but containing numerous idiosyncratic norms was voted by Parliament
in 1865 together with a Commercial Code, regulating business practices, which
derived directly from the Code of the Kingdom of Sardinia with minor modi-
fications. Only in 1882 did Italy introduce its own new Commercial Code
based on the “revolutionary” premise that, in business matters, commercial law
should prevail over the civil discipline. As argued in chapter 19, the creation of
a national bureaucracy and of a set of administrative laws turned out to be not
as growth-friendly as elsewhere in Europe.
Human capital creation was even slower than the building of infrastructure
and institutions (see chapter 9). Compulsory primary education (for three years)
was introduced immediately after unification but its implementation, mandated
to local (city) governments, was poorly funded and supervised. Only in the first
decade of the twentieth century did the national government take over the task
of providing free and compulsory five-year elementary education. Despite these
shortcomings, literacy in the population aged 15–19 rose from 27 percent in 1861
to 45 percent in 1881 and 62 percent in 1901(Vecchi 2011, 425), albeit with huge
regional disparities.
Slowness in the implementation of the single market, in human capital cre-
ation, and in the diffusion of modern legal institutions accounts for part of the
failure of the new-born state to immediately catch up with its richest European
neighbors. External shocks and policy mistakes also delayed convergence.
In its first decade, the New Kingdom fought two wars (in 1866 and 1870),
with the attendant suspension of convertibility of the lira and increase in gov-
ernment spending. Southern brigandage—a mix of social unrest and legiti-
mist guerrilla—was met by ruthless action by a large military deployment.
Throughout this period, many in Italy and abroad doubted the viability and
even the future existence of the new Kingdom. Perceived instability was hardly
conducive to business confidence. Neither was a fiscal policy aimed at balanc-
ing the state budget by 1876. A commercial policy characterized by moderate
(1878) and then (1887) higher protection for manufacturing and agriculture fig-
ures prominently in the contemporary and historical literature as one of the
main culprits for unsatisfactory growth. As argued in chapter 2, Italy’s shift
to protection was hardly an Italian peculiarity, including the pactum scleeris
between iron and wheat. The tariff of 1887 ignited a trade war with France
that damaged silk and wine exports. The import duty on wheat, a response to
falling transatlantic transport cost, was undeniably technically irrational, but it
was seen by moderate free traders of the time as a useful compromise to ease
the cost of globalization borne by a relatively small number of people.
By the late 1870s, the single market began to take shape and modern insti-
tutions to impact on the economy. At the same time, equilibrium had been
restored to public finances, and the 1874 banking law had somehow better orga-
nized the financial system. Italy looked more stable to investors and the expec-
tation of a return to convertibility of the lira (which took place in 1883) made
the country more attractive to foreign capital. Growth acceleration in GDP and
investment took place from the late 1870s to the late 1880s. It was then frustrated
by the fragility of a poorly regulated banking system, fraught with inexperi-
ence and greed. In an only too-well-known sequence of events—familiar to late
twentieth- and early twenty-first-century readers—convertibility allowed banks
to borrow abroad at relatively low rates. In Luzzatto’s imaginative metaphor,
“the atmosphere was hyper-oxygenated by gold [ . . . ] For the first time since
1861, the public could nourish the illusion—if short lived—of cheap money: in
1884 the official discount rate was reduced to 4 percent, but commercial banks
practiced a 3 percent to their best clients” (Luzzatto 1963, 208). Easy credit was
largely directed to the construction industry, particularly in Turin, Rome, and
Naples, soon fuelling a bubble. For a while interest rates remained relatively low
but soon inexperienced (and dishonest) risky borrowers entered the market and
systemic leverage increased. By the late 1880s the flow of foreign capital dried
up and then reversed; Italy’s international reputation was not aided by the tariff
war with France and the sudden shift of alliances by a treaty with Berlin and
Vienna. Italian banks were forced to reduce their exposition to industry, partic-
ularly to the construction sector. The gold outflow made it difficult for the six
banks of issue to maintain the mandated reserve ratio. Questionable account-
ing practices were used to conceal the lack of full metal coverage of notes. It
would be later discovered that, to avoid collapse, one of the main banks of
issue, Banca Romana, even resorted to the criminal practice of printing two
sets of banknotes bearing the same serial numbers. The construction bubble
burst, a number of companies were forced to receivership, and the smallest and
least capitalized banks began to fail. Contagion spread to the larger commercial
banks and to some of the six banks of issue. By 1892–1893 most Italian commer-
cial banks were either illiquid or insolvent. Convertibility, de facto unavailable
since 1887, was suspended in 1893. Weak political leadership, in the venomous
climate of the struggle between Crispi and Giolitti, scandals, and turncoats
(vividly described in Federico De Roberto’s novel Imperio), allowed the cri-
sis to drag on until the twenty-third hour. Only in the summer of 1893 did a
sweeping banking reform create the Bank of Italy out of the merger of three
banks of issue. In 1894 the two largest commercial banks were liquidated and
two better-managed and capitalized banks grew from their ashes. The appear-
ance of a modern central bank and reorganization of the banking system on a
sounder basis put an end to the panic, clearing the board for a sustained period
of catch-up growth to take place.
Before moving to Italy’s century-long catch-up growth, it is useful to note a
peculiarity of the postunification Italian economy. Recent research (Vecchi 2011
and various chapters in this book) shows that the most relevant welfare indica-
tors monotonically improved during the postunification low GDP growth years.
Between 1861 and 1891, life expectancy at birth grew from twenty-nine to thirty-
eight years (catching up with France); infant mortality declined from 223 to
189 per thousand (catching up with France and Great Britain); and the average
height of recruits increased from 162.9 to 164.4. These numbers point not only
to improved nutrition but also to better sanitation, caused by investment in
aqueducts and sewerage systems. The already mentioned literacy improvements
were mirrored in a reduction in child participation in the labor force (Toniolo
and Vecchi 2007). If income inequality did not change much until about 1900,
consumption expenditure became more egalitarian (Rossi, Toniolo, and Vecchi
2001) and, what probably matters most, absolute poverty declined from 44 to
35 percent of the population (Vecchi 2011, 297). Slow GDP growth not with-
standing, there were considerable welfare gains accruing from unification to the
first generation of Italians, particularly to its less privileged members. If not
in GDP per person, Italians caught up with their more advanced neighbors in
other important aspects of individual and collective welfare: those who showed
their disappointment for the economic outcomes of the Risorgimento were only
partly justified by facts.
The Long Convergence, 1896–1992
Hooking into the “First Globalization,” 1896–1913

By the late 1890s Italy’s GDP per person had fallen to 38 percent of Great
Britain’s (down from 45 percent in 1870); by 1913 it reached almost 54 percent.
Sharp growth acceleration took place from the late 1890s onward: the cyclical
component explains about one fifth of it, the rest is caused by trend change
(Ciocca 2007,142–143). For the first time since the seventeenth century, rather
than falling behind, the Peninsula forged ahead reducing the income gap rela-
tive to the most productive country of the time (Toniolo 1990; Zamagni 1993).
Between 1897 and 1913 Italy’s total and per person real GDP grew on aver-
age by 2.4 and 1.6 percent per annum, respectively; industrial production grew
on average by 3.8 percent; and agriculture by 1.7 percent. The pace of produc-
tivity growth across all sectors increased from the 1880s onward and further
accelerated at the end of the century. Between 1901 and 1911, a period also called
the “Giolittian era” after Giovanni Giolitti, the leading political figure of the
time, labor productivity grew by 2.5 percent per annum in industry and by 2.2
percent in the services sector (see chapter 7).
Some industries (metal-making, steam engines, electricity, and electrome-
chanics) expanded at double digit rates. In this phase some “first mover” firms
established an enduring advantage in key sectors of the second industrial revolu-
tion: Fiat in automobiles; Pirelli in cables and tires; Ansaldo in shipbuilding; and
Falck, Piombino, and Terni in the mass production of steel (see chapter 16).
Power generation (mainly hydroelectric) and the electromechanic sector,
already quite sophisticated at the beginning of the 1890s, expanded rapidly
from 1900 onward. The first foreign direct investments by Italian companies
date back to this period. Foreign direct investments and imports of machinery
were responsible for technology transfers from the most advanced producers.
If French, Belgian, Swiss, and British foreign direct investments concentrated
mainly in public utility and transportation, German and later American foreign
direct investments favored manufacturing (see chapter 15).
Modern industry, however, was mainly concentrated in the Northwestern
part of the country (in 1911 the regions of Milan, Turin, and Genoa produced
55 percent of the country’s value added),thereby increasing regional economic
disparities (see chapters 20 and 21).
After 1896, once the light at the end of the financial-crisis tunnel was in sight
and the economy again took a central place in the political arena, monetary,
fiscal, and exchange rate policies supported growth in a time-consistent fashion

(Toniolo 1990; see chapters 2 and 13). A sequence of balanced budgets revived
the interest of foreign investors in Italy. The debt-to-GDP ratio rapidly declined
(see chapter 18). In 1906, confidence was so high that the voluntary conversion
of Italian Consols (Rendita Italiana) from 5 to 3.75 percent was subscribed by
all but a handful of bondholders who were redeemed at par. Cleverly, the gold
standard was never officially reinstated, but monetary authorities consistently
mimicked it, holding the exchange rate within the “gold points,” at times even
above the old parity (Cesarano, Cifarelli, and Toniolo 2012). Interest rates slowly
converged on those of Paris and London.
A virtuous cycle set in whereby the exchange rate stability was a cause
and an effect of emigrant remittances, emigration being one of the most con-
spicuous results of Italy’s increasing participation in the “first globalization’s”
Atlantic economy (see chapter 10). Despite substantial export growth, the trade
deficit increased (see chapter 21) because of the import of raw materials and
cheap overseas grain but also, to a large extent, because of the huge import of
machinery embodying new technology (Warglien 1985). The relatively high, but
far from prohibitive, tariff of 1887 remained in statute books but commercial
treaties containing the “most-favored nation clause” progressively tempered it.
Industrial growth was mainly concentrated in the Northwest of the coun-
try (Ciccarelli and Fenoaltea 2009, 2010; see chapter 20), which enjoyed an
original natural advantage and easy access to the largest domestic markets
for the new industries, particularly engineering (see chapter 21). The never-to-
be-solved “Southern question” arose. It was intertwined with a “social question”
that sometimes took violent forms but never again reached the pitch of 1898,
when Milan had been the theater of the most violent repression ordered by the
government.
It is perhaps surprising, given the record of the industrial revolutions that
took place in other countries during the first half of the century, that Italy’s late
industrialization turned out to be unusually “benevolent” toward the lower clas-
ses (Toniolo 2003): average life expectancy lengthened to forty-five years, the
incidence of child labor sharply declined, and Italian recruits grew taller (see
chapter 8; Vecchi 2011). Certainly surprising is the fact that income and con-
sumption distribution became less unequal and absolute poverty was reduced
(Rossi, Toniolo, and Vecchi 2001; Vecchi 2011; see chapter 8). The egalitarian
and poor-friendly features of Italy’s late industrialization are in need of a rigor-
ous explanation (Toniolo 2003). For the time being a tentative hypothesis points
to its taking place in an increasingly open economy during the so-called first
globalization. It is likely that migrations reduced both the rent-to-wage and the
skilled-to-unskilled wage ratios (see chapter 10), while at the same time interna-
tional trade increased the worker’s real purchasing power through the import of
cheaper foreign “wage goods.” The social and political environment is also likely
to have played a role: the Socialist Party was created in 1892; trade union mem-
bership increased; socially motivated Catholics grew stronger (in 1891 Pope Leo
XIII published his social encyclical Rerum Novarum); and, what matters most,
the governments of the Giolittian era had a more open view of liberal democ-
racy and took an inclusive stance towards moderate socialists and Catholics,
both advocates of social reforms (Gentile 1977).
Economic Survival and Political Collapse

Index-number problems exacerbated by the enormous shift in relative prices
that is typical of war economies make it hard to determine Italy’s progress in
catching up with the more developed countries during the First World War.
What can be said is that the steel, shipbuilding, engineering, and chemical
industries—all heavily subsidized—underwent rapid expansion. A factor of par-
ticular importance for subsequent growth was high investment in the hydro-
electric power industry, a sector in which Italy was on the technologic frontier
at a time when electrification was the world’s new “general purpose technol-
ogy.” After a fall in 1915, the year Italy entered the war, industrial production
and GDP recovered and remained in 1916 and 1917 at the all-time level reached
in 1913. After the war, part of the excess productive capacity was eliminated, not
without pain, in a crisis that saw a drop in GDP by almost 9 percent between
1917 and 1921. Part of the wartime productive capacity, however, endemically
outstripped demand for many years, typically in the shipbuilding sector. Other
wartime high-technology investments were converted to peacetime use.
The war tragically marked the watershed between the “first globalization”
and a period known to historians as the “globalization backlash.” As for con-
vergence, the story of the Italian economy in the interwar years divides into
two periods. Up to 1929 Italy’s growth rate was somewhat above the Western
European average, significantly higher than in the United Kingdom but signifi-
cantly lower than in France. In the 1930s, however, Italy’s growth trailed behind
that of the major European powers.
Between the 1917 and 1929 (both cyclical peaks) Italy’s GDP grew by 2.2 per-
cent per annum (versus 2.5 percent in 1898–1913). Between 1922 (the year when
the highest prewar GDP level was roughly regained) and 1929, Italy’s annual
growth rate was an impressive 4 percent. The rate was 6.1 percent in 1922–1925,
the “liberal” years of the Fascist regime, with exports growing yearly at the
tune of 18.7 percent. The first Mussolini government resumed the successful
prewar macroeconomic policy stance: the budget deficit was eliminated by 1925,
the GDP/debt ratio fell, and the Bank rate was kept at a relatively low level. At
the same time, the wartime suspension of import duties on grains remained in
effect (Toniolo 1980; see chapter 3).
The year 1925 was the political and economic watershed of the Fascist
period. Coincidentally, with Mussolini formalizing his dictatorship and with
a stock market crash (caused by overtrading by banks), the wheat import
duty was reintroduced together with an increase in overall protection of the

so-called heavy engineering and metal-making industries (see chapter 2).
Giuseppe Volpi, a high-profile representative of the heavy-industry compound,
replaced Alberto De Stefani, an economics professor, as the Minister of Finance.
The following year, Mussolini launched his campaign for the revaluation of the
lira aimed at the reintroduction of the gold standard. The years 1925–1926 wit-
nessed possibly the most sudden and complete 180-degree turnaround of eco-
nomic policy in Italian history. From then until the end of the Second World
War, the Italian economy was increasingly inward-looking. The Fascist ruling
elites did not understand that a medium-sized economy, still relatively back-
ward and prevalently agricultural, lacking mineral resources and dependent on
imports for food, raw materials, and advanced technology, could only prosper
by competing on world markets and would suffer more than others from the
rigors of autarky.
Catch-up Intermission, 1929–1945

Growth continued at a slower pace until the onset of the Great Depression
(2.5 percent per annum in 1925–1929). Among the results of our research project
(see chapter 6)is an estimation of industrial production in the 1930s, based on
hitherto unexplored output and employment sources (Giugliano 2012). It is now
known that the Italian Great Depression lasted longer than previously believed:
only in 1935 did GDP and industrial output reach the level of 1929, only to fall
again in 1936. The crisis would have been more devastating without the measures
taken in 1931–1933 to bail out and reform the big universal banks that over the
years had turned themselves into something similar to industrial conglomerates
holding majority stakes in the largest Italian firms. Swift, effective, and secret
action by the state and the monetary authorities prevented the banking crisis
from producing the crippling outcomes seen in Austria and Germany (Toniolo
1995). As an initially unintended consequence, the crisis produced one of the
most important institutional innovations in the history of the Italian economy:
the establishment of the Institute for Industrial Reconstruction (IRI). The state
took over control of most of the largest companies from the banks, creating one
of the major tools it would use to support reconstruction and growth after the
war (Castronovo 2012).
During the 1930s, Italy’s secular convergence to the most advanced coun-
tries came to a halt: between 1929 and 1939 growth averaged about 1 percent a
year, against a Western European average of 1.1 percent. Over the same period
the autarkic German economy, despite its collapse between 1929 and 1932, grew
by more than 2 percent a year, thanks to the mobilization of the country’s
abundant natural resources and to its advanced technology. In Italy, protection-
ist policies, progressively tightened until reaching risible forms of autarky, the
stubborn overvaluation of the real exchange rate (Toniolo 1980; see chapter 13)
especially after the 1931 devaluation of sterling, participation in the “gold bloc,”
and tight exchange rate controls go a long way to explain the decade-long halt
in Italy’s convergence. Nor did an increasingly dirigiste approach to resource
allocation yield results comparable with those of Nazi Germany: a command
economy would have required a stronger and more efficient state apparatus and
probably coercive measures like those used by the Nazi regime, which Mussolini
was unable or unwilling to manage.
In contrast with the experience of 1896–1913, income inequality rose in
the 1920s (see chapter 8; there are no reliable data for the 1930s). The num-
ber of average hours worked per person employed rose in the early 1920s, and
then sharply declined after 1925. Elementary school attendance rates declined
between 1926 and 1936 and the growth of aggregate accumulation of human
capital slowed down (Vecchi 2011; see chapter 9). In the 1930s, the progress
in life expectancy somehow slowed and the number of poor increased, as did
that of children at work. Despite his far from negligible approval rate by the
Italian people, and his obvious claims to the contrary, Mussolini was not as
effective in promoting the welfare of the ordinary Italian citizen as his propa-
ganda claimed.
Reconstruction: Setting the Stage for Long-Term Growth

Italy’s participation in the Second World War turned out to be an economic
disaster. Whereas between 1915 and 1918 GDP had grown on average by 1.9 per-
cent per annum, it decreased on average by almost 10 percent every year between
1940 and 1945, with most of the decline concentrated in 1943–1945, when the
country was divided and war was fought on its territory. In 1945, Italy’s GDP
stood at the level of 1906. Reconstruction, however, was fast: by 1949 Italian
GDP was already higher by 10 percent than in 1939, the best prewar year.
It is an accepted tenet in the literature that the “second postwar settle-
ment,” unlike the 1919 Versailles Treaty, was a key factor in setting the stage
for the subsequent rapid growth in Western Europe and Japan (see chapters 3
and 4 and references thereof). The Marshall Plan was a crucial ingredient of
the settlement, not so much for its size (less than 2 percent of Italy’s GDP in
the years 1948–1952) but for easing the “dollar gap” for import of raw materi-
als and US technology, and for lessening the distributional costs of monetary
stabilization. The Marshall Plan was also an institutional tool in that, through
the Organization for European Economic Cooperation in which Italy eagerly
participated, it opened the long way toward international competition and
European integration. The policy of progressive, irrevocable opening up to the
international economy represented a sharp break with the past. It was a funda-
mental political choice, upheld even in the face of resistance from powerful eco-
nomic lobbies, the same that from 1925 onward had advocated autarky (Toniolo
and Salsano 2011). International trade liberalization was set on course by slowly
dismantling the autarkic apparatus and progressively moving from bilateral to
multilateral payments (Guido Carli, future Governor of the Bank of Italy, was
the first chair of the European Payments Union board).
As for domestic policies, runaway inflation was stopped in its tracks in the
summer of 1947; however, not before it was conveniently instrumental in wiping
off most of the government debt. From then onward, the early postwar govern-
ments and the Bank of Italy took an “orthodox” macroeconomic policy stance,
including the reconstruction of foreign exchange reserves, which in the minds
of the main policy-makers had served Italy so well before 1914. This policy was
met by fierce criticism not only from the left, but also from the ERP adminis-
tration (see chapter 5).
Then as in future years, domestic market liberalization proved more dif-
ficult to realize than opening up to international competition. A comprehensive
political economy study of the long-standing preference of Italians for interna-
tional competition matched by tightly regulated domestic markets has yet to
be made. In the immediate postwar years, however, the international free trade
stance and the European treaties themselves were largely the initiative of politi-
cal authorities that were able to overcome the opposition of powerful vested
interests. The same political authorities, however, nurtured a good dose of mis-
trust—resulting from ideology and the experience of the 1930s—of the ability
of private enterprise to generate adequate capital accumulation, technology, and
productivity growth (see chapter 3). The decision, already made once back in
1937, not to privatize IRI was confirmed. A non-trivial corollary was the deci-
sion to keep practically the entire system of financial intermediation in pub-
lic hands. The financial system remained bank-oriented and strictly regulated
(see chapter 17). The stock market stayed thin, oligopolistic, and vulnerable to
the speculative forays of a handful of raiders. Overall, the postwar economic
institutions corresponded to the idea of a “mixed economy”—characterized by
a strong role for the state as producer and regulator—that had inspired the con-
stitutional compromise among the various political parties, which sealed the
creation of the Republic in 1947.
Chapter 4 argues that “the reconstruction period opened an institutional
gap between Italy on one hand and Germany and Japan on the other,” a gap
that may help explain the long-run weaknesses of the Italian economy com-
pared with that of her wartime allies. In particular, Germany was better able
than Italy to create a Soziale Marktwirtschaft commanding a social consensus
on the country’s economic goals that was unattainable in Italy’s more polarized
social and ideologic environment.
The stock of human capital that the Republic inherited from previous
decades was lower than that of the main European countries. Primary educa-
tion had made huge strides, and by 1951 the illiteracy rate among the population
older than fifteen years was down to 15 percent. However, the average number
of years of schooling (4.1 years, with large regional disparities)was the lowest
among the twelve countries of Western Europe, and despite great advances, Italy
continued to lag behind in education attainments over the next sixty years.
The Golden Age

A good part of Italy’s secular convergence toward more advanced countries
occurred between 1950 and 1973. In the previously mentioned context of rapid
opening-up to international competition coupled with protection and regula-
tion of the domestic market, per capita GDP grew by an average of 5.3 percent
per year between 1950 and 1973. Industrial production increased annually by
8.2 percent and labor productivity by 6.2 percent. Together with Germany and
Japan, the other former Axis powers (see chapter 4), during this quarter of a
century Italy converged strongly toward the high-income countries. In 1950–
1973, Italian GDP per person income rose from 38 to 64 and from 50 to 88
percent of, respectively, that of the United States and United Kingdom. In 1951,
Italy’s product per hour worked was only 46.5 percent of the United Kingdom’s;
it was 101.6 percent in 1973. Total factor productivity (TFP) grew at the fast-
est rate in Italian history and explained more than half of GDP growth (labor
and capital inputs accounted, respectively, for about 17 and 29 percent of GDP
growth; see chapter 7).
Italy’s growth in the Golden Age cannot be explained only by catch-up. Many
factors in Italy’s growth were common to all of Europe but some were idiosyn-
cratic to the Italian Peninsula. The technologies of the day, largely adaptations
of the Fordist model, were well suited to a country endowed with an abundant
labor force, possessed of basic education, and a relatively small but sophisti-
cated cadre of engineers. Up to the mid-1960s, the plentiful availability of labor
ensured that wages did not outstrip productivity growth. A large domestic mar-
ket allowed the exploitation of economies of scale, especially in the production
of durable consumer goods, which in turn generated competitive advantages in
export markets. During this period, public enterprises under excellent middle
managers were an engine of investment and technical progress. IRI produced
at internationally competitive prices intermediate goods, such as iron and steel,
in which the private sector had historically been uncompetitive and in need of
protection from 1887 onward. The impact of international technology transfers,
including rapidly increasing foreign direct investment, was mainly caused by
the ability of Italian firms to acquire and diffuse technical knowledge through
imitation, reverse engineering, and adaptation (see chapter 14). This was true
not only of the large firms but also of the medium-size enterprises organized
in “districts,” one of the most peculiar and successful Italian institutions (see
chapter 5).
The rapid transformation of the Italian economy is witnessed by changes in
the composition of export trade, by then largely based on medium-technology
manufacturing (see chapter 12), and by the fact that most manufacturing
employment (60 percent in 1970) was concentrated in capital-intensive indus-
tries, such as automotive, chemicals, heavy engineering, steel making, and ship-
building (see chapter 16).
In the time-span of less than a generation, the life of the average Italian was
culturally, socially, and economically transformed. This was also as the result
of mass migration from countryside to city in Italy and across the border, this
time mostly to neighboring European countries (see chapter 10). If aggregate
caloric intake was already adequate, the daily diet became more diversified and,
what matters most, malnutrition was almost eradicated and absolute poverty
radically reduced (Vecchi 2011). Houses became larger and healthier, with uni-
versal access to sanitation and the rapid diffusion of central heating. In collec-
tive memories, the Golden Age stands out as the triumph of mass consumption
in consumer durables; the small Fiat 500 and 600 crowned the ordinary per-
son’s dream of private transportation (Toniolo and Vecchi 2010). The progressive
improvement in the public provision of health services and retirement pensions
together with longer-term job opportunities lowered workers vulnerability to
poverty. Income distribution became steadily more egalitarian (see chapter 8).
The North-South income gap narrowed for the first and only time since unifi-
cation (see chapters 20 and 21).
Overall, Italy’s postwar economic arrangements, based on extreme open-
ness to foreign trade, accompanied by ample safeguards for domestic producers
naturally sheltered from international competition, and on an important role
of the state as producer of goods and services, proved capable of generating
fast growth in an initially still backward economy. Things began to change
toward the middle of the 1960s, when the North approached full employment.
It became harder to meet increased wage demands, while at the same time
maintaining high levels of investment. Endogenous innovation was growing too
slowly at a time when the advantages of backwardness, typically unlimited sup-
ply of labor and imported technology, began to fade. By the end of the 1960s it
was already clear that Italy had to adapt institutions, financial markets, training
and research, and the economic role of government to the characteristics of a
no-longer backward economy (Rossi and Toniolo 1996). Little was done, how-
ever, and this omission weighed on subsequent growth.
The Silver Age, 1973–1990

In the early 1970s the pace of growth slowed abruptly in Europe and the United
States. In Europe, the impetus from such key factors of postwar growth as
reconstruction and the progressive European market integration petered out. A
long phase during which cheap raw materials had maintained favorable terms
of trade for the West came to an end. In the initially more backward countries,
the advantages of an abundant supply of labor faded. Convergence itself reduced

the productivity gains that could be wrung from technology transfers (Crafts
and Toniolo 1996a, 2010; Toniolo 1998). All this makes the decline in produc-
tivity growth comprehensible, although the reasons why it was so sharp and
sudden and occurred simultaneously in every country west and east of the Iron
Curtain are not entirely clear. The negative expectations caused by the end of
the Bretton Woods cooperative monetary order and by the first oil shock are
only part of the explanation.
The Italian economy, now well integrated into the world economy, par-
ticipated in the events that affected the latter, notably the negative productiv-
ity shock, although with an evolution that reflected its own peculiar features.
Between 1973 and 1992, per capita GDP grew at the respectable rate of 2.5 per-
cent per year. The convergence on US per capita GDP reached 76 percent(up
from 65 percent in 1973). The convergence on Western Europe was virtually
complete: in 1992, per capita GDP in Italy was equal to that in Germany and
the United Kingdom. Convergence of product per hour worked was also almost
complete.
If the convergence on US GDP came to a halt at about three quarters of the
way, the productivity story is different. The productivity convergence needs to
be stressed, not least in view of the contrast with the following twenty years.
Hourly output in the Italian economy rose from 66 percent of the US figure in
1973 to 86 percent in 1992. In other words, per capita GDP grew more slowly
than labor productivity; the Italian labor force participation rate was lower than
the US rate, and the gap widened over time. This feature was common to all
the continental European economies, but it was especially marked in the case
of Italy. It is not clear whether this was a preference for free time over work or
the result of an inability on the part of the Italian economy to meet the demand
for employment.
The continuation, albeit at a slower rate, of convergence in the twenty years
that followed the Golden Age was achieved with a succession of policies that in
the short term stabilized cohesion, a key ingredient of the “social capability for
growth,” and boosted aggregate demand. The needed structural reforms were
half-baked, because weak political leadership was unable to effectively counter-
act the weight of distributional coalitions. The cost of Italy’s inability to change
its institutions as the advantages of backwardness faded and international com-
petition changed the conditions for growth sustainability would come to a head
in the 1990s.
From the “hot autumn” of 1969 and throughout the difficult 1970s, a series
of off-the-cuff measures were adopted to expand welfare provisions and pro-
vide indiscriminate subsidies to firms. Political micromanagement in resource
allocation grew in importance, particularly in public enterprises. In the pro-
cess, the allocative effectiveness of the credit system decreased (see chapter 17).
Double-digit inflation was higher and lasted longer in Italy than in the com-
petitor countries. If an increasing number of Italians acquired secondary and
tertiary education, the quality of the school system deteriorated. The time
required to obtain justice in civil and administrative courts lengthened (see
chapter 19). Growing signs of frailty in large private-sector firms accompanied
the weakening of public enterprises. The labor market became more rigid.
Italy remained locked into a product specialization concentrated in sec-
tors marked by low or medium technology (see chapters12 and 16), although
there was a continuous drive for quality in many branches of traditional Italian
products. Employment came to be increasingly concentrated in small and
medium-sized firms, more flexible and adaptable but less capable of research
and development. It was probably thanks to this flexibility, another ingredient
of the country’s “social capacity for growth,” that Italy succeeded in maintain-
ing its share of the world export market.
However, although the system’s ability to sustain growth in the long run
weakened, and although domestic terrorism and social turmoil shackled the
country, the overall performance of the Italian economy during the 1970s was
surprisingly good. Despite 1975 being the first postwar recession year with real
GDP falling by more than 2 percent, over the decade real GDP grew annually
at the respectable rate of 3.4 percent (3.6 percent between 1973, the year of the
first oil shock, and 1979). Income inequality decreased at the fastest pace than
in any decade since unification (see chapter 8).
The good performance of the real economy in the 1970s can be explained
by the expansive fiscal and monetary stance adopted to soften the economic
and social impact of the two oil shocks. The cost was two-digit inflation, and
foreign exchange depreciation. Social tensions were oiled by increasing welfare
provisions (see chapter 3). The resulting budget deficits were partly monetized,
hence the relatively moderate growth in the ratio of debt to GDP. The jury is
still out on the costs and benefits of Italy’s macroeconomic policy in the 1970s:
it has been argued that it kept profits and demand high, thereby supporting
employment and lowering the costs of the subsequent disinflation in the 1980s.
The opposite opinion holds that the neglect of the fiscal constraint and the
heavy-handed state management of resource allocation, including credit (see
chapter 17), simply postponed and thus made more costly the necessary macro-
economic adjustment.
At the end of the 1970s, however, consensus built up about bringing infla-
tion under control. Three main decisions were made: (1) participation in the
European Monetary System, (2) the introduction of a form of incomes policy,
and (3) repeal of the agreement between the central bank and the Treasury
whereby the latter bought unsubscribed government bonds at every auction (the
so-called divorce between the Treasury and the Bank of Italy). It was hoped (in
vain as it turned out) that the latter decision would also increase fiscal respon-
sibility by making policy-makers come to terms with budget constraints.
Disinflation came at the cost of sluggish growth (only 0.8 percent per
annum) in 1980–1983. GDP growth then resumed at a quite sustained pace (3.1
percent annually between 1983 and 1990). By 1984, social tensions had receded
and governments could count on larger and more stable majorities. A win-
dow of opportunity opened to address Italy’s macroeconomic problems. Freed
from previous obligations toward the Treasury, the Bank of Italy succeeded in
taming, if not entirely defeating, inflationary expectations. The government,
however, did not seize the opportunity afforded by growing GDP to stabilize
the debt-to-GDP ratio. The overall budget deficit, which averaged 7.6 percent
of GDP in the 1970s, rose to 10.7 percent as the average for the 1980s. Public
spending expansion was amplified by interest payments, because lower infla-
tion meant high real borrowing costs to the government. Rather than being
stabilized, in the 1980s the ratio of the debt to GDP rose from 56 to 94 percent
(see chapter 18). No similar pattern is to be found in such a short period of
time in any other developed country after the Second World War. The roots of
the debt crisis of twenty years later are to be found in the missed opportunity
of the 1980s.
In the medium term, however, everything looked pretty shiny. Productivity
convergence with France and Germany was completed, the United Kingdom was
“overtaken,” and the United States was closely approached. Distributional equality
reached its all-time highest level in the mid-1980s. Social tensions were reduced to
a “physiologic” level, and public opinion was engulfed in a wave of optimism.
Divergence in the “Second

Globalization,” 1990–2011
From Convergence to Divergence

The secular process of Italy’s catch up came to an end in the early 1990s. In the
following two decades, the growth in GDP per person was roughly the same as
that of the first decades after unification and in both periods Italy, rather than
catching up, lost ground to the most advanced countries. In 1992, Italy’s GDP
and labor productivity stood at 76 and 86 percent of the respective US values;
by 2010 the ratio of Italian to US per capita GDP was back to its 1973 level (64
percent). To be sure, during the same period of time the growth rate slowed
down in several other advanced countries, in an international economy seeing
not only the rapid emergence of the leading Asian countries but also renewed
US economic vitality (Rhode and Toniolo 2006). Japan and Germany, in particu-
lar, turned from rapid catch-up to a divergence: their gap with the United States
widened by about a dozen percentage points. Italy’s performance, however, was
particularly disappointing from about the year 2000 onward (Table 1.5).
Between 1992 and 2000 Italian per capita GDP annual growth rate (1.7
percent) was slower than the average for the twelve Western European countries,
Table 1.5 Economic performance, Italy and advanced countries, 1992–2010

1992–2010 1992–2000 2000–2007 2007–2010 TFP
1990–2007
Italy 0.5 1.7 0.7 – 2.2 0.7*
France 1.0 1.7 1.1 – 1.0 n.a.
Germany 1.2 1.5 1.3 0.1 1.5
Japan 0.7 0.7 1.5 – 1.2 1.1
United Kingdom 1.8 3.1 2.1 – 1.9 0.7
United States 1.5 2.7 1.4 – 1.2 0.9
Sources: http://stats.oecd.org/ Chapter 7, and Data Appendix.

Average annual growth rate in GDP per person and Total Factor Productivity.
* 1993–2007.
but faster than Germany’s and Japan’s. It was only 0.8 percentage points below
the secular catch-up trend (1896–1992) and above the growth rate realized dur-
ing the so-called Giolittian era (1900–1913). Output per worker and TFP growth,
however, progressively slowed down (see chapter 7).
The years of 2000–2011 were technically a lost decade, with total GDP in
2011 a mere 1.1 percent higher than it had been ten years earlier, and still about
5 percent lower than it was in 2007 (in the previous major depression, the 1929
GDP level was reached again in 1935). For a country that was the second larg-
est industrial producer in the euro area, especially serious was the weakness of
the manufacturing sector, where output contracted by about 4 percent between
2000 and 2007.
Italy’s weak performance since the early 1990s and particularly in the first
decade of the century is largely caused by low productivity growth. In 1995,
Italy’s output per hour worked reached 90 percent of the United States, the nar-
rowest gap ever. From then onward, Italy’s productivity growth did not keep
pace with that of the productivity leaders (Table 1.6). Between 1995 and 2000
the increase in hourly output was about half that of the euro area. TFP growth
was also abnormally low. However, the number of hours worked continued
to increase, up to the onset of the crisis in 2008. This was partly caused by
the increase in employment deriving from important, albeit incomplete, labor
market reforms. After peaking in 1995, in less than ten years unemployment
returned to levels similar to those in the early 1980s. Investment also continued
to grow in the first decade of the 21st century; “the demand for factors of pro-
duction continued to expand satisfactorily” (De Novellis 2012, 26).
An economy that was somewhat recovering between 2005 and 2007 was
hit by a crisis that in two years resulted in the loss of more than 5 percentage
points in GDP per person, a decline comparable with that of the Italian Great
Depression of the early 1930s.
Table 1.6 Labor and Total Factor Productivity

Labor Productivity * Total Factor
Productivity†
Agriculture Industry Services Total Total economy
economy
1993–2010 3.0 0.8 0.6 0.9 0.4
1993–2000 5.9 1.8 1.0 1.6 1.3
2000–2007 1.4 0.3 0.2 0.3 0.2
2007–2010 1.0 −1.0 −0.1 −0.3 −1.0
Sources: Elaborations from Chapter 7 and Data Appendix.

Average annual growth rates, %.
* Estimates built using the FTE measure of labor. Valued added is the October 2011 Istat data release. It
includes housing and government services.
†
TFP estimates built using the FTE measure of labor and the capital services measure for capital. Value
added from October 2011 Istat data release has been netted of housing. Factor shares are variable, based
on actual wage data.
Losing Growth Capability

From the mid-1990s onward, Italy seems to have somehow lost its “social capac-
ity for growth.” As in the first decades of its history as a united country, in
the most recent years divergence rather than catch-up characterized the Italian
economy. Why did Italy’s robust secular convergence stop at the turn of the
twentieth century? This question inspired the launch of the research project
that resulted in this book. Each individual chapter provides building blocks for
those who try to provide a comprehensive answer to this complex question.
What follows is my own attempt to do so.
Needless to say, no parallels can be drawn between the 1990s and 2000s
and the years of divergence that followed unification in 1861, besides the sim-
ilarity in the aggregate growth rates. In the 1860s, Italy was a backward coun-
try in a rapidly integrating Atlantic economy, trying to engineer a typical
catch-up process by importing technology and exporting labor-intensive goods
and labor itself to the most advanced countries of the time, once the disad-
vantages of foreign domination and internal market fragmentation had been
overcome. In 1992, Italy’s economy was possibly slightly larger than the United
Kingdom’s and the seventh largest in the world (when measured at purchasing
power parities; Maddison 2001). What matters most, it was very close to the
productivity frontier with a product per hour worked at about 90 percent of
the US level (1995).
In the international economy, major changes had been slowly building up in
the 1980s, overlooked by Italian producers, trade unionists, and policy-makers
alike. Between 1989 and 1992, a bundle of major shocks suddenly changed the
playing field: a technologic revolution; a rapid opening of the world markets for
goods, services, and capital (known as the “second globalization”); an accelera-

tion of European integration leading to the creation of the Monetary Union; and
the irreversible establishment of two giant countries, China and India (together
almost two-fifths of the world population), as major players in the international
economy.
Each of these shocks required rapid adjustment, first and foremost cul-
tural, by entrepreneurs, workers, and political decision makers (i.e., the whole
of society). Not many European countries were ready to carry through this
adaptation. The Scandinavian countries succeeded quite well, others found the
adaptation to the new environment harder. Italy was the large European coun-
try that was possibly the least successful in making the productive, social, and
cultural changes needed to turn each of the shocks from fetters into growth
opportunities.
In the search for the reasons for Italy’s diminished “social capacity for
growth” one might usefully try to distinguish between the weakening of growth
factors that sustained growth until the 1980s, and long-standing weaknesses of
Italy’s economy, institutions, and society that did not prevent (some even fos-
tered) the previous convergence process but which, in today’s conditions, have
become obstacles to growth.
Missing Growth Factors

Seen in a long-term perspective, three major changes took place in the Italian
economy from the late 1980s onward that stand out as potentially affecting its
growth rate: (1) a decrease in size, scope, and productivity of the large firms, (2)
an increase of the debt-to-GDP ratio over and above the supposedly “critical”
threshold of 90 percent, and (3) a shift from under evaluation to overvaluation
of the real exchange rate of the currency.
Chapters 15 and 17 highlight the quantitative and qualitative progressive
weakening of Italy’s large firms. More than other countries, Italy has always
been the country of small firms: at the beginning of the 1960s Italy’s aver-
age firm size was forty-nine workers, compared with France’s seventy and
Germany’s seventy-eight. As often emphasized, the resilience of Italy’s system
of small companies is one of the idiosyncratic features of its economy: it gave
and continues to give Italian industry a flexibility that is one of the country’s
competitive advantages. Small companies, however, drew major advantages, not
only as subcontractors, from the existence of a sufficient number of efficient
large enterprises as the main producers of applied research, with fallouts on
the rest of the economy, and vehicles for foreign direct investment, probably
the main channel of technology transfer. In recent decades, the average firm
size has declined in every European country, but the phenomenon was espe-
cially pronounced in Italy. In 2008 the average number of workers in Italian
firms was half the average of the five leading EU countries. The downsizing of
large companies entailed a reduction in Italy’s research and development capa-
bility at a time when the rapid development and adoption of new techniques
was more important than in the past. Moreover, the quality of Italy’s larger
companies also declined: between 2000 and 2005 output per hour worked con-
tracted by about 20 percent in firms with more than 500 workers, more than
in the rest of the system. The short-lived recovery of 2005–2007 was driven
by an improvement in the productivity of large firms, thus confirming their
systemic role.
High public expenditure and a large public debt growth emerged in the
last two decades as another potential cause of lower growth. Although Italy
was always a high debt country (the debt-to-GDP ratio exceeded 90 percent for
seventy-five years since unification), Italy’s postwar growth took place in a low
debt and public expenditure environment. In 1979, the debt-to-GDP ratio was
about 60 percent (see chapter 18). By the end of the 1980s the ratio had risen
to 90 percent and reached 105 percent in 1992. Although it is hard to set debt
thresholds, valid for all times and countries, above which aggregate growth is
negatively affected, a number of economists argue that a debt-to-GDP ratio
above 90 percent is likely to reduce growth (this is also the view emerging from
chapter 18). A large public debt is a drag on growth, drives up interest rates,
requires heavier taxation, and often as in Italy over the past decade results in
reduced public investment in research and infrastructure. In the long run it
is a threat to the welfare state, potentially undermining social cohesion. Italy’s
economic history shows that the country is more “debt tolerant” than most
other countries, and has an excellent reputation for paying interest and princi-
pals. Nevertheless, a prolonged period of high debt, with no discernible down-
ward trend, coupled with tax rates higher than 40 percent (high in historical
and comparative perspective) was not seen in peacetime since the first decades
after unification, another similarity between the two “tails.” In the late 1890s
the debt-to-GDP ratio was nearly 120 percent. A credible and time-consistent
commitment to debt reduction was one of the macroeconomic conditions for
convergence growth that took place in the following years.
A third “novelty” of the 1990s and 2000s was the overvaluation of the real
exchange rate, in contrast to Italy’s previous economic history when it was
almost always undervalued or close to parity. Chapter 13 argues that underval-
uation fosters growth by shifting resources from protected sectors to high pro-
ductivity growth export-oriented industries. The authors of chapter 13 maintain,
however, that this effect became weaker as the economy grew. It was probably
a fairly significant factor until the start of the 1970s, much less so thereafter. It
is thus unlikely that the historical novelty of an overvalued real exchange rate
slowed down growth after 1993. More than a cause of the disease, it was prob-
ably a symptom. As the nominal exchange rate rose, Italy did not respond with
adequate product and labor market policies aimed at keeping unit costs in line
with its euro area competitors.
The Impact of Old Weaknesses

Most of the chapters in this book highlight cultural, social, institutional, and
economic weaknesses of Italy’s long-term growth since the unification of the
country. Many of these weaknesses (North-South divide, low human and social
capital, weak competition in the domestic product and labor markets, finan-
cial intermediation defined a “petrified forest,” narrow capital markets, inef-
ficient public administration, and insufficient research and development)show
an incredible secular persistence. Many of them also figure prominently in the
literature as the causes of Italy’s unsatisfactory economic performance since the
mid-late 1990s.
To argue that ossified and never corrected weaknesses explain Italy’s diver-
gence in the 1990s and 2000s one must explain why the same weaknesses were
not an obstacle to rapid catch-up growth until the last decade of twentieth cen-
tury. This explanation needs to account for the fact that the 1990s witnessed a
good number of reforms trying to improve on at least some of the previously
mentioned weaknesses (see chapters 3, 17, and 19).
In 1990–1993 a comprehensive banking reform, the first since 1936, set in
motion the privatization of the savings banks and the IRI-owned “big three”
creating conditions for the emergence of large banking groups in an open and
market-oriented environment, which improved the allocative efficiency of the
financial system (see chapter 17). In 1997 and 2003, legislation was introduced
that considerably increased labor market flexibility (at the cost, however, of
increasing the gap between protected “insiders” and “outsiders”). Important
changes were introduced in the university system. In 1998, Italy’s product mar-
kets were the fourth most tightly regulated among those of the Organization
for Economic Cooperation and Development (OECD) countries (after Poland,
Turkey, and Greece); they are now less regulated than those of France, Belgium,
and Austria. Even more impressive have been improvements in administrative
regulation and overall “barriers to entrepreneurship” (Wölfi et al. 2009). Some
of the chronic weaknesses of the Italian economy were addressed and partly
solved after 1992, even though the implementation of the reforms met with
grassroots’ resistance that rendered them often incomplete, ill-applied, and dis-
torted. Moreover, at the turn of the century the reform drive ran out of steam,
and Italy has continued to slip downward in the “doing business” rankings of
the World Bank (www.doingbusiness.org/).
To understand why old deficiencies are now much more of a drag on the
economy than they were before, despite non-marginal steps taken to correct
some of them, two obvious considerations are in order. First, the interna-
tional environment has been transformed by globalization, technology, and the
European single market and currency. Second, the very success of long-run
convergence has altered the conditions that make its continuation possible.
Once a country (almost) closes the productivity gap with the most advanced
countries, new ways to economic growth must be found. As we have seen, an
economy that is far from the technology frontier can exploit its backwardness
to grow faster than the leader by adapting imported technology to its own
factor endowment and by shifting labor from low- to high-productivity sec-
tors, but in the proximity of the frontier, other growth factors become crucial:
apt institutions (in the broad sense), research, human capital, and physical and
intangible infrastructure.
There is no need to repeat here the list of Italy’s long-standing and
never-corrected economic weaknesses: they are measured and discussed at
length in the various chapters of this book. Most of them proved to be rela-
tively harmless in a backward country engaged in catch-up growth in a context
of mild protection from international competition. They became more bind-
ing as Italy moved close to the productivity frontier, and turned into heavy
fetters with the “second globalization,” the single European market, and the
new “encompassing technology” (ICT) of the twenty-first century. Italy ranks
twenty-fourth out of the twenty-six countries for which the OECD has pro-
duced an index of the capacity to withstand globalization based on regulations,
education, labor market flexibility, employment programs, and environment
for innovation.
To a good extent, Italy missed the chance to exploit the ICT revolution, the
present era’s “general purpose technology,” to increase productivity, particularly
in the service sector, now by far the largest share of the economy. This is a
technology that by its nature cannot thrive in an overregulated environment.
Italy’s timid deregulation was not sufficient to encourage the spread of infor-
mation and communication technology, nor did it help small firms to grow in
size. Above all, the transfer and the diffusion of ICT require more human capi-
tal than Italy had built up over the decades. The case of education (see chapters
8, 9, and 11) is a good illustration of how a long-standing weakness became a
serious drag on growth only from the 1980s or 1990s onward.
Education, a Case in Point

In Italy’s 150 years as a unified nation, school attendance among the population
aged fifteen to sixty-four has risen from an average of just over one year to
10.8 years, but this enormous progress has not brought convergence in this field
with the other main European countries. Some of these countries, themselves
not richer than Italy in 1861, had already then significantly higher literacy rates.
Others, such as Finland, began with even lower rates of school attendance but
overtook Italy in the second postwar years. Italy’s school attendance rate is still
the lowest in the twelve countries of Western Europe. According to de Mauro
(1991), a distinguished linguist and a former minister of education, the (relative)
neglect of universal education was the gravest sin committed by Italy’s elites
from unification to the present day.
It is likely that the relative scarcity of human capital, as gauged by school

attendance, did not negatively impact on the rate of catch-up from the initial
backwardness to a productivity level close to the frontier. Some scholars main-
tain that it may even have favored growth, because the kind of skills required
in the catch-up phase derived from practical and informal know-how passed
on tacitly on the job, rather than acquired by formal education. To simplify a
complex issue: to successfully import and adapt foreign technology Italy needed
a good pool of highly trained engineers and a workforce with basic education
and skills acquired in agriculture, construction, or craftsmanship. It was well
endowed with both. Close to the frontier, in a globalized world, low human
capital is a barrier to the diffusion of ICT, to endogenous innovation, and to the
adoption of state-the-art production processes. Moreover, low human capital
makes it more difficult to generally “cope with globalization,” including through
the understanding of different cultures; it is also a barrier to the formation of
the intangible social capital of trust and sense of belonging that is conducive to
community cohesion (see chapter 11). Italy’s relatively poor human capital may
go quite a long way in explaining the entrenched reluctance to change of a large
portion of the Italian electorate.
In strictly quantitative terms, it is encouraging that the fastest improve-
ment in average years of schooling in the population ever achieved by Italy
came in the first decade of the twenty-first century: from 8.3 in 2001 to 10.8 in
2010 (see chapter 9), equal to an increase by 2.9 percent per year (3.6 percent
in the South), compared with 1.7 percent over the previous thirty years. More
important still, the share of population aged twenty-five to sixty-four that
completed tertiary (university) education increased from 9.4 percent in 2000
to 14.5 percent in 2009 (see chapter 9). The rate of university enrolment in
the relevant age group was in 2009 close to the OECD average, as was the
dropout rate. In this area enormous progress was made in the first decade
of the twenty-first century, despite low GDP growth. Given the low starting
level, however, it will take several years for the ratio of university graduates in
the population of working age to come close to the OECD average and make
an impact on growth. Moreover, the quality of Italian education has ample
room for improvement: the OECD PISA mathematics score of Italy’s second-
ary school students is not statistically different from that of the United States
(a notoriously poor performer) and much below the European, let alone the
Asian, averages (www.pisa.oecd.org/).
Education is not the only area where Italy was improving in the years of
low GDP growth. Between 2000 and 2009 life expectancy at birth increased by
two full years, from 79.8 to 81.8, and infant mortality decreased from 4.3 to 3.7
per thousand (OECD 2012). The number of deaths in car accidents decreased
from 5,669 in 2006 to 4,090 in 2010 (http://dati.istat.it/). Poverty, both absolute
and relative, remained constant over the years, including the 2008–2009 crisis.
As in 1861–1896, low growth and divergence did not mean lack of improvements
in some crucial quality-of-life indicators.
The Roots of Sluggish Growth

The points made in this final section can be summarized as follows. In the
1980s, Italy’s productivity continued to converge to that of the leaders, if at a
lower pace than in the previous “Golden Age.” Growth was sustained by a lax
fiscal stance (see chapter 18) and, to a small extent, by the undervaluation of the
real exchange rate (see chapter 13). Neither option was available in the 1990s and
2000s. Moreover, a weakening of the public and private large enterprise as an
engine of growth had taken place from the 1970s onward (see chapters 14–16).
Both the high debt-to-GDP ratio and a weaker ability to generate research and
development and economies of scale are likely to have impacted negatively on
growth in the post-1992 competitive and technologic environment, although it
is difficult to quantify their impact. In addition, and despite the reforms of the
1990s, in the new international environment a number of long-standing weak-
nesses of the system came to weigh much more heavily than before on the per-
formance of the Italian economy.
According to the The Global Competitiveness Report by the World Economic
Forum, “Italy continues to do well in more complex areas measured by the
Global Competiveness Index, particularly the sophistication of its businesses
( . . . ) producing goods high on the value chain, with one of the best world’s
clusters (2nd). Italy also benefits from its large market size”(Schwab 2011,27).
However, the Report notes that such strong points are hampered by structural
weaknesses, such as those briefly highlighted previously, and by high levels of
corruption and organized crime. Overall, “Italy ranked 88th (out the 142 coun-
tries considered in the Report) for is institutional environment.”
The synthetic quantification of institutions is a complex and controversial
task: a good case in point is the different appreciation by compilers of national
rankings of Italy’s labor market efficiency. Its assessment by the previously
quoted OECD team (Wolfi et al. 2009) is strikingly more favorable to Italy
than that by the World Economic Forum. Nevertheless, most of the chapters in
this book point in the direction of widespread and long-standing institutional
failures. The adoption of ICT is a good case in point. As argued by Crafts
(2011b, 8–9):“The diffusion of this new technology was hindered by oppressive
regulation and shortfalls in human capital by comparison with the European
leaders in the take up of ICT(Conway et al., 2006).[ . . . ] In the retail sector,
where the potential for ICT to raise productivity was very considerable, it is
clear that productivity performance was impaired by regulation; barriers to
entry and mark-ups in retailing remained high on average with adverse con-
sequences for TFP (Daveri et al., 2010). However, in districts where competi-
tion was stimulated by the 1998 regulatory reform both ICT investment and
labor productivity increased (Schivardi and Viviano, 2011).”If ICT diffusion is
aided by complementary investments in intangible capital and in high-quality
human capital, shortcomings in these areas are ultimately caused by institu-
tional failures.
Why has Italy been so stubbornly resistant to deep institutional change?

Why have far-reaching reforms been rare in the country’s history? The authors
of chapter 3 offer four explanations: (1) the severity of the division between
groups and parties, paradoxically increased by the demise of ideologies and
of the traditional political parties, which only strengthened Olson’s (1982) dis-
tributional coalitions; (2) the difficulty, on the firm’s side, to efficiently allo-
cate entrepreneurial talents because of a closed corporate governance centered
on family controlled and pyramidal business groups; (3) the lack of political
leadership in reforming the public sector (education, justice, and security are
major growth factors, and their weakness is particularly crippling to the south-
ern economy); and (4) an overall institutional (and constitutional) design that
renders substantial policy decisions difficult to make.
These weaknesses have ancient roots. The institutional design of the new
kingdom in the aftermath of the unification was hastily assembled and, some
argue, focused primarily on market unification, thus partly missing the oppor-
tunity offered by the caesura of 1861 to build the institutional infrastructure of
a modern state, which besides Piedmont hardly existed in the Peninsula (see
chapter 19). The institutional and political weakness of liberal Italy was exposed
immediately after the First World War, another major caesura, giving way to
populism and dictatorship. The “modernizing” features of the latter came from
agencies created outside of the official state bureaucracy (Melis 1996), which was
inefficient, pervasive, and swollen in the Depression to enhance middle-class
consensus for the regime. Finally, if the second-postwar reconstruction was the
result of good leadership and national cohesion behind the surface of fierce
political competition, it is possible that Italy’s treatment by the occupation
power, less invasive than in Germany and Japan, might have been a curse in
disguise (see chapters 3 and 4) as a missed opportunity for a more radical insti-
tutional change.
Italy, however, is not unable to change, particularly when cornered by seri-
ous crises. In the mid-1890s Italy was in the throes of the potentially devastating
epilogue to a banking and balance-of-payments crisis, permeated with episodes
of corruption and wracked by fierce political struggle. The country survived
thanks to fundamental institutional changes, including the creation of the Bank
of Italy, and—in the wake of the shocking military defeat on the battlefield of
Adowa—the recovery of national cohesion, which permitted the design of time-
consistent economic policies. In the early 1930s a group of technocrats saved the
banking system from the fate that befell the Austrian and German banks. After
the war, Italy dug itself out of the material, moral, and political rubble thanks
to a political elite farsighted enough to forge a compromise that produced the
constitutional pact for the Republic. In the 1970s and again in the early 1990s
Italian society found the strength to overcome the crisis and introduce relevant
reforms. Unfortunately, institutional reforms were almost ever imperfect and
incomplete, and sometimes watered down after the immediate threat was over-
come. The truce among the various distributional coalitions often did not last
long enough to allow institutional reforms to permeate society. This is likely

to change in the medium term as international competition and conditional-
ity create incentives for institutional reforms. Moreover, and more important,
the impact of the recent acceleration in human capital formation on ever-larger
strata of the population will not only weaken negative aspects of Italy’s culture
but encode individually learned techniques and experiences into organizational
routines that are possibly more important than formal institutions. More than
in other countries Italy’s future crucially depends on the quality and diffusion
of education.
Acknowledgment
I am grateful to the researchers and staff of the Economic History Research
Division at the Bank of Italy for their invaluable support and to Alfredo
Gigliobianco, Claire Giordano, and Matteo Gomellini for useful comments.
Chapter 2
ITALY AND THE

FIRST AGE OF
GLOBALIZATION,

harold james and

kevin h. o’rourke
Introduction: Italian Policies

and Performance in a Comparative
Perspective
There is a natural tension in economic history between the tendency of
economists to generalize, and the insistence of the historian on what is specific
to particular times and places. A comparative perspective then becomes par-
ticularly helpful in seeing what features of a country’s economic development
are specific to that country, and in placing this history within a broader inter-
national context. It is natural for economic historians to blame their country’s
failings on country-specific institutional weaknesses or policy mistakes, or to
explain their country’s successes in a similar manner. However, when one looks
at the broader international context, one may see similar behavior elsewhere,
suggesting that at least to some extent, these failures or successes may be part
of a much bigger story.
This chapter demonstrates that such a comparative perspective is

indispensible when considering Italian economic policy and performance in
the years between unification and World War II. In particular, Italian trade
policy, monetary policy, and industrial policy were not that unusual in the con-
text of the time, and particularly when one remembers that Italy was a poor,
capital-scarce economy trying to deal with the challenges that all European
countries faced during this period: how to industrialize, how to become or
remain militarily competitive, and how to grapple with the challenges of glo-
balization. The fact that Italy was capital-scarce is crucial in explaining its trade
policy, its monetary and financial policies, and its industrial policy, with all of
these policies having ramifications for each other. During the period discussed
here, Italian trade and monetary policies were by no means out of the ordinary,
however beneficial or harmful they may have been. If an Italian specificity can
be located, this is more in the field of industrial policy, particularly during the
interwar period, and one can argue that these innovations helped to set the
stage for the Italian postwar miracle, if at an eventual cost. However, this devel-
opment can also be understood by appealing to the interaction between the
international economic situation of the time, and banking and industrial sys-
tems that were themselves the product of Italian capital scarcity.
To understand what follows, one needs to start at the beginning, and ask
what were the challenges facing the newly unified Italian state. The Kingdom
of Italy was established in 1861, just at the time when the world was beginning
to grapple with a new and intensive phase of globalization. Declining transport
costs led formerly sheltered sectors to become exposed to international competi-
tion for the first time, including grain, olive oil, and citrus fruits, all important
in the Italian context. Market integration also made it more difficult for periph-
eral economies to industrialize, because they were faced with low-cost competi-
tion from the expanding industrial core. In those parts of the world where local
populations were deprived of the ability to determine their own trade policies,
the nineteenth century was a period of deindustrialization, a dangerous phe-
nomenon at a time of increasingly industrialized warfare.
Politically, the late nineteenth century saw the beginnings of a rudimentary
system of international economic governance. The 1860 Cobden-Chevalier treaty
set up the basic institutional mechanism in the form of most-favored-nation
clauses that would dominate trade negotiations between states for more than a
century. In 1863, an International Postal Congress in Paris began to work on the
integration of local and national postal systems. The globalization of the 1860s
was not just a question of economics and economic governance: entertainment,
ideologies, and humanitarianism all became internationalized. In the middle of
the nineteenth century, the world was galvanized by the transatlantic cable and
the ubiquitous railroad; by the music of Verdi and Wagner; and by the reforms
of Cavour, Bismarck, Gladstone, and Lincoln. The battle of Solferino in the war
of 1859 produced not just the final impetus for Italian unification but also the
International Committee of the Red Cross, as the outcome of the experience of
italy and the first age of globalization, 1861–1940 39
the Genevois businessman Henri Dunant in trying to care for the wounded on
the battlefield.
Some commentators see the nation-state of the mid-nineteenth century in
Europe as a response to the challenges of globalization. There was an external
and an internal challenge: how could political societies be strong enough to
compete with existing and well-established nations, and how could they over-
come internal divisions.
The developments of the 1860s were the outcome of vast and bitter civil
wars. One should place the unification of Italy and the nearly simultaneous cre-
ation of the German empire alongside the drama of the much bloodier but also
highly divisive American Civil War. In each case, a more industrialized north
defeated a rural, and perhaps more romantic, south.
Italian and German businessmen, thinkers, and politicians saw a need to
catch-up with a new model of preeminence and power offered by Great Britain.
Italy had included territories with the highest per capita income in the world
between 1300 and 1600, but since then had undergone a significant relative
decline, associated with absolute stagnation (Maddison 2010). Britain, however,
had some rather unique advantages: above all it had security at a relatively
cheap price because of its island location. For the small and comparatively
dynamic ancien régime states that lay on the old historic Rhineland and Alpine
trade route from the North Sea to the Mediterranean, such as the Netherlands,
Tuscany, Venezia, or Baden, there was no such easy answer. Defense was too
expensive, and territorial expansion would produce additional costs that could
not be covered from additional revenue. Unconventionally shaped states had
a greater incentive to change the status quo: Prussia, an odd amalgam of
low-quality agricultural land with some rich territories in the west of Germany,
in the Rhine corridor; or Piedmont, a prosperous and heavily French influ-
enced territorial state linked to a large and poor Mediterranean island. These
two states already incorporated huge contradictions, between rich and poor,
between manufacturers and farmers, and between Protestant and Catholic. An
expansion might be a way of reducing or relativizing these differences by set-
ting them in a larger context.
When the unconventional Italian and German state had triumphed, when
Cavour and Bismarck stood supreme, there was a clear but problematical legacy
of the way in which unity had been thought and fought. As Massimo d’Azeglio
famously put it, Italy was made: now it was time to make Italians (“L’Italia è
fatta, ora restano da fare gli italiani ”). A developmental strategy was needed
that fit with the prevailing sense of the need to create the sinews of a new state.
There was also a legacy of the security dilemma that had produced unification:
that changing the state structure depended on altering the age-old continental
Austro-French balance that went back to the rivalry of Habsburg and Valois. It
was likely that the developmental strategy should have a heavy military orienta-
tion. The German approach made the house of Krupp the iconic German enter-
prise of the Kaiserreich; the apparent success of the German model pushed the
Kingdom of Italy to a developmentalism that in the 1880s focused on building

up the improbable Umbrian town of Terni into a Central-Italian Krupp, a rep-
lica of Essen. Making Italians almost inevitably carried with it the demand for
a strategy of developmentalism, which had major implications for trade and
banking policy.
Italian Trade Policy in a

Comparative Context, 1861–1929
In 1851 and 1859, the Piedmontese government adopted tariff reforms that greatly
liberalized trade policy in the kingdom.1 This was consistent with the liberal
philosophy of Cavour, and with the free-trade philosophy of the time, which
culminated with the signing of the Cobden-Chevalier Treaty between France
and Britain in 1860. Toniolo (1990) notes that in contrast with other policy areas,
unification of the Peninsula’s customs policies happened suddenly and brutally,
without the transition periods commonly imposed during more recent moves
toward free-trade areas or customs unions. The liberal Piedmontese tariff, and
existing Piedmontese trade and navigation treaties, were extended to the new
Kingdom with barely any modifications. This was followed in 1863 by the sign-
ing of a trade treaty with France, as a result of which Italy became a member
of the nascent “European network of treaties” based on the most-favored-nation
clause. Bairoch (1989) notes that in the mid-1870s, at which stage this network
of trade treaties was at its apogee, Italy had the second lowest tariffs of any
major Continental European economy, with average tariffs on manufactured
goods of between 8 and 10 percent (Table 2.1). Initially local producers retained
some of the protection offered by poor transportation facilities, but as railways
were constructed across the country, this protection was gradually eroded.
Such a liberal stance was entirely typical in the context of the period. It could
also have been expected in a largely agricultural economy, with net exports of
agricultural goods and a powerful landowning class.2 However, manufacturers in
a variety of industries, especially in the South (which had been heavily protected
before unification) lost as a result of this abrupt shift to what almost amounted
to free trade, and it was predictable that they would seek to redress matters.
In 1870, a commission of inquiry into Italian manufacturing was set up on the
grounds that the 1863 trade treaty with France would soon be up for renegoti-
ation. The inquiry was the opportunity for businessmen in textiles and heavy
industry (the latter supported by the military) to demand protection, and the
outcome was the adoption of a tariff in May 1878, which is often taken to mark
the end of free trade in Italy. The textile industry was the most-favored sector,
and modest tariffs on wheat were also introduced. Overall, however, this was not
a dramatic increase in protection, and tariffs were reduced as a result of trade
treaties being signed, for example with France in 1881. This was not sufficient for
industrialists; another commission led, finally, to the adoption of a far more pro-
tective tariff in 1887, which imposed high duties on textiles, and (especially) iron
and steel products. The duty on yarn amounted to some 27 percent according
to Toniolo (1990, 84), compared with a tariff of just 7 percent on cloth (imply-
ing little or no effective protection for weaving); similarly, engineering had to
pay for the very high tariffs on iron and steel, without being compensated with
high tariffs for its own output. Wheat tariffs were also dramatically increased,
amounting to the equivalent of 25 percent ad valorem in 1885.
This shift to protection has been widely criticized in the Italian literature,
but it was hardly an Italian peculiarity. Just as the 1860s saw a move toward freer
trade across Western Europe, and not only in Italy, so too the 1880s saw a rever-
sion to protectionism. The Italian tariff increases are also exactly the reaction
to the grain invasion that would be predicted by Rogowski’s (1989) Heckscher-
Ohlin model of the politics of trade policy during this period. Because Italy was
a capital-scarce economy, Italian industrialists were bound to be protectionist,
but initially they had to deal with the opposition of many landlords, because
Table 2.1 European manufacturing tariffs, 1875 and 1913

Country 1875 1913 (1) 1913 (2) 1914 1913 (3) 1913 (4)
(percent) (percent) (percent) (percent) (rank) (rank)
Belgium 9–10 9 9 10 11 11
Denmark 15–20 14 n.a. 18 16 I4
France 12–15 20 21 22 12 12
Germany 4–6 13 13 17 6 3
Italy 8–10 18 20 18 15 17
Norway 2–4 n.a. n.a. 12 8 8
Portugal 20–25 n.a. n.a. n.a. 14 13
Spain 15–20 41 34 42 18 18
Sweden 3–5 20 25 23 5 6
Switzerland 4–6 9 8 7 3 7
The Netherlands 3–5 4 n.a. 3 1 1
United Kingdom 0 0 0 n.a. 4 5
Source: Bairoch (1989, 76), O’Rourke and Williamson (1999, 98–99).

Notes: 1875: average levels of duties on manufactured products in 1875, from Bairoch (1989, 42, table 5);
1913 (1): League of Nations estimate, as reported in Bairoch (1989, 76, table 9); 1913 (2): Liepmann (1938)
estimate, as reported in Bairoch (1989, 76, table 9); 1914: average duties on British manufactures, Bairoch
(1989, 76); 1913 (3): rank among 18 countries (1 = least protectionist, 18 = most protectionist), based on the
adjusted trade intensity ratios in Estevadeordal (1997, 104, table 6); 1913 (4): rank among 18 countries
(1 = least protectionist, 18 = most protectionist), based on the openness measures in Estevadeordal (1997,
105, table 6). n.a. = not available.
Table 2.2 Agricultural protection, 1913

Country Wheat 1913 1913 (1) (rank) 1913 (2) (rank)
(percent)
Belgium 0 8 7
Denmark 0 1 1
France 38 10 12
Germany 36 6 6
Italy 40 12 16
Norway 4 16 13
Portugal Prohibitive 18 18
Spain 43 14 17
Sweden 28 7 8
Switzerland 2 17 14
The Netherlands 0 3 3
United Kingdom 0 4 2
Source: O’Rourke and Williamson (1999, 98–99).

Notes: Wheat 1913: levels of duties on wheat, calculated by Bairoch
(1989, 76, table 9); 1913 (1): rank among 18 countries (1 = least protectionist, 18 =
most protectionist), based on the adjusted trade intensity ratios in Estevadeordal
(1997, 104, table 6); 1913 (2): rank among 18 countries
(1 = least protectionist, 18 = most protectionist), based on the openness measures
in Estevadeordal (1997, 105, table 6).
Italy was an agricultural exporter in the context of Europe. The worldwide

reduction of transport costs, however, switched landowners to the protectionist
camp, by exposing them to competition from the land-abundant frontier econ-
omies; a coalition of iron and wheat was a logical consequence, with socialists
supporting the free trade that was in the interests of relatively abundant Italian
labor (Bairoch 1989, 134).
The increase in protection implied by the 1887 tariff was exacerbated by a
trade war with France that started in the following year, and which severely
damaged the Italian silk and wine industries. Between 1887 and 1897, Italian
exports to France fell by 57 percent, compared with a 21 percent decline in
bilateral trade in the opposite direction (Conybeare 1985, 161). The trade war
ended in stages: Italy abandoned its penalty tariffs against France in 1890, and
France reciprocated in 1892. Even so, it was only in 1898 that France accorded
Italy minimum tariff status (160).
Wheat tariffs were also increased again in 1888, and yet again in 1894. By
1913 wheat tariffs in Italy were equivalent to a roughly 40 percent ad valorem
tariff (Table 2.2). However, a series of trade treaties subsequently lowered rates
of Italian protection, favoring agricultural exports at the expense of protection

for industry. Tariffs were thus on a downward trajectory between the mid-1890s
and World War I, and indeed the wheat tariff was suspended when war broke
out. Tariff policy remained relatively liberal until 1925: a tariff of 1921 was again
watered down by a series of treaties, which had been the intention because the
1921 tariff was a tarif de combat. In 1925, however, wheat and sugar duties were
sharply raised, ostensibly for revenue reasons, and in 1926 tariffs on manufac-
tured goods were increased again.
The wisdom or otherwise of Italian protection during the late nineteenth cen-
tury has been the subject of ferocious debate among economic historians. Some
authors argue that grain tariffs helped smooth the disruption associated with the
influx of cheap cereals from the frontiers, thus lowering adjustment costs, whereas
tariffs on iron and steel helped establish Italian heavy industries, which otherwise
would never have been established, and which were crucial for industrialization
in the long run. (A contemporary might have added that industrialization was
crucial for military security, whatever the deadweight economic losses this might
have implied.) However, others have argued that the structure of protection was
irrational. Gerschenkron (1962), who in principle accepted that government inter-
vention could be beneficial in a backward economy, such as Italy, argued that
the lack of Italian coal reserves implied that Italian policy should have promoted
industries that were not coal-intensive, such as engineering. Instead, the tariff
favored the iron and steel industries, which were heavy consumers of coal (and
were thus uncompetitive), and placed engineering at a disadvantage. Moreover,
the tariff failed to protect “the equally promising field of the chemical industry,
pregnant with many innovational possibilities and well suited to the conditions
of the country,” whereas tariffs promoted the cotton textile industry, which was
old, “with a moderate rate of modern technological progress and accordingly rel-
atively limited possibilities in a backward country on the European continent”
(Gerschenkron 1962, 81, 83).3 Gerschenkron also objected to the grain tariffs on
the grounds that they damaged industry, and Fenoaltea (1993) has provided a for-
mal rationale for this in the form of a quasi-classical model in which grain tariffs
increased nominal wages (because the real grain wage was exogenously given as
a result of migration flows)4; these higher nominal wages reduced employment in
manufacturing, with the surplus labor emigrating.5
It is beyond the scope of this chapter to adjudicate between the various
arguments that have been made about the effectiveness or otherwise of Italian
tariffs, but it can provide some guidance to the following questions: How high
were Italian tariffs? How high were they in an international context? Were they
sufficiently high as to have had a big impact on the Italian economy?
The first question to address is: how high were Italian tariffs? Tables 2.1–2.3
provide one answer to this question for the pre-1914 period, based on the work
of Bairoch (1989), Liepmann (1938), and Estevadeordal (1997). As noted, aver-
age manufacturing tariffs were relatively low in Italy in 1875, so the focus here
is on average levels of protection on the eve of World War I. The first two
Table 2.3 Overall protection, 1913

Country 1913 (1) 1913 (2) 1913 (3) 1913 (4) 1913 (5)
(percent) (percent) (percent) (rank) (rank)
Belgium 15.8 6 14 10 10
Denmark 5.8 9 n.a. 2 4
France 8.7 18 24 14 14
Germany 7.9 12 17 8 8
Italy 9.7 17 25 16 17
Norway 11,4 n.a. n.a. 11 12
Portugal 23.7 n.a. n.a. 17 15
Spain 14.3 33 37 18 18
Sweden 9 16 28 7 7
Switzerland 4.4 7 11 9 9
The Netherlands 0.4 3 n.a 1 1
United Kingdom 5.6 0 0 3 3
Source: O’Rourke and Williamson (1999, 98–99).

Notes: 1913 (1): import duties as percent of special total imports (1909–1913),
calculated by Bairoch (1989, 76, table 9); 1913 (2): League of Nations estimate,
as reported in Bairoch (1989, 76, table 9); 1913 (3): Liepmann (1938) estimate, as
reported in Bairoch (1989, 76, table 9); 1913 (4): rank among 18 countries (1 = least
protectionist, 18 = most protectionist), based on the adjusted trade intensity
ratios in Estevadeordal (1997, 107, table 8); 1913 (5): rank among 18 countries
(1 = least protectionist, 18 = most protectionist), based on the openness measures in
Estevadeordal (1997, 107, table 8).
authors provide a range of percentage tariffs: the ad valorem tariff on wheat

and average tariffs for industrial products, agricultural products, and imports
as a whole. For example, column (1) of Table 2.3 gives Bairoch’s average tariffs,
computed as the ratio of customs duties to the value of imports. As is well
known (Anderson and Neary 2005) this measure is biased downward, because it
amounts to an import-weighted average tariff, and as tariffs increase on partic-
ular products the weight on these products declines. However, it has the advan-
tage of being easily measurable for many countries. Bairoch’s data suggest that
in 1913, the Italian average tariff was 9.7 percent, somewhat higher than French
or German average tariffs, but much lower than average tariffs in Portugal or
Spain, and such industrialized countries as Belgium or the United States.6 The
overall impression one gets from the average tariff data in Tables 2.1–2.3 is that
Italian tariffs were roughly comparable with tariffs in France, with manufactur-
ing tariffs being generally a little lower in the Peninsula, whereas tariffs were
clearly lower in Italy than in Spain and Portugal. However, the Italian wheat
tariff was quite high in an international context.
.14
.12
.10
.08
.06
.04
.02
.00
1876 1880 1884 1888 1892 1896 1900 1904 1908 1912 1916
Year
France Germany Italy

Sweden UK
Figure 2.1 Average agricultural tariffs, 1870–1913. Source: Lehmann and O’Rourke (2010).
Estevadeordal (1997) adopts a different approach, inspired by Leamer (1988).

This approach assumes that trade is driven by Heckscher-Ohlin forces, and
that any divergence from the level of trade that the Heckscher-Ohlin model
would predict must be caused by protectionism. As can be seen from the tables,
this method concludes that Italy was one of the most protectionist countries in
Estevadeordal’s sample, but the method is obviously suspect, because it is only
as reliable as the econometric and theoretical framework used to generate the
predicted “correct” level of trade.
The overall impression, then, is that Italian protection in 1913 or 1914,
although nonnegligible, was not out of the ordinary in the context of the time.
This is the major theme of Federico and Tena (1998). However, there is one
problem with judging Italy’s protection by the yardstick of levels of protection
Europe-wide in 1913: tariff levels were not constant over time, and indeed were
falling in Italy from some point in the 1890s onward. Figures 2.1–2.3 remedy this
by plotting average tariffs in Italy and four other major European economies
(France, Germany, Sweden, and the United Kingdom) between the mid-1870s
and World War I. The graphs plot three different average tariffs: (1) those on
imports of agricultural goods; (2) those for manufactured goods; and (3) those
for “exotic” goods (i.e., revenue tariffs on goods clearly not produced domesti-
cally, or substituting for domestically produced goods).
These data suggest that, compared with other large European economies
of the time, with whom Italy would have compared herself, Italian tariffs
were toward the high end of the spectrum for most of this period. Her agri-
cultural tariffs were similar to German ones: slightly higher for most of the
.12
.10
.08
.06
.04
.02
.00
1876 1880 1884 1888 1892 1896 1900 1904 1908 1912 1916
Year

Sweden UK
Figure 2.2 Average manufacturing tariffs, 1870–1913. Source: Lehmann and

O’Rourke (2010).
period, but lower toward the end. It is important to note, however, that these
agricultural tariffs include tariffs on sugar, which were extremely high in Italy.
Her manufacturing tariffs were lower than tariffs in Sweden, but usually higher
than tariffs in France or Germany. Her revenue tariffs (i.e., tariffs levied on
such goods as coffee, tea, and other products clearly not produced domestically)
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
1876 1880 1884 1888 1892 1896 1900 1904 1908 1912 1916
Year

Sweden UK
Figure 2.3 Average revenue (exotic) tariffs, 1870–1913. Source: Lehmann and
O’Rourke (2010).
70
60
shillings per quarter
50
40
30
20
1870 1875 1880 1885 1890 1895 1900 1905
France Germany
Italy Sweden
Figure 2.4 Nominal wheat prices (shillings per imperial quarter), 1870–1906.
Source: O’Rourke (1997) and data courtesy of Giovanni Federico.
were much higher than in other countries in the late 1880s and 1890s, if unre-
markable at other times. However, Italian tariffs were not wildly out of line
with tariffs in other European countries. They were surely lower than in such
countries as Spain (not included in the Lehmann-O’Rourke sample) and the
highly protectionist United States. It was Italian revenue tariffs that really stood
out during the periods when Italian protection was at its highest in relative
terms.
Wheat tariffs have been particularly criticized in the Italian literature.
Although the authors do not yet have comparable data on wheat tariffs in Italy
and other countries, there are data on wheat prices. Figures 2.4 and 2.5 place
Italian wheat prices in the late nineteenth century into a comparative per-
spective. Figure 2.4 plots nominal wheat prices in four protectionist European
economies: (1) France, (2) Germany, (3) Italy, and (4) Sweden.7 Tariffs were not
enough to prevent wheat prices from falling in any of these countries: they
could counteract the impact of cheaper transport between Western Europe and
the granaries of Russia and the New World, but they were not high enough to
counteract the impact of technological change, which was lowering the supply
price of wheat in these locations (O’Rourke 1997). The degree to which prices in
the four countries moved together is noteworthy: tariffs and transport costs cre-
ated wedges between prices in different countries, but grain markets remained
fundamentally linked together. Italian prices were by no means out of line with
prices in the other three countries, although they were slightly higher in the
early years of the twentieth century. Figure 2.5 provides the same data, and
those for the United Kingdom, but expressed now as a percentage premium over
prices in Odessa. There is a clear divergence between trends in the protectionist
100
80
60
percent
40
20
–20
1870 1875 1880 1885 1890 1895 1900 1905

Sweden UK
Figure 2.5 Wheat prices relative to Odessa, 1870–1906 (% price gaps). Source: O’Rourke
(1997) and data courtesy of Giovanni Federico.
countries on the one hand, and the free-trading United Kingdom on the other;
Italy does not stand out within the former group of countries as being particu-
larly protectionist, according to this criterion.
Federico and Tena (1998) show that what was true of 1913 was true also for
the mid-1920s: Italy was very much an average country when it came to tar-
iff levels. According to League of Nations data, Italy came either ninth out of
twenty countries, or eighth out of sixteen countries, in the protectionist league
table; according to the data presented in Liepmann (1938), it came ninth out of
fifteen. Table 2.4 shows that, as in the late nineteenth century, it was Italian
revenue tariffs that were particularly high, although the relatively high tariffs
on semimanufactured goods also suggests an overall tariff policy that was not
as consistently pro-industrial development as it might have been. However, as
has been seen in earlier years, Italian protection had been reasonably high in
the context of other major Western European economies. Was it high enough to
have had a big impact on the Italian economy?
Table 2.4 Nominal tariff rates, 1927

Fiscal goods 30.9 51 61.1
Foodstuffs 12.7 19.6 15.8
Semimanufactures 12 10.4 22.2
Manufactures 21.6 15.5 22.2
Source: Federico and Tena (1998, 89, table 7).

To answer this question one must first determine the structure of protection:
what sectors were most protected, especially taking into account the fact that
some of their inputs might have been made more expensive as a result of tariff
policy. Federico and Tena (1998) provide data on effective rates of protection in
thirty-five sectors in 1911. Their results show that the highest effective rates of
protection were enjoyed by sugar beet processors (126 percent) and the coal and
tar sector (136.3 percent). Within industry, steel-making was a big winner, with
an effective rate of protection of 74.2 percent; textiles (26.9 percent) and cloth-
ing (15.3 percent) also benefitted. The effective rate of protection enjoyed by the
promising engineering and chemical sectors was far more modest (8.2 percent
and 17.9 percent), but at least it was not negative (unlike the case for foundries
and shipbuilding). Overall, the big winners were wheat (30.7 percent) and sugar
production, textiles, and iron and steel production, as the conventional wisdom
has suggested. The choices that were made seem to be more easily explained
by appealing to the political power of landowners, and the nascent military–
industrial complex, than by positing a deeply thought-out strategy of industri-
alization behind tariff barriers. However, Italy was hardly alone in tailoring its
trade policy to the interests of landowners, or in worrying about her military
security.
What was the impact of these tariffs? To answer this question, one inevita-
bly has to commit to a model of the Italian economy, and different models give
different answers. The answer here is based on a fairly standard static model,
outlined in Federico and O’Rourke (2000); this will not satisfy those who believe
that the important effects of trade policy are dynamic, and can only be under-
stood within the context of models that involve nonconvexities of one sort or
another. The finding here is that tariffs were probably not high enough to have
a big impact one way or another, but it is important to recognize that there are
alternative modeling frameworks in which small distortions can end up having
big consequences in the long run.
Federico and O’Rourke distinguish between nine sectors, four of them agri-
cultural and five nonagricultural. The agricultural sectors are wheat and sugar,
lumped together because they were so highly protected (WHEAT); nonwheat till-
age crops (TILL); Mediterranean products, such as wine and oil (MED); and ani-
mal products (ANIMAL). The nonagricultural sectors are the military–industrial
complex (steel-making, the production of rolling stock, and shipbuilding; MIC);
other capital-intensive sectors, such as chemicals and other engineering activities
(KII); textiles (TEXT); other industries (largely consumer industries, such as cloth-
ing and food-processing; OTHER); and nontraded goods including utilities and
services (NT). There are four primary factors of production: unskilled or raw labor
(L), skills (H), capital (K), and land (R). Land is only used in the agricultural sec-
tors, and is sometimes sector-specific; skills are only used in the nonagricultural
sectors, and are assumed to be sector-specific; capital and raw labor are mobile
across sectors, although labor is imperfectly mobile between agriculture and the
rest of the economy so as to account for the reality of rural-urban wage gaps.
Table 2.5 Tariff levels, 1897–1911 (ad valorem

equivalents, percent)
Sector 1897 1911
Wheat and sugar 97.7 29.6
Other tillage 5.7 4
Mediterranean crops 17.8 8.1
Animal products 2.9 3.6
Military–industrial complex 26.1 15.7
Other capital-intensive industries 15.8 6.6
Textiles 6.8 4.1
Other industries 8 8.4
Exotic goods 95.4 74.5
Source: Federico and O’Rourke (2000).
Having constructed the model, which is calibrated so as to replicate the

state of the economy in 1911, one can then impose various tariff-related shocks
on it and see how the economy adjusts. The most obvious shock is to impose
free trade on the economy: this means setting all existing tariffs to zero. The
impact of the shock depends on the sizes of the initial tariffs, which are given
in the second column of Table 2.5. Because wheat and sugar production enjoyed
the highest level of protection, their output would have changed the most,
declining by 53.2 percent; protection led to the combined sugar and wheat sec-
tor being roughly twice the size that it would have had under free trade. This
decline in the WHEAT sector would have led to land being reallocated to other
agricultural sectors, with the result that the output of nonwheat tillage crops
would have expanded by some 21.5 percent, and animal production would have
increased by almost 10 percent. Within industry, the big loser from a switch
to free trade would not surprisingly have been the military–industrial com-
plex, whose output would have fallen by 14.2 percent. The big beneficiary would
not have been engineering (whose output would have declined marginally), but
rather textiles production, whose output would have expanded by 27 percent.
This may seem surprising in light of the literature reviewed previously, but it
makes sense given that the initial tariff on textiles production in 1911 was rel-
atively low, and that as a labor-intensive industry in a labor-abundant country
it should have benefitted from a move to free trade. Overall, agricultural out-
put would have contracted by some 2 percent, whereas industry would have
expanded by 6 percent: the overall structure of the economy would not have
changed by very much. Nevertheless, protection did have a major impact on
individual sectors, and would have had an even bigger impact in 1897, when (as
can be seen from the table) the level of protection was higher.
Overall, the conclusion has to be that Italian tariff policy during this period
was hardly out of the ordinary: it followed the ebbs and flows of international
trends toward and away from freer international markets fairly faithfully. The
pattern of production was not dissimilar from that in other European countries
with a similar economic structure: as everywhere, Italy protected grain, whereas
the protection afforded to heavy industry was similar to that in Germany, and
reflected Italy’s capital-scarce status. That capital scarcity had even more direct
implications for Italian monetary and banking policy, as shown next.
Monetary and Fiscal Policy,

from Unification to the Resumption
of the Gold Standard
The exchange rate and its management constitute one of the most direct ways
in which a national economy is connected to the world monetary system. In
the course of the last third of the nineteenth century, the world’s major coun-
tries adopted the gold standard. There might even have been a more ambitious
monetary unification. In 1867, at the instigation of Napoleon III, who launched
an International Monetary Conference in Paris, it looked as if there would be a
single world money, broken into divisions of pounds, worth five dollars, which
in turn would be worth five lira or francs.
Unified Italy for a short time looked as if it was on this path: a law of
1862 adopted a bimetallic gold and silver standard on the French pattern. In
1865, when Italy joined in the Latin Monetary Union, managed by France and
Napoleon IIII, it looked as if the new currency bloc would move in the direction
of a pure gold standard, which was the intention of Napoleon III’s advisers.
Then war intervened, and Italy moved in another direction. In 1866, at the
outbreak of the last of the wars of unification with Austria, the issue banks
suspended convertibility in the so-called corso forzoso; by 1868, the currency
had depreciated by some 12 percent. It was only in 1883 that convertibility was
resumed. The banks of issue very quickly stopped free conversion, however,
although the exchange rate was carefully managed to be close to the gold parity
before 1893, and then again after 1899. Italy thus belonged to the periphery, rather
than the core, of the prewar gold standard. The periods of formal adherence to
all the rules of the gold standard, 1862–1866, 1883, and then again between 1927
and 1934 (when exchange controls were introduced), were thus rather brief.
For peripheral, capital-scarce countries, such as Italy, the attraction of
the gold standard lay mostly in opening up international capital markets, and
allowing a lowered cost of borrowing. That was the irresistible attraction that
drew them to the golden magnet. Fenoaltea (1988) has argued convincingly that
Italy’s success in attracting capital inflows, which was largely dependent on

world capital market conditions, was a key determinant of the Italian construc-
tion cycle. However, because these capital movements were channeled through
financial intermediaries, they also had consequences for Italian financial stabil-
ity, of a sort that is still familiar today.
Italy’s formal attachment to the gold standard in 1883, and the maintenance
of parity even after the end of free conversion, did produce some of the benefits
associated with the gold standard in other countries. It sparked a substantial
surge in growth, financed in large part by inflows of foreign credits, and a
real estate boom. There was a substantial current account deficit, reflecting the
inflows of external money. Between 1882 and 1887, the lending of commercial
banks increased by 15 percent a year (Toniolo 1990, 77). When the boom slowed
down in 1887–1888, the Italian banks ran into great difficulties. The inflows
now stopped, while the current account moved into surplus in 1891 and 1892.
The sudden stop was fundamentally unsustainable in the political and eco-
nomic circumstances of Italy, and a wave of scandals and crises erupted that
required a complete reorganization of Italian banking, with a new central bank
(the Banca d’Italia) taking the place of the previous banks of issue, and new
commercial banks. The year 1893 saw a major financial crisis in which the two
largest commercial banks, the Credito Mobiliare and the Banca Generale, failed,
in addition to one of the note-issuing banks, the Banca Romana. For most of the
period after the re-establishment of the gold standard, the lira-sterling exchange
rate was very close to parity, but after June 1893 the exchange rate fell sharply.
The depreciation of the lira reached as much as 13 percent.
The subsequent bank reform led to the creation of a new major note-issuing
bank, the Banca d’Italia, which absorbed the Banca Romana. Bank reform also
led to the institution of new mixed or universal banks, explicitly copied from
the German model, and financed at first largely by international consortia in
which the German financial establishment was preponderant. The new banks,
the Banca Commerciale Italiano, often called the Comit (1894), and the Credito
Italiano (Credit, 1895), were intended to contribute to the financing of industrial
development (discussed in the next section). In practice they set off a new wave
of capital inflows that lasted until the next financial crisis.
A major driver of exchange rate policy during this period was the problem
of handling government debt. At the time of Italian unification, public debt
amounted to about half of gross domestic product (GDP), but the ratio doubled
over eight years, and the interest on debt amounted to almost 40 percent of
government expenditure. In the 1870s, there was a serious attempt at fiscal con-
solidation in preparation for the readoption of the gold standard, but the largest
bank of issue, the Banca Nazionale, continued to monetize a substantial part of
the government debt.
Government bonds (rendita) were mostly sold abroad, chiefly on the Paris
market, and paid in foreign currency at the official parity. There was thus a
strong incentive for Italian investors to buy renditas but to collect their cou-
pon payments in the foreign currency. In 1873 an affidavit was introduced that
required a declaration under oath that the owner was not an Italian citizen, but
the new regime was not vigorously enforced and was abolished in 1881 (Tattara
2003). Although in the 1870s some 40 percent of the Italian government debt was
paid out abroad, by the early 1880s the ratio had reached 80 percent, and the
readoption of a gold standard in consequence now looked as if it was a relatively
costless operation, because the government debt was serviced in gold anyway.
When the financial crisis of 1893 shook Italy, the affidavit was reintroduced.
Prewar Italy was tested by two crises: while 1893 fundamentally shook every
part of the Italian banking and financial system, and led to a sharp drop in
capital inflows, 1907 showed the resilience of the new order. The financial cri-
sis, associated with a stock market decline (28 percent from August 1906 to
July 1908) and a radical contraction of bank lending in 1907, barely affected the
exchange rate (Cesarano, Cifarelli, and Toniolo 2012). Italy had reached a new
level of financial maturity.
The Banca d’Italia under Bonaldo Stringher had managed a conversion of
state debt in 1903 and then tried to encourage the purchase of government bonds
through easy money and low interest rates (Confalonieri 1977, 137; Forsyth 1993,
43). However, borrowing in Italy remained expensive. As Figures 2.6 and 2.7
show, the difference between long-term bond yields in France and Italy (which
had reached a height of 2.1 percent in January 1894) fell in the course of the
1900s, but it did not disappear (unlike in Switzerland, where the same premium
had existed relative to the French market before 1907, but virtually vanished in
the aftermath of the establishment of a new National Bank) (Bordo and James
2007). At the end of 1910, the difference was still 0.6 percent, but by 1914 it had
faded to between 0.1 and 0.2 percent.
Like other European countries, Italy suspended convertibility at the outset
of World War I. The wartime era produced high levels of inflation, which con-
tinued in the atmosphere of social violence that immediately followed the peace,
with a sharp deflation following in 1920 that produced a new wave of banking
difficulties. As elsewhere, Italian leaders were determined to reintroduce the
gold standard, and they eventually succeeded.
9
8
7
6
5
4
3
Italy
2
1 France
0
01/31/1871
10/31/1873
07/31/1876
04/30/1879
01/31/1882
10/31/1884
07/31/1887
04/30/1890
01/31/1893
10/31/1895
07/31/1898
04/30/1901
01/31/1904
01/31/1906
07/31/1909
04/30/1912
01/31/1915
10/31/1917
07/31/1920
04/30/1923
01/31/1926
10/31/1928
07/31/1931
04/30/1934
01/31/1937
10/31/1939
Figure 2.6 Yields on French and Italian 10-year government bonds. Source: Global
Financial Data.
2.5
2
1.5
1
0.5
0
01/31/1871
02/28/1873
03/31/1875
04/30/1877
05/31/1879
06/30/1881
07/31/1883
08/31/1885
09/30/1887
10/31/1889
11/30/1891
12/31/1893
01/31/1896
02/28/1898
03/31/1900
04/30/1902
05/31/1904
06/30/1906
07/31/1908
08/31/1910
09/30/1912
10/31/1914
11/30/1916
13/31/1918
01/31/1921
02/28/1923
03/31/1925
04/30/1927
05/31/1929
06/30/1931
07/31/1933
08/31/1935
09/30/1937
10/31/1939
–0.5
–1
–1.5
–2
–2.5
Figure 2.7 Difference in yields of French and Italian 10-year government bonds.
Source: Global Financial Data.
In August 1926, Mussolini announced his intention to revalue the lira, and
Italy began a package of stabilization measures that included raising interest
rates, budgetary stabilization and debt consolidation, and restriction of note
issue by the Banca d’Italia. The idea behind the currency stabilization was to
allow Italian business and the government to borrow on international markets.
There seemed to be an international trend in favor of gold. In particular the
major western central banks, the Bank of England and the Federal Reserve,
and the British and US governments pressed continental Europeans to return to
gold. The reward would be, as before World War I, a “good housekeeping seal
of approval” and access to capital markets. The operation was a trade-off, in
that the chosen exchange rate of the quota novanta represented a considerable
overvaluation of the lira, and a blow to the competitiveness of Italian industry;
but the major attraction lay not simply in prestige calculations (Cohen 1972)
but above all, yet again, in a lowered cost of borrowing. However, the yield
on long-term government bonds remained more or less constant, at around 5
percent. In contrast, France, with a stabilization that undervalued the French
franc, achieved a much more dramatic reduction in the cost of government bor-
rowing. Italy’s formal return to the gold standard occurred on December 21,
1927, with a 40 percent gold coverage requirement.
Industrial Policy from Unification

to the Great Depression
The history of Italian economic development through much of the nine-
teenth century is a story of a capital-scarce country’s response to economic
backwardness and a poor resource endowment for the crucial technologies of

the European industrial revolution: in particular, the absence of large iron ore
and coal fields. It is not surprising that Alexander Gerschenkron chose Italy as a
case study not only for the economics of “backwardness,” but also for the ques-
tion of how state action could overcome backwardness. The imbalance between
state provision of financing and private control of policy was widely seen as the
key to an Italian phenomenon of “capitalism without capital.”
What preexisting Italian advantages there were lay in wide-reaching net-
works of relationships, with a strong family content, combined with an interest
in technical progress. The great Milanese economist Carlo Cattaneo developed
a theory according to which intelligence formed the major principle of public
economy: “Control of new arts gave plentiful and reliable food to a number of
families. They took their secrets from land to land; their wealth was the idea
they had developed. They often remained divided from the crowd owing to their
foreign origin and their different religion. Their knowledge became an inheri-
tance, a perpetual privilege; they became a caste” (Cattaneo 2002 [1859], 72–73).
Especially in Lombardy, the commitment to technical education became insti-
tutionalized at an early stage through the Milan Society for the Encouragement
of Arts and Sciences established in 1838 (Lacaita 1990). That was never a solu-
tion, however, that could be hoped to apply to every region of Italy. As a result,
politicians embarked on a search for a new way of galvanizing growth.
Soon after unification the emphasis shifted dramatically to an insistence
that state action was needed to make good the weaknesses of the private sector.
Other countries, especially Germany, seemed to have evolved in a different way
from the United Kingdom: should not Italy imitate the new model of success?
In the 1880s, Italy adopted a spectacular policy of economic development. The
origins of the new approach lay in debates of the 1860s and 1870s about how an
Italian political entity could best be built. Emulation of a foreign model seemed
a necessity for launching Italy on a path to greater power and greater economic
dynamism (the two being connected).
The construction of a steel industry, which seemed to be the foundation
of British and German strength, looked like a national imperative that also
might be the foundation for a native armaments industry. Already in 1867, in
the immediate aftermath of the Austro-Prussian war, the Venetian business-
man and politician Vincenzo Stefano Breda had proposed a “patriotic effort”
to build cannon according to the latest Krupp method, using steel made by the
brand-new Bessemer process. Breda proposed a mixed private-public form of
enterprise. The proposal was rejected by the center-right governments, but after
1876 governments of the left were more sympathetic. Breda argued strongly for a
location away from traditional iron centers in Turin or Lombardy, because they
were too near the frontier and vulnerable to attack. By the 1870s he focused his
attention on the Umbrian town of Terni, home of an established jute indus-
try but with no obvious locational advantages for steel-making (except for a
plentiful water supply that could also be used as an energy source). In 1879
he founded a company in Terni, Cassian Bon, which acted as a proxy for his
own construction company, Società Veneta, and worked closely with the naval
engineer and Minister of the Navy Admiral Benedetto Brin in securing a law of
1884 that created a large steel-making and armaments industry in Terni. It was
heavily financed by banks (above all the Credito Mobiliare) but its major asset
was always its political linkage. In particular, the personal commitment of the
monarch seems to have been crucial. In the same way as Wilhelm I supported
Alfred Krupp, Umberto I bubbled over with enthusiasm for the Terni project,
and endorsed it with an official visit in 1887.
The whole affair of the origins of Terni was surrounded by a miasma of
charges of corruption and bribery. It was an inauspicious beginning to the new
policy of developmentalism. Terni became the most obvious symbol of what
liberal commentators, such as Amatori and Colli (1999), politely term “a pre-
cocious state capitalism,” not so much the direct control of the state through
ownership but a preponderant role of the state as a result of procurements and
tariff policy. Alternately, socialist critics detect the capture of the state by spe-
cial business interests and see the steel sector as what Ernesto Rossi termed
“la grande parassitaria” (Balconi 1991, 82).
From the last years of the nineteenth century, the Italian story shifted to
the politics of the search for institutional mechanisms for overcoming back-
wardness. The principal feature of Italian backwardness seemed to be the
under-development of the capital market. At first, many business leaders believed
that the best device for transcending Italy’s institutional limits lay in financial
institutions that could mobilize domestic investment resources and also attract
foreign investments. However, such institutions were themselves quite vulnera-
ble. In 1893, there was a general banking crisis after a severe economic down-
turn, in which two of the largest Italian commercial banks, Credito Mobiliare
and the Banca Generale, failed. After this episode, there was more or less con-
tinual political intervention in business structures, with the result that business
and financial and political interests became closely interconnected. A new set of
banks, closely linked to a German model of industrialization, became very pow-
erful, but also immediately became the subject of political attention. Periodic
crises destroyed financial values and demanded restructuring: after World War
I, such restructuring usually occurred at the public initiative and with public
funds. The financial story of twentieth century Italy can be summarized as the
repeated destruction of capital, both of investors in the stock market, and of the
government’s contributions.
The first hope of liberal Italy at the beginning of the twentieth century
was that Italy could be made financially and economically more robust through
the operations of the newly established Banca Commerciale and the Credito
Italiano. These Milanese banks8 rapidly became intertwined with factions in
the political elite of liberal Italy. In addition to a German business model, these
institutions initially operated with German capital. They derived most of their
earnings from underwriting, and promoted quite speculative enterprises. After
a sharp setback in the stock market after the US crisis of 1907, the stock-buying
public turned away from this kind of asset, and the banks had to retrench their
position (see Forsyth 1993, 35–36). The Banca d’Italia and its energetic general
manager Bonaldo Stringher played a vital part in the rescue of a major bank,
the Società Bancaria Italiana, but also in the restructuring of particular indus-
tries, notably in the creation of the Ilva steel trust of 1911.
During World War I, the state launched a new round of developmentalism,
with a particular concentration on the ability of hydroelectric power to substi-
tute for those resources needed for the development of heavy industry. A gov-
ernment decree of September 1916 (the Bonomi decree) gave favorable treatment
to enterprises that would construct their own generators, networks, and distri-
bution systems. The decree gave a boost to the already well-developed hydro-
electric industry, and to new industries that used electricity rather than coal as
the fuel for steel-making.
In the 1920s and 1930s, many prominent managers of the steel industry
again used politics as a way to gain support for their vision of a business model
in which Italy would develop its own alternatives to a competitive and open
international economy. They emphasized the necessity of the “ciclo integrale”
in a large-scale path of developing a big steel and metallurgy sector, and that
ignored the economics of resource scarcity (Sinigaglia 1946). These managers
seemed to manage the shift of the political system from liberalism to fascism
just as surely and confidently as they would manage the transition back in the
opposite direction in the 1940s. The ideology of the state mattered less than a
developmental philosophy. Oscar Sinigaglia, the brilliant technocrat who played
a central role in the development of the state sector and then became the direc-
tor of the state steel holding company Finsider, before he was ousted in the
aftermath of the 1938 racial law, later referred to the slowness of the adoption of
such a cycle as the characteristic “Italian problem.” By the 1930s, the large-scale
state steel industry seemed to be competing on unfavorable terms with private
producers. Sinigaglia designed schemes for autarky behind which the idea of
the complete cycle could be realized. An adequate national production of steel
could then provide the basis for a modern engineering industry.
As it turned out, the interaction between the universal banking model of
development, and the deflation that followed the resumption of the gold stan-
dard, and the outbreak of the Depression, would provide the conditions within
which the State could become the dominant actor in Italian heavy industry. Ilva
had in 1920 been rescued by the Banca Commerciale and the Credito Italiano
in a highly costly operation, through a newly created Istituto Finanzaria, but its
business continued to remain highly problematic, and it is not surprising that
its bank-owners looked for a way out. The banks emerged as effective control-
lers of much of Italian heavy industry, and in particular of steel, but that made
them highly vulnerable in the deflationary business climate of the 1920s, after
the stabilization of the Italian lira in 1927 at the over-valued quota novanta.
As seen in the next section, the result was that the industrial hegemony of the
universal banks was destroyed by new deflation during the world depression at
the end of the 1920s and in the early 1930s, with the state definitively taking
their place.
The Great Depression, Institute

for Industrial Production, and
Italy’s Switch to Autarky
The deflation associated with the return to the gold standard is usually thought
to be responsible for a falling off of growth in 1926 and in 1927, but the renewed
expansion of 1928 looked at first like a vindication of the government’s strategy.
Capital flowed in, and borrowing rates were lower.
After 1929, however, deficit countries were pushed into adjustment by the
freezing up of international capital markets. From 1929 to 1935 a contraction of
the monetary base of about 25 percent was experienced. There was a sharp loss
of reserves in 1931, in the midst of the Central European banking and financial
crisis, but the cover ratio stayed above the 40 percent level. It was only when
that cover ratio fell below 40 percent that Italy formally ended the commitment
to the gold standard, in September 1936.
The response of Italy to the 1931 banking crisis is often held to be particu-
larly resourceful and even constructive (Fratianni and Spinelli 2004). Unlike
Austria, Hungary, and Germany, where there was a very similar mixed or uni-
versal banking system, in which banks were vulnerable because of the large port-
folio of industrial participations that they held in their portfolio, in Italy there
was no open banking crisis, although this is what some outside observers, such
as the well-informed Swiss financier Felix Somary, had predicted (Toniolo 1995).
Bank deposits indeed only fell by 3.6 percent in 1931 (Mattesini and Quintieri
1997, 275). However, the major banks were insolvent, in large part because of
the extensive holdings of industrial securities that they had been pushed to
take over in the early 1920s as part of the rescue operation for Italian industry.
The Credito Italiano, Italy’s second largest bank, was insolvent by the end of
1930 and the largest bank, the Banca Commerciale, by May 1931. There was
also a substantial degree of political tension between the Banca Commerciale
and the government, which saw the Commerciale as dominated by figures from
the liberal era. A few days after the collapse of the German Darmstädter und
Nationalbank, on July 19, 1931, the general manager of the Banca Commerciale,
Giuseppe Toeplitz, appealed to the Bank of Italy for support. In September he
was received by Mussolini. The next month a new holding company, SOFINDIT,
was created to take over the industrial assets of the Commerciale. Together
with parallel holding companies, SFI (which had taken over the assets of the
Credito Italian) and Elettrofinanziaria, the industrial assets were transferred to

a new state holding company, the Institute for Industrial Reconstruction (IRI).
By January 1934, IRI held 48.5 percent of the share capital of Italy. Then, in
March 1934, IRI acquired the capital of the banks themselves. By 1937, it con-
trolled all the capital of the military steel sector (Terni, Ansaldo, Cogne); 40%
of nonmilitary steel; and 30% of the electrical industry. In the aftermath of the
creation of a bad bank, a new banking law (1936) limited the industrial engage-
ment of banks (see also Guarino and Toniolo 1993).
In a dramatic series of speeches, Mussolini seemed to come back to the
anticapitalist rhetoric of the early days of Fascism. In the immediate aftermath
of the financial crisis, he explained that “if I tried to harness the capitalistic
force up to now, it was because it was already active. But when the first resis-
tance occurs, it will be replaced without hesitation by a new, entirely different
and more worthy force” (Avagliano 1991, 35). He saw the major members of the
Consorzio Siderurgico on March 13, 1933, and explained that the steel makers
were not responding adequately to the Fascist initiatives for industrial reorga-
nization: “Unfortunately it is a question of one of these circumstances which
have recently become quite common, in which the business leaders say that the
company can be completely cured if particular measures are taken. I make the
appropriate orders, and things develop worse than they were before.”9
In May 1934, as the process of IRI’s takeover of bank assets was being
worked out, Mussolini announced that: “Those who still speak of a liberal econ-
omy make me laugh – laugh or weep, both at the same time. But three quarters
of the Italian industrial and agricultural economy is in the hands of the state.
And if I dare to introduce to Italy state capitalism or state socialism, which is
the reverse side of the medal, I will have the necessary subjective and objective
conditions to do it” (Giordano 2007, 35).
The financial and economic crisis of the early 1930s thus opened the oppor-
tunity to launch a new wave of developmentalism. Again, there was a strong
emphasis on hydroelectric power as a way of solving the sensitive issue of energy
dependence. From 1925 to 1937, the output of hydroelectric power more than
doubled. In the geopolitical context of the 1930s, military action was another
way in which the state influenced economic development. Indeed, according
to Toniolo (1980, 272), it was only with the putting into practice of the plans
for invading Ethiopia that the Italian economy received the stimulus necessary
for economic recovery. The decision to activate the invasion plans was taken in
December 1934, and the invasion itself took place in October 1935. The under-
taking implied massive military expenditure. This may plausibly be taken to
have had Keynesian effects on Italian GDP, because Italian deficits exceeded
10 percent of GDP in 1936 and 1937 (Almunia et al. 2010), despite increases in
taxation of various sorts. Various types of compulsion were used to ensure that
government bonds be taken up; expenditure was also financed by national-
izing foreign investment in 1935, and by the 1936 “day of the wedding ring,”
when Italians were asked to hand over their gold to the regime (Zamagni 1993b,
253–254). Monetary financing of the deficit was also resorted to. There were
large military orders for industrial output, which rose by almost 15 percent in
1937, by 3 percent in 1938, and by almost 9 percent in 1939. Overall, Italian GDP
grew by 9.1 percent in 1937, by 2.1 percent in 1938, and by 5.3 percent in 1939.10
Increasing control by the state in industry and banking coincided with a
shift toward much greater intervention in monetary and trade affairs. The cur-
rency decree of May 26, 1934, (Decree 804) introduced a wide-ranging exchange
control and de facto ended the period of the gold standard, marking Italy’s turn
away from the globalized world of convertibility and international capital flows.
Subsequent decrees tightened the controls: on December 8, 1934, (Decree 1942)
it was required that foreign securities owned by Italians should be registered
with the Istituto nazionale per i cambi con l’estero; and in August 1936 (Decree
1631), such securities were compulsorily sold to the government in exchange for
treasury bonds. Foreign bank accounts had to be declared. Even though at the
beginning of August 1936 Italy joined France in devaluing relative to gold, the
abandonment of the gold parity was not used as an opportunity to move back
to convertibility or to end exchange controls.
At the same time, trade policy was turned into a tool of diplomacy. The
bilateralization of trade was a way of contributing to the political reordering of
Central Europe. In May 1934, for instance, Italy concluded an agreement with
Hungary to buy one million quintals of Hungarian wheat, with an option for a
further million, at prices double those prevailing on the world market (Ránki
1983, 139). Within two years, Italy’s share of Hungarian trade grew from 7.8 to
13.6 percent. Italian trade was also reoriented toward her colonies: Italian colo-
nies accounted for less than 3 percent of Italian exports in the late 1920s, but a
quarter of total exports between 1936 and 1939. They were a particularly impor-
tant market for industrial products, and especially “advanced” industries, such
as chemicals and engineering (Chapter 12; Federico 1998). Again, however, it is
important to stress that this was a general phenomenon during the 1930s, and
not one limited to Italy, as Table 2.6 makes clear.
Unlike in some countries, notably Britain and Germany in 1931 or the
United States in 1933, the turn away from the principles of an open world econ-
omy was not directly associated with financial crisis. Openness to the world
economy seemed a less attractive strategy after the state of capital markets ruled
out the possibilities of access and renewed borrowing. The Great Depression
killed off this major attraction of a globalized world for the Italian state, con-
cerned as ever with the implications of Italian capital scarcity. However, it was
the currency implications of managed trade that really made for the final shift
of Italian politics against the liberal economic view, or against globalization, in
May 1934.
The much larger interventions of the 1930s left a troubled legacy for the
postwar period. The establishment of the industrial holding company IRI made
virtually all of Italian large-scale industry dependent on the state. It thus pro-
vided an immediate lever for quite spectacular growth at a time when the world
Table 2.6 The share of formal and informal empire trade, 1929–1938 (percent)
In imports In exports
Trade of Share of 1929 1932 1938 1929 1932 1938
United Kingdom British Commonwealth, colonies, protectorates 30.2 36.4 41.9 44.4 45.4 49.9
United States Philippines 2.9 6.1 4.8 1.6 2.8 2.8
France French colonies, protectorates, and mandated territories 12 20.9 25.8 18.8 31.5 27.5
Belgium Belgian Congo 3.9 3.8 8.3 2.6 1.3 1.9
The Netherlands Netherlands overseas territories 5.5 5 8.8 9.4 5.9 10.7
Italy Italian colonies and Ethiopia 1.5 1.1 1.8 2.1 3.6 23.3
Portugal Portuguese overseas territories 7.9 10.4 10.2 12.7 13.9 12.2
Japan Korea and Formosa 12.3 26.2 30 16.8 21.6 32.9
Kwantung 6 4 1.6 4.8 6.8 13.7
Manchuria 1.9 2.7 9 2.5 1.5 8.1
Rest of China 5.8 4 4.4 10.9 7.3 8
Total Japanese sphere of influence 26 36.9 45 35 37.2 62.7
Germany Bulgaria, Greece, Hungary, Romania, Turkey, Yugoslavia 4.5 5.5 12 5 3.9 13.2
Latin America 12.2 11.2 15.6 7.8 4.3 11.5
Total German sphere of influence 16.7 16.7 27.6 12.8 8.2 24.7
Source: League of Nations (1939, 34–35).

economic environment was favorable. In this way, the interwar period’s policies
can be seen as having created a springboard for the postwar miracle.11 But they
also created and augmented a host of political economy problems, in particular
the heavy engagement of the state in wage bargaining and wage determination,
and a corporate governance in which managers were attached to ideas of gigan-
tism or elephantism. This tension was not a uniquely Italian phenomenon. As
Eichengreen (2007) has pointed out, institutional environments that were well-
suited to producing catch-up growth across Europe after 1950 were not nec-
essarily appropriate once convergence on the technological frontier had been
largely achieved.
Migration Policies
A survey of Italian economic policies during this period is not complete without
some mention of policies related to the migration flows discussed in Chapter 10.
As a poor, capital-scarce country, Italy had an incentive to attract inflows of
capital, but an alternative way of increasing capital-labor ratios (and land-labor
ratios into the bargain) was to export people. A premise of liberal Italy was
that emigration helped to solve national problems: unemployment and under-
employment, and the overpopulation of the South. Liberal politicians also liked
to emphasize the economic benefits to Italy that followed from remittances.
The liberals resisted the idea that emigration represented some kind of loss of
national force or vitality, and generally presented the phenomenon of a “greater
Italy” that spanned the world as a trade, wealth, and power-enhancing exercise.
The phenomenon was most graphically depicted by the young economist Luigi
Einaudi in 1899, when he suggested that the phenomenon of emigration was
the reason that “Made in Italy” was eventually destined to overtake “Made in
Germany” (Einaudi 1900). However, by the end of the nineteenth century, these
arguments became increasingly contested on economic and ideological grounds.
The agrarians in particular worried that emigration was causing an excessive
and debilitating rise in rural wages. Nationalists, such as the novelist Enrico
Corradini, recast this case in ideological terms (Choate 2008).
When it tried to regulate emigration, the initial concern of the Italian gov-
ernment was to end the abuses and excessive charges of the shipping compa-
nies, and thus by effectively reducing the price, to facilitate the phenomenon
of emigration. A major reform came in 1901, with a law that swept away the
previous system of agents and subagents, although in practice the people who
had previously organized emigration remained under a new name (“vettori ”).
The law established a General Commissariat of Emigration, with financial
resources intended to sustain Italianness abroad (Italianità) through guidance
in Italy and through the provision of educational resources abroad and the
creation of a “chain of assistance”; in addition, the Commissariat superintended

the funneling of remittances through the Banco di Napoli. The rural post office
network was also expanded to facilitate the relatives of migrants (Esteves and
Khoudour-Castéras 2011).
Another example of domestic reforms associated with emigrant welfare
came with the 1904 Franco-Italian labor treaty. This was part of a wave of inter-
national treaties that were designed to protect nascent welfare states from the
pressures to which they were being subjected by migration. Because the social
insurance programs of the period were typically restricted to national citizens,
immigrants provided a potential way for employers to circumvent the new rules
and regulations. Immigration thus risked undermining the social compacts
of the time, and indeed immigration from Italy and elsewhere caused strikes
and even riots in France on occasion. One solution was for the host country
to extend welfare benefits to immigrants, on condition that the source country
implement similar reforms domestically; this also had the benefit of leveling the
playing field for employers producing in different countries. This was exactly
the bargain struck in 1904, and the Franco-Italian treaty became the model for
similar treaties in the following years (Huberman 2012).
Although the Commissariat was primarily targeted at overseas migration,
the Franco-Italian treaty reminds one of the growing importance of Italian
emigration to other European countries. Italian nationalists began to emphasize
that flows of migration in Europe were more likely to be compatible with the
maintenance of a strong national identity. In the immediate aftermath of World
War I, and in part as a result of changing and more restrictive legislation in the
United States, transoceanic migration fell more sharply than nonoceanic flows.
That result pleased the nationalists.
There was no immediate break after the establishment of Mussolini’s
rule.12 Indeed, at the beginning, Mussolini seemed to echo the language of
prewar liberal politicians. In a 1923 speech, for instance, he said: “For better
or worse emigration is a physiological necessity of the Italian people. We are
forty millions hemmed in in our adorable but narrow peninsula. So it follows
that the problem of Italian expansion in the world is a life and death issue
for the Italian race” (Primiceri 2010, 140). A few years later, however, the tone
of his speeches changed and he began to refer to the “evil” of migration. In
1927, the Commissariat was abolished and replaced by a more state-controlled
Directorate. There were some administrative restrictions put in place to try to
make emigration more difficult (e.g., the need for would-be emigrants to show
that they had either a work permit or relatives abroad), but these restrictions
were promptly lifted in 1930 with the onset of the Depression. The new empha-
sis was more on controlling the politics of Italian emigrants and tying them in
to the cause of an international propagation of Fascism, an Italian policy inno-
vation that would later appeal to German Nazis. The Fascist philosopher and
politician Giovanni Gentile told the Italian parliament in 1927 that solving the
“demographic problem” had an internal and an external aspect, and that the
internal aspect required the vigorous pursuit of developmental policy, of “using

to the maximum extent all the resources that our earth can offer” (Primiceri
2010, 198). By the 1930s, the government would also present emigration to the
colonies as a key aspect of Italian development. Mussolini justified the invasion
of Abyssinia as a search for an outlet for surplus Italians.
The original vision of completely free migration did not work, or did not
work fast enough, because Italy’s problems seemed to persist. There was in con-
sequence a demand for more regulation, but even at the height of the Fascist
era, Italian politicians saw an outflow of population as one part of a solution to
the “demographic problem.” It just turned out to be an increasingly controlled
and regimented solution, which turned into a justification of imperialism rather
than a vision of a peaceful greater Italy spread over the world.
The Institutional Bases for

Convergence in a Capital-Scarce
Economy
The previous sections have shown that Italian trade, financial, and industrial
policies during the period in question were not all that unusual when viewed in
an international context. They reflected the capital-scarce nature of the Italian
economy, and a desire to achieve military security and economic convergence
on the leading economies of the day. These preoccupations were hardly unique
to Italy. Insofar as we have been able to identify Italian policy specificities, these
largely involved interwar industrial policy: IRI was a uniquely Italian institu-
tion, even though it was clearly of its time. More generally, the Italian response
to the Depression was relatively successful by the dismal standards of the time,
and may even have helped provide some of the foundations for the postwar
economic miracle discussed in Chapter 3. Migration policy was also consider-
ably more developed in Italy than in Ireland, where it was left to such institu-
tions as the Gaelic Athletic Association and the Catholic Church to provide
emigrants with cultural links to their homeland.
Italian policies may not have been that out of the ordinary, but how well
did they succeed in achieving their aims? Italian military history is beyond the
scope of this chapter, but how well did Italy succeed in achieving its economic
objectives?
Standard neoclassical economics suggests that economically backward coun-
tries should be able to benefit from globalization, and see their convergence
on the technological frontier speeded up as a result of technological transfers,
trade, and capital imports. Furthermore, emigration may help them to achieve
convergence in per capita terms, if at a cost in terms of a diminishing popula-
tion. However, a vast empirical literature emphasizes that this convergence is
not automatic: it requires that various social and institutional prerequisites be

put in place for convergence to be achieved. The Italian economy saw major
institutional reforms over the course of the period under review, which were
successful in spurring growth in the short run, but which would eventually
outlive their usefulness as the international economic environment changed.
The first major wave of reforms highlighted here was the banking reforms
instituted after the financial crisis of 1893. This crisis was intimately linked
with the capital inflows that the new Italian state had actively sought, but with
whose consequences its banks (no more than the Thai and Korean banks in
the 1990s or Icelandic, Irish, or Spanish banks in the early twenty-first century)
were ill-suited to cope. This crisis was a salutary one in many ways, with the
new universal banks ushering in a period of faster economic growth (Figure
2.8). Between unification and 1899, economic growth in Italy was just 0.6 per-
cent per annum, but it more than doubled to a respectable 1.3 percent between
1899 and 1915. Figure 2.9 shows that 1900 marks the dividing line between a
period when Italian incomes were falling steadily further behind incomes in
the leading economies of the day, and a period when, at least for a time, Italy
managed some convergence vis-à-vis France, Britain, and Western Europe as a
whole, and stopped losing ground relative to Germany and the United States.13
Between 1921 and 1929, the Italian economy experienced extremely strong
growth, at a rate of 3.1 percent per annum.14
Unfortunately, the deflation of the 1920s (which was a worldwide rather
than an Italian phenomenon) placed the universal banking model under severe
strain, and the worldwide Depression that followed finished it off. The result
was another crisis-driven response, which again can be seen as salutary, if
attention is restricted to its economic dimension. As Figures 2.8 and 2.9 show,
the Italian recovery from the Depression was quite strong in absolute and
4,500
4,000
3,500
2009 euros
3,000
2,500
2,000
1870 1880 1890 1900 1910 1920 1930 1940

Figure 2.8 Italian GDP per capita, 1861–1940 (2009 euros). Source: Banca
d’Italia database.
France Germany
1.0 1.0
0.9 0.9
0.8 0.8
0.7 0.7
0.6 0.6
0.5 0.5
1870 1880 1890 1900 1910 1920 1930 1940 1870 1880 1890 1900 1910 1920 1930 1940
UK USA
.56 .64
.60
.52
.56
.48 .52
.44 .48
.44
.40
.40
.36 .36
1870 1880 1890 1900 1910 1920 1930 1940 1870 1880 1890 1900 1910 1920 1930 1940
Spain Western European 12

1.6 .75
1.5
1.4 .70
1.3
.65
1.2
1.1 .60
1.0
0.9 .55
1870 1880 1890 1900 1910 1920 1930 1940 1870 1880 1890 1900 1910 1920 1930 1940
Figure 2.9 Italian per capita GDP relative to those of other countries, 1861–1940.
Source: Banca d’Italia database; Maddison (2010).
30,000
20,000
10,000
8,000
2009 euros
6,000
5,000
4,000
3,000
2,000
1,000
1875 1900 1925 1950 1975 2000
Figure 2.10 Italian GDP per capita, 1861–2008 (2009 euros). Source: Banca d’Italia
database.
Spain
Portugal
.035
Italy
.03 Austria Norway
Growth 1950−2008
Finland
Belgium
.025 Germany France
Netherlands
Denmark
Australia
UK Canada USA
Sweden
.02
.015 Switzerland
NewZealand
2000 4000 6000 8000 10000

1950 income per capita (1990 international G−K dollars)
Figure 2.11 Initial income and subsequent growth, 1950–2008. Source: Banca d’Italia
database; Maddison (2010).
relative terms, especially in the second half of the 1930s, and it paved the way
for the extraordinary success of the postwar period (Figure 2.10): between 1945
and 2008, per capita GDP increased more than tenfold, an astonishing perfor-
mance, even taking into account the collapse in output during World War II
(see Chapter 3). This was a period of supremely successful convergence on the
technological frontier internationally, but Italy, in large part because it had a
long way to catch up, was one of Europe’s star performers (Figure 2.11).
Yet again, however, the new institutional framework became less of an advan-
tage, and more of a handicap, in Italy as in other rapidly growing catch-up econ-
omies. By the end of the century, Italy faced a crisis of slow economic growth,
in large part a result of its successful convergence experience, but until now this
crisis has been insufficiently dramatic to force another round of major struc-
tural change in the economy. In the past (notably in the 1890s and the 1930s),
deep crises were associated with a fundamental change of the policy paradigm.
Crises were a learning experience. Will the intensification of the crisis in 2011,
the 150th anniversary of unification, change this assessment? In Italy, as in the
rest of Europe, we have not yet come to the end of (economic) history.
Acknowledgment
This paper is a revised version of a paper originally presented at the conference
on Italy and the World Economy, 1861–2011, held at the Banca d’Italia, Rome,
12–15 October 2011. The authors are extremely grateful for their comments and
suggestions, support, and help with data to Gianni Toniolo; to the discussants
Stefano Fenoaltea and Vera Zamagni; to participants at the conference; and to

Alberto Baffigi, Nick Crafts, Giovanni Federico, Alfredo Gigliobianco, Michael
Huberman, and Cormac Ó Gráda. The research leading to these results has
received funding from the European Research Council under the European
Union’s Seventh Framework Programme (FP7/2007–2013) / ERC grant agree-
ment no. 249546. The usual disclaimer applies.
Notes
1. Our description of the course of Italian trade policy draws heavily on such
sources as Coppa (1970), Cohen and Federico (2001b), Federico (2006), and
Toniolo (1990).
2. The policy would have suited Northern landowners at least, if not the owners of
Southern latifundia.
3. Toniolo (1977b) confirms that the duties on iron and steel harmed the engineering
sector, but doubts whether this had a significant impact on overall rates of Italian
growth.
4. Quasi-classical, because classical models achieved this fixity of the real grain wage
by appealing to Malthusian mechanisms, rather than migration.
5. This argument is of necessity a counterfactual one: wheat prices were in fact
declining, because Italian tariffs did not rise enough to counteract the impact of
continually falling transport costs and declining supply prices on the frontiers
of the New World. One can certainly argue that in the absence of these tariffs,
wheat prices would have declined by even more.
6. The latter country is not included in these tables, but had very high tariffs: its
average tariff in 1913 was 21.4 percent, according to Bairoch (1989, 76).
7. The Italian prices are wholesale prices; the British prices are the Gazette averages;
the other prices are market averages.
8. The Credito Italiano was founded in Genoa as the Banco di Genova, but in 1907
moved its headquarters to Milan.
9. Archivio Storico Banca Intesa, BCI, Sofindit.
10. Banca d’Italia database.
11. Similarly, Alexander Field (2011) has argued that the interwar period provided the
springboard for postwar US growth.
12. For a useful survey, see Cannistraro and Rosoli (1979). See also the discussion in
Ipsen (1996).
13. The exercise is a crude one: the new Banca d’Italia data are rebased using
Maddison’s (2010) figure for 1990 (expressed in 1990 Geary-Khamis dollars) as a
benchmark.
14. Growth rates here and subsequently are all based on regressions of the log of per
capita income against a time trend.
Chapter 3
THE GOLDEN AGE

AND THE SECOND
GLOBALIZATION IN
ITALY
nicholas crafts and

marco magnani
Introduction
This chapter examines Italy’s growth performance in the period since World
War II. We develop an interpretation of catch-up growth from an initial posi-
tion where the level of per capita income was well below that of the leading
economies, and then explore the experience of recent decades where the issue
becomes one of further modernization to maintain a strong position among
the elite. Economic policy decisions, in particular those made in response to
challenges emerging from the external economic environment, have played a
major role in determining productivity performance through their impact on
the quantity and quality of investment and innovation. Evaluation of their part
in growth outcomes is the central concern.
An important starting point for analysis is the proposition that the pro-
cess of catch-up growth typically entails a series of ongoing reforms with the
danger that at some point the political economy of the next step in modern-
ization becomes too difficult. As modern growth economics stresses (Aghion
and Howitt 2006), the institutions and policy choices that can galvanize a
far-from-frontier economy differ in many ways from what is appropriate for
a close-to-frontier economy. In particular, in the latter case stronger competi-
tion in product markets and high-quality education become more important.
Similarly, as new technologies come along, institutions and policies need to
be reformed. Yet, making the requisite adjustments may be problematic and
achieved only slowly and incompletely such that catch-up growth falters. The
constraints of the historical legacy are important in this context.
The international economic environment affects growth performance in sev-
eral important ways, although its impact depends on the details of the domes-
tic policy response and interactions with domestic institutions. It follows that
each country’s performance has a common component based on external cir-
cumstances and an individual component based on its own distinctive behavior
shaped by history and politics, even though ideas as to what is “best-practice”
policy are strongly correlated across the Organization for Economic Cooperation
and Development (OECD) countries.
Key aspects of developments in the world economy include high-profile
shocks to aggregate supply (e.g., oil-price rises) and to aggregate demand (e.g.,
financial crises). Dealing with these macroeconomic disturbances can entail
policy choices with long-term supply-side consequences. In turn, the extent
of policy discretion depends on the international economic architecture of
monetary arrangements, treaty obligations, and so forth, which influence the
prospects for export-led growth and the extent of globalization. As globaliza-
tion proceeds, changes in the international division of labor imply the need
for structural change, and this places a premium on flexibility in domestic
markets. Finally, technological change, which overwhelmingly comes from
other countries’ research and development (R & D), provides opportunities for
faster growth but exploiting them well may depend on policy reform. Across
the world, the diffusion of and convergence in the use of technology has sped
up and has been about three times as rapid post-1950 compared with pre-1925
(Comin, Hobijn, and Rovito 2006).
The international economic environment with which the Italian economy
interacts has been transformed in the last sixty years. The trajectory has been
toward globalization (i.e., the greater economic integration of capital and prod-
uct markets especially within Europe but also across the world as a whole),
starting from a position of very low capital mobility and trade protectionism
after the disruptions of the Great Depression and World War II. Tables 3.1 and
3.2 reflect these trends.
Table 3.1 shows a big decline in trade costs during the postwar period; these
trends are dominated by reductions in protectionist barriers rather than declines
in transport costs. This is apparent from the variations for Italian trade with
different partners, which reveal that European integration has been the most
powerful influence on trade costs. The European Economic Community (EEC)
stimulated both “juggernaut” and “domino” effects, which consolidated the
the golden age and the second globalization in italy 71
Table 3.1 Trade costs: Italy with various partner countries

Germany UK Spain USA India
1929 1.10 1.22 1.63 1.26 1.54
1950 1.27 1.36 2.40 1.40 1.97
1960 1.01 1.25 1.54 1.29 2.00
1970 0.79 1.21 1.42 1.22 2.30
1980 0.61 0.86 1.08 1.13 1.86
1990 0.56 0.84 0.87 1.13 1.85
2000 0.66 0.90 0.87 1.14 1.83
Notes: Trade costs are inferred from a gravity model of trade flows and comprise both
policy and non-policy barriers to trade; world average trade costs normalized to 1950 =
were 0.98 in 1970, 0.82 in 1980, and 0.84 in 2000.
Source: Data underlying Jacks, Meissner, and Novy (2011) generously provided by
Dennis Novy.
original trade agreement by increasing the weight of business favoring further

liberalization and encouraging enlargement and multilateral tariff reductions
(Baldwin 2006).
Table 3.2 reflects the very low level of international capital mobility in the
early postwar period when OECD countries, including Italy, generally controlled
capital movements very tightly while making their macroeconomic trilemma
choice for a combination of independent monetary policy and a fixed exchange
rate under the auspices of the Bretton Woods international monetary system
(Obstfeld and Taylor 2004). From the 1980s, the globalization of capital markets
accelerated sharply and Italy moved to full capital-account liberalization by the
1990s, a very different policy stance compared with the early 1950s.
After World War II, growth of world trade by volume was very strong. It
outstripped world gross domestic product (GDP) growth and averaged 7.9 per-
cent during 1950–1973 (World Trade Organization 2008), even though the world
average decline in trade costs was only about 2 percent before 1970 in a period
when trade liberalization mainly concerned OECD manufacturing. From 1973 to
the eve of the current crisis, world trade growth slowed to 4.8 percent per year
but was still much faster than GDP growth. A striking feature of these years was
the emergence of a new international division of labor in which Asian countries
became much more important as exporters of manufactures, whereas the shares
of Europe and North America contracted sharply (Table 3.3). This reflected Asian
success in putting in place policies and institutions that promoted rapid catch-
up growth first in Japan, then in the Asian Tigers, followed by China and India
(Table 3.4). Adjustments to this new exporting prowess were required, especially
of such countries as Italy where revealed comparative advantage was positively
correlated with that of dynamic Asia (Rae and Sollie 2007).
Table 3.2 Capital account openness (0–100) and foreign-owned

assets/world GDP (percent)
a) Capital account openness
World Average Italy
1890–1913 99.7 1950–1954 37.5
1955–1959 50
1949 42 1960–1964 67.5
1950s 53 1965–1969 75
1960s 55 1970–1974 75
1970s 47 1975–1979 75
1980s 50 1980–1984 75
1990s 68 1985–1989 85
2000–2005 78 1990–1994 92.5
1995–1999 100
b) Foreign-owned assets/world GDP
1870 7
1914 18
1945 5
1960 6
1980 25
2000 92
Sources: Capital account openness from Quinn (2003) and data appendix to Quinn and
Toyoda (2008); foreign-owned assets/world GDP from Obstfeld and Taylor (2004).
Table 3.4 reports that the period from the early 1950s to the first OPEC oil
shock, the so-called Golden Age of European growth, was one where the world
economy as a whole grew fast. These were the years of the Bretton Woods sys-
tem of pegged exchange rates and, quite unlike the interwar period, an era
when OECD countries were largely free from financial crises and macroeco-
nomic turbulence (Bordo 1993). It was an ideal opportunity for countries with
undervalued exchange rates, faced with buoyant export demand, to industrial-
ize and catch up (Boltho 1996). Conversely, the stagflation of the 1970s, driven
by adverse aggregate supply shocks, was an environment that posed great chal-
lenges for macroeconomic policymakers who faced difficult trade-offs between
objectives. For many European countries, including Italy, the policy frame-
work that eventually emerged was a trajectory toward a single currency via the
European monetary system of the 1980s and 1990s. This was an era of slower
macroeconomic growth but, after the 1980s, a combination of good luck in terms
Table 3.3 Shares of world output and world exports of manufactures (percent)
a) Output
1953 1973 1990 2007
Western Europe 26.1 24.5 32.9 22.4
North America 46.9 35.1 23.4 25.7
Japan 2.9 8.8 16.8 16.5
China 2.3 3.9 2.7 11.2
India 1.7 2.1 1.5 1.6
Other Asia 1 3.1 4.9 8.6
Rest of world 19.1 22.5 17.8 14
b) Exports
1953 1973 1990 2007
Western Europe 51.9 55.9 54.2 40.8
North America 35.8 16.1 15.2 11.9
Japan 2.9 9.6 11.5 6.7
China 0.1 0.6 1.9 11.9
Rest of Asia 1.6 4.5 11.1 16.5
Rest of world 7.7 13.3 6.1 8.3
Sources: Output from Bairoch (1982), United Nations (1965), and UNIDO (2002) (2009); exports from
United Nations (1958; 1976) and World Trade Organization (2001; 2008).
Table 3.4 Levels and growth rates of real GDP/person at purchasing power parity
1950 1973 2007 Growth Rate Growth Rate
1950–1973 1973–2007
(percent p.a.) (percent p.a.)
Western Europe 4,569 11,392 21,589 4.05 1.91
United States 9,561 16,689 31,357 2.45 1.88
Japan 1,921 11,434 22,950 8.07 2.07
China 448 838 6,303 2.76 6.12
India 619 853 2,817 1.41 3.57
Asian Tigers 955 3,631 21,212 5.98 5.34
World average 2,111 4,083 7,468 2.91 1.80
Source: Maddison (2003) with updates from website. Levels refer to 1990 Geary-Khamis dollars.
of the absence of adverse shocks and the adoption of inflation-targeting policies

produced macroeconomic stability, the so-called Great Moderation (Stock and
Watson 2005).
Fast European growth in the 1950s and 1960s was based on policies and insti-
tutions that facilitated high rates of investment and the diffusion of American
technology in the era of Fordist manufacturing. Broadly speaking, this was a
period where, to use the terminology of Hall and Soskice (2001), “coordinated
market economies” prospered. This was generally a period of greater govern-
ment intervention in terms of regulation, state ownership, and industrial pol-
icy. In later decades, growth opportunities centered more on the services sector
and the diffusion of information and communications technologies (ICT). This
seems to have been an era that placed a greater premium on flexible adjustment
in labor and product markets and on intangible capital accumulation rather
than on massive investment in physical capital (Nicoletti and Scarpetta 2005;
Timmer et al. 2010). In this era, the “liberal market economies” were better
placed. However, as ideas of “best practice” in microeconomic policy changed,
there was a general change of emphasis among OECD countries toward compe-
tition and privatization policies.
To a considerable extent, Italy has shared in these general European trends.
At the same time, it is clear that in some respects the Italian experience dif-
fers. With regard to institutions, as Hall and Soskice (2001) note, Italy has
represented an “ambiguous case,” neither a CME (German-style) nor an LME
(American-style). Concerning policy responses, the Italian approach to coping
with the stagflationary shocks of the 1970s resulted in a relatively high infla-
tion economy and led to the build-up of a high ratio of public debt to GDP
in the 1980s.1 The question of economic performance in the South marks Italy
as a special case. In terms of growth outcomes, the key feature is that as a
far-from-frontier economy in the age of Fordist manufacturing, Italy outper-
formed during the Golden Age; however, as a close-to-frontier economy in the
ICT era, Italy has disappointed over the last twenty years.
This highlights the general question of whether Italy was more in need of
policy reform than its European peer group after the Golden Age or whether
policy reforms were implemented more slowly or less successfully. This in turn
raises a number of other issues that are explored in what follows. These include
evaluating the pluses and minuses of the postwar settlement in the short and
the long run; reviewing supply-side policies relevant to consideration of the
implications of decisions Italy made with regard to the European integration
agenda; and the possible reasons for the difficulties of implementing structural
reforms, in particular after the Golden Age.
The analysis ends in 2007 on the eve of the crisis, which is not explic-
itly considered. In so far as Italy’s difficulties during the present travails of the
Eurozone have been exacerbated by inadequate public-finance and supply-side
reforms, this discussion of Italy’s economic history provides some context for,
although not an analysis of, these problems.
Table 3.5 Levels and rates of growth of real GDP/person in Western

European countries, 1950–1973 (percent per year)
1950 1973 Growth Rate 1950–1973
Switzerland 9,064 18,204 3.08
Denmark 6,943 13,945 3.08
United Kingdom 6,939 12,025 2.42
Sweden 6,739 12,494 3.06
Netherlands 5,971 13,081 3.45
Belgium 5,462 12,170 3.54
Norway 5,430 11,324 3.24
France 5,186 12,824 4.02
West Germany 4,281 13,153 5.02
Finland 4,253 11,085 4.25
Austria 3,706 11,235 4.94
Italy 3,502 10,634 4.95
Ireland 3,453 6,867 3.03
Spain 2,189 7,661 5.60
Portugal 2,086 7,063 5.45
Greece 1,915 7,655 6.21
Source: Conference Board (2011). Levels refer to 1990 Geary-Khamis dollars.
Italy in the Golden Age

It has become conventional in comparative studies of European economic
growth to consider the period 1950–1973 as the Golden Age. This was a period
of beta-convergence in which European countries generally experienced rapid
catch-up growth based on technology transfer and structural change, and
growth rates were inversely correlated with initial income levels. The basis of
catch-up varied over time; initially, postwar reconstruction and reduction in the
size of the agricultural sector played a part, but by the later 1960s reductions in
technology gaps were the main source (Temin 2002).
During the Golden Age, Italy enjoyed growth of real GDP per person at
almost five percent per year, as seen in Table 3.5. This reflects the relatively large
scope for catch-up reflected in the low initial income level in 1950. However,
normalizing for initial income, Italy outperformed its European peer group
and growth was about 0.65 percentage points per year faster than might have
Table 3.6 Contribution of structural change to labor productivity

growth, 1950–1973 (percent per year)
Orthodox Measure Broadberry Measure
Denmark 0.24 1.10
France 0.00 0.52
Italy 0.83 1.77
Netherlands –0.31 0.29
Spain 0.80 1.77
Sweden 0.00 0.60
United Kingdom –0.12 0.31
West Germany 0.18 0.77
Source: Derived from van Ark (1996) based on a three-sector decomposition

(agriculture, industry, services) where agriculture is deemed to be the declining sector.
The orthodox approach considers that the contribution of structural change equals
ΔAO/AO —ΣΔAi/Ai*Ai/AO*Si, where A is labor productivity, S is share of employment,
and the subscripts O and i stand for the whole economy and sector i, respectively
(Nordhaus 1972). Broadberry (1998) modified this so that labor productivity growth
in declining sectors is measured using the overall rate of labor force growth not the
sectoral rate.
been expected (Crafts and Toniolo 2008). Labor productivity growth averaged
6.8 percent per year in industry and 5.7 percent per year in agriculture during
these years (Broadberry, Giordano, and Zollino 2012). The weight of agriculture
in the economy fell rapidly; the sector accounted for 44 percent of employment
in 1951 but only 18 percent in 1973.
Italy enjoyed a remarkably rapid rate of total factor productivity (TFP)
growth at this time; from 1945 to 1973 the average was 5.8 percent per year
(Broadberry, Giordano, and Zollino 2012). As catch-up proceeded from a start-
ing point of “backwardness,” TFP growth partly came from reductions in inef-
ficiency, especially resulting from the movement of labor out of agriculture
(Table 3.6), and from the realization of substantial economies of scale (Rossi
and Toniolo 1996). In part, TFP growth reflected successful technology transfer
together with creative adaptation and localized learning at which Italy excelled
(Antonelli and Barbiellini-Amidei 2009), even though the country did not have
a national innovation system that exhibited high levels of R & D or rates of pat-
enting. In the 1960s, Italy spent only about 0.6 percent GDP on R & D (about
one-third the West German level), and in 1973 obtained only 3.4 percent of the
foreign patents in the United States compared with a West German share of
24.2 percent (Verspagen 1996; Pavitt and Soete 1982).
Human capital was on the whole favorable. Although average years of school-
ing were low (4.8 years in 1950 rising to 6.8 in 1970; Morrisson and Murtin 2009),
human capital was suited to incrementally adapt the imported technologies that
constituted the main channel of innovation. In comparative terms, Italy ben-

efited from a high number of good engineers who played an essential role in
designing the organization of productive processes in large firms. This exper-
tise was inherited and further developed largely by public firms, which were the
main promoters of convergence of the Italian industrial structure toward that
prevailing in Europe (De Nardis and Trau 2005; Barca and Trento 1997). This
evolution paralleled and complemented the earliest stages of the process driven
by small-to-medium firms, often forming industrial districts specialized in tra-
ditional products, which accelerated dramatically later in the 1970s. The con-
vergence process of the Golden Age was, however, incomplete: high-technology
sectors were less well developed than in the other major European economies, as
is reflected in the trade performance data reported in Federico and Wolf (2011).
Moving to a trajectory of rapid catch-up growth was not automatic but
required an appropriate institutional and policy framework, “social capability”
in the well-known terminology of Abramovitz (1986). In this regard, a key ingre-
dient in Western Europe was the postwar settlement, which for most countries
was reached in the context of the Marshall Plan (Judt 2010).
It is not entirely clear how much difference the Marshall Plan made to early
postwar Italy. It is unlikely that growth was much affected by the direct eco-
nomic effects of the $1.5 billion that Italy received from the United States in the
years 1948–1951, amounting to 2 percent of GDP compared with an average of
2.5 percent for all countries (Eichengreen and Uzan 1992), but it may have been
an important factor in deciding distribution of the costs of stabilization; in
supporting modernization of industrial plants, especially in the electrical, steel,
and metals sectors (Fauri 2010); and in heading off a possible “war of attrition”
(Casella and Eichengreen 1994). It also added impetus to the move toward trade
liberalization and the European Payments Union.
The main features of the postwar settlement in Italy were early stabilization
in 1947, a political constitution that embodied checks and balances, isolation of
a strong Communist Party, progressive opening to international competition,
and participation in the Bretton Woods system. Italy was at the forefront of
the European integration process, moved relatively quickly to reduce barriers
to international trade, and joined the Bretton Woods system at an undervalued
parity.2 These decisions were strongly influenced by the positioning of Italy in
the Western bloc led by the United States. At the same time, they were seen
by the leading economic authorities (notably by Luigi Einaudi, the Governor of
the Bank of Italy and, in 1947, Minister of the Budget) as useful steps to foster
competition and to weaken the industrial oligopolistic groups.
However, unlike what happened in the United Kingdom in 1948 and later
in Germany where competition authorities were created, on the domestic front
this aim was not accompanied by corresponding attempts to implement com-
petition policies; corporate governance structures remained closed, and sectors
sheltered from international competition (retail, professional orders, public utili-
ties) remained highly regulated.
The domestic policy stance reflected the heterogeneous nature of the main
political forces and interest groups. Free market supporters were in a minori-
ty—because of the prevailing ideological climate in Europe after the war and
because of Italy’s historical legacy—and had to face not only the isolated but
socially influential communist and socialist opposition but also the hostil-
ity of an important component of the ruling party (the Catholic Democrazia
Cristiana), which favored an active role for the State in the economy. A similar
confidence in the necessity of public intervention to promote accumulation and
a corresponding mistrust of the capacity of private groups to accomplish this
task shaped the ideas of leading managers of State-owned enterprises (Institute
for Industrial Reconstruction [IRI]), among them Donato Menichella, general
director of IRI in 1933–1944 and Governor of the Bank of Italy from 1948 to
1960. A distinctive feature of the postwar settlement was preservation of the
unusually large role played by firms and banks controlled by the State, but
operating as private profit-oriented autonomous entities concentrated in IRI,
created in 1933 after the collapse of the big private financial and industrial
groups. It was mainly the political acumen of the Prime Minister and leader
of the Democrazia Cristiana, Alcide De Gasperi, which enabled a balance to
be struck between these different forces, and between them and the interests of
private industrial firms.
After World War II, for the first time in Italian history the South—since
1861 the most prominent structural issue of the Italian economy (Iuzzolino,
Pellegrini, and Viesti 2011)—became the object of specific systematic policies.
At the outset of the Golden Age, the South benefited very little from European
Recovery Program (ERP) funds (Fauri 2010; Del Monte and Giannola 1978).
The promotion of growth in the South was not a priority of the policy agenda
(Cafiero 1996). However, two factors rapidly changed this picture. First, acute
social tensions in the huge Southern agricultural sector, largely based on large
estates, greatly endangered political stability and the integration of Italy in the
Western bloc. Second, the influence and quality of IRI management was a fun-
damental element in promoting a specific policy aimed at the reduction of the
North-South gap. This policy, “l’intervento straordinario” (special development
policy), was based on the principle of additionality with respect to “ordinary”
policy (i.e., was targeted specifically at the backward areas and was therefore
“extra” with respect to “ordinary” capital expenditure), and was conceived as
a decisive part of Italian economic policy as a whole. It was animated by the
belief that closure of the income gap, far from being the long period outcome
of market forces (as mainstream economist thought had maintained), had to be
achieved by policy means. The growth of the South and of Italy was seen as one
thing: this was the central idea animating promoters of the special development
policy and later of the structural-reform policy (programmazione) during the
center-left governments at the beginning of the 1960s (La Malfa 1962).
The main instrument of the special development policy, the “Cassa del
Mezzogiorno,” was a body independent from the Public Administration.3
A significant degree of autonomy from ordinary Public Administration was a

feature of Italian economic policy in the Golden Age, not just regional policy.
The most successful period of the Cassa coincided with this period. Between
1951 and 1973, the North-South gap in terms of GDP per head experienced a
strong reduction for the first and only time in history.
In the Golden Age, the South had positive effects on the growth of the rest
of Italy. Low-skilled and cheap labor, particularly suitable for the Fordist mode
of production, poured from the Southern agricultural sector into the Northern
plants. Especially before the creation of the European Common Market, the
growing market in the South increased demand for Northern products. At the
end of the 1950s, 70 percent of net exports of the Center-North were directed
toward the South. The growth of the domestic market allowed economies of
scale to be realized in Northern firms (Iuzzolino, Pellegrini, and Viesti 2012).
Trade liberalization was an important factor in Western Europe’s Golden
Age. Between the late 1950s and early 1970s, it raised the average growth rate
by about one percent per year (Badinger 2005). Countries that were slow to
liberalize, such as Spain and Ireland, paid a price in terms of slower growth. In
the Italian case, the move to greater openness facilitated a process of export-led
growth as Italy’s share of world manufactured exports rose from 3.7 percent in
1950 to 6.8 percent in 1973. The real exchange rate was kept low by the tendency
for real wages to grow only a little faster than labor productivity in the con-
text of an elastic supply of labor to manufacturing industries.4 The consequent
expansion of the tradeables sector raised its productivity through internal and
external economies of scale; according to some estimates, undervaluation of 20
percent on average during the 1950s and 1960s may have raised the growth rate
by perhaps 1 percentage point per year at this time (Di Nino, Eichengreen, and
Massimo 2012b).
Eichengreen (1996) argued that catch-up growth in the European Golden
Age was underpinned in many countries by a corporatist social contract that
allowed a cooperative equilibrium in which wage restraint was rewarded by
high investment, which benefited firms and their workers in the long run. A
cross-country regression suggests that until the mid-1970s coordinated wage
bargaining does seem to have raised investment and growth rates quite appre-
ciably (Gilmore 2009) but this was only to a very limited extent the case for
Italy. Wage moderation in Italy lacked these institutional underpinnings and
should rather be seen as a result of weak union bargaining power where, as
Lewis (1954) might have put it, labor supply was “unlimited” as labor was rede-
ployed out of agriculture. However, the high degree of political and ideological
conflict (Salvati 2000) accompanied by the ruthless attitude of entrepreneurs
keen to exploit their bargaining power made this equilibrium potentially unsta-
ble. The first strike wave in the early 1960s and, to a much greater extent, the
“hot autumn” of 1969 signaled the end of this phase. The subsequent instabil-
ity of industrial relations confirms the absence of institutions of a coordinated
market economy.
With regard to domestic supply-side policy, the postwar settlement was

adequate for a process of rapid catch-up for a “backward” economy to be
launched, but as Italy got closer to the frontier this was no longer the case.
This is epitomized by a distinctive feature of Golden Age Italy, namely the
state-owned enterprises IRI augmented by ENI in the energy sector from 1953.
Initially, public enterprises were a route to speeding up investment and were
given high managerial autonomy, which meant they could achieve economic
efficiency. In particular, IRI helped development of the private machinery
industry by providing cheap intermediate inputs; compensating for the weak-
ness of private firms in this field was important. By the 1960s, however, public
enterprises were increasingly hijacked for political purposes (Barca et al. 1998;
Woods 1998). This degenerative process also involved banks owned by IRI.
Whereas in the 1950s and 1960s they allocated financial resources efficiently,
in subsequent years they were hampered in selecting innovative firms by the
growing influence of political networks.
The postwar investment boom was largely financed from a high share of
profits in national income. Italy possessed neither a CME bank-based nor an
LME equity-based financial system but rather one in which corporate gover-
nance was largely based on family-controlled pyramidal groups, State-owned
large firms, and banks that were themselves very largely under State control
(Pagano and Trento 2003). By the end of the Golden Age, as profits came under
pressure, this resulted in major problems for the operation and financing of
large firms (de Cecco and Ferri 2001).
The peak of the Golden Age was reached in 1958–1963 with the culmination
of the “economic miracle” that had turned Italy into an industrial economy, but
there were emerging tensions that threatened instability, notably the potential
conflict between sustaining growth on the basis of low wages and demands for
higher consumption resulting from successful economic development.
In 1963, at the end of the “economic miracle,” monetary policy suddenly
turned restrictive in the face of mounting balance of payments disequilibria and
inflation pressures. These latter were driven by the first significant wage push
in fifty years, in the context of the abatement of unemployment and a resur-
gence of union militancy. The policy reaction was successful in stopping wage
increases and in avoiding a much feared devaluation and the economy managed
to return to an equilibrium (albeit slower) growth path until the beginning of
the next decade.
In retrospect, 1963 is also noteworthy because of new aspects of the design
of economic policy similar in some ways to those emerging elsewhere in Europe.
In many countries some sort of vaguely Keynesian-inspired income policies
were attempted during the 1960s (e.g., France, Denmark, Germany, and United
Kingdom). However, the most ambitious attempt was put forward in Italy, when
the socialist party, previously under communist influence, entered the govern-
ment in 1963 forming a center-left coalition. Because the economy had grown
at incredibly high rates in previous years, the general assumption was that this
speed could easily be maintained and that the main task left for economic
policy was to direct the resources produced by growth to favored objectives. To
achieve this result a macroeconomic program (programmazione) was designed
to tackle the main structural problems of the economy, namely the North-South
gap, welfare, antitrust regulation, and company-law reform. Incomes policy
would ensure the sustainability of growth by preserving competitiveness and by
keeping inflationary pressures under control. With the programmazione there
was also an attempt to render industrial relations less adversarial by involving
unions in discussions about the compatibility of wage dynamics with macro-
economic objectives and to pave the way for a coordinated market economy.
On the whole, the program was heavily influenced by a dirigiste approach
not uncommon in European economic culture of the time. Somehow paradoxi-
cally, this was also caused by the intellectual contribution to the programmazi-
one of the “liberal-socialisti,” a small but very active group in the second half
of the 1950s, aimed at introducing competition on the product and service mar-
kets, in particular in public utilities, and at opening the structures of corpo-
rate governance of private firms. Both anticipated central themes of the policy
debate decades later. At that time, the latter was successfully countered by the
employers’ organization. The competition issue was tackled by the proposal to
dismantle existing monopolies not by ensuring a proper competition-promoting
regulation of the market but by nationalization of entire sectors. Whereas the
case of failure of the market was acknowledged, the case of failure of the State
was still to be taken into consideration.
Policy reform proved unrealistic, however, for a number of reasons. On the
macroeconomic side, the momentum of growth gradually decreased. On the
whole, firms encountered significant difficulties in speeding up innovation to
compensate for the waning of the catch-up model based on “unlimited” labor
supply and on technological transfer. The growth of fixed investment, mainly
aimed at implementing labor-saving technologies, slowed from 11 percent on a
yearly average in 1958–1963 to 5 percent in 1964–1973. Current account surpluses
(2 percent of GDP on average at this time) were matched by capital outflows
surging to $1 billion annually (Biagioli 1995). The first, by changing relative fac-
tor intensity, reflected the aim of containing the squeeze of profits caused by
wage increases of 1961–1963; the second was the result not only of the search for
financial instruments still unavailable on the Italian market but also to a con-
siderable extent of an emerging fear of left-oriented policy measures.
The reform design dragged on during the entire decade and was never
implemented. Incomes policy proposals ran up against the weakness of the
reform culture of the communist opposition (Magnani 1997a), the targets set
by the programmazione were not compatible with the inefficiency of public
administration, and the antitrust regulation and company-law reform propos-
als were defeated by consolidated interests of the large industrial groups (Barca
1997a; Ciocca 2007). Moreover, the ambition of the State to guide the mar-
ket in strategic directions turned into a radical reduction of the autonomy of
economic leaders, more and more subordinated to the greed of political lobbies
and parties. The progressive contribution of State-controlled enterprises came
gradually to an end, accentuating the 1970s crisis of large firms in the steel,
energy, and chemicals sectors that had led convergence of the Italian industrial
structure during the Golden Age.
The hot autumn of 1969 marked a clear failure of the incomes-policy
approach advanced by the center-left governments. Within a few years, the
Italian economy went through a huge and persistent wage shock and through
the oil shock. The macroeconomic context for reform worsened rapidly. Also,
development policy suffered clear setbacks at the end of the 1960s. The abo-
lition of regionally differentiated wage structures in national contracts raised
relative Southern labor costs and reduced wage flexibility, although a partial
compensation was found by charging employers’ social-security contributions
to the budget. Moreover, construction of the first pillars of a modern national
welfare state, in particular in terms of pensions and health service, inevitably
tended to reduce the amount of public resources available for the special devel-
opment policy.
Was economic policy well-designed to exploit the favorable conditions
of the Golden Age? In principle, two episodes seem particularly relevant in
answering this question: the postwar settlement in 1946–1948 and the center-left
turn in 1963. The former was mainly a product of political circumstances of the
time. The growth model that resulted delivered extraordinary results up to the
early 1960s, even by standards of the time. At the beginning of the 1960s polit-
ical constraints were less severe and growth had produced an unprecedented
volume of resources. Despite its contradictions, the turn of 1963 represents a
missed opportunity for reforms that would have improved subsequent economic
performance.
The failure in 1963 to adapt institutions, regulations, and the scope of pub-
lic intervention in the economy to new circumstances created by growth (end
of the unlimited supply of labor, congestion costs, formation of a significant
working class in the North, and resurgence of union militancy) may be thought
of as a clear reflection of a long-standing feature of Italian economic policy (i.e.,
the weakness of the reform policy culture), squeezed between the “alternative to
the system” at that time cautiously but nonetheless firmly put forward by the
main opposition party on the one hand and the defense of diffused particular
interests on the other.
From the 1970s to the 1990s

After the early 1970s, growth slowed markedly across Europe (Table 3.7). The end
of the Golden Age had a number of unavoidable aspects including exhaustion of
Table 3.7 Levels and rates of growth of real GDP per person, 1973–1995
(percent per year)
Y/P 1973 Y/P 1995 Growth Rate 1973–1995
Switzerland 18,204 20,627 0.58
Denmark 13,945 20,350 1.74
Sweden 13,494 17,648 1.23
West Germany 13,153 19,849 1.92
Netherlands 13,081 18,700 1.65
France 12,824 18,206 1.61
Belgium 12,170 18,270 1.87
United Kingdom 12,025 17,586 1.75
Norway 11,324 21,578 2.96
Austria 11,235 17,959 2.16
Finland 11,085 15,970 1.88
Italy 10,634 17,216 2.21
Spain 7,661 13,132 2.48
Greece 7,655 10,321 1.37
Portugal 7,063 11,614 2.29
Ireland 6,867 12,734 2.85
Source: Conference Board (2011).

Estimates for Ireland are based on GNP.
transitory components of fast growth, such as postwar reconstruction; reduced

opportunities to redeploy labor out of agriculture; narrowing of the technol-
ogy gap; and diminishing returns to investment. TFP growth slowed markedly.
Moreover, the United States itself experienced a productivity growth slow-
down. All-in-all, the scope for catch-up growth was much reduced, although
by no means eliminated. In addition, in the face of internal labor militancy
and external oil-price shocks together with the collapse of the discipline of the
fixed exchange rate system macroeconomic policymaking became much more
difficult.
Indeed, from the end of the Golden Age, Western Europe’s catch-up of the
United States in terms of real GDP per person stalled. The European level was
68.3 percent of the American level in 1973, 68.6 percent in 1995, and 68.2 per-
cent in 2007. The picture in terms of labor productivity was different. Catch-up
in terms of real GDP per hour worked continued until the mid-1990s and the
European level rose from 63.3 percent of the American level in 1973 to 85.1 per-
cent in 1995 but then retreated to 76.5 percent by 2007. From the 1970s to the
mid-1990s the discrepancy comes from a decrease in the amount of work done
by Europeans compared with Americans, accounted for by a combination of
rising unemployment, earlier retirement, and longer holidays. The implications
for economic welfare depend on how far these outcomes result from differences
in preferences or distortions to markets from regulations, taxes, and so forth.
This remains unclear (Faggio and Nickell 2007).
Italy has had a similar experience but with some distinctive features; real
GDP per person was 63.7 percent of the level in the United States both in 1973
and in 2007 but had been higher at 69.9 percent in 1995. The gap in labor pro-
ductivity between Italy and the United States narrowed quite steadily between
the end of the Golden Age and the mid-1990s but then widened appreciably; the
ratio was 64.9 percent in 1973, 81.8 percent in 1995, and 67.6 percent in 2007. The
idiosyncratic Italian aspects that are a cause for concern are low female employ-
ment and high levels of inactivity among males over 55. These aspects have
been a persistent feature of recent decades and do, at least partly, reflect distor-
tions. Together, inflexibilities in labor markets that deny part-time employment
opportunities and relatively low education attainments account for most of the
difference in female employment levels compared with the European average
(Del Boca, Pasqua, and Pronzato 2004), whereas early retirement for men has
been heavily incentivized by the pension system and an astonishingly high
implicit tax on working after the age of 60 (Duval 2003).5
Although catch-up of the United States in terms of labor productivity con-
tinued, the rate of convergence slowed down (Crafts 2007). European coun-
tries struggled to cope with the aftermath of macroeconomic turbulence of the
1970s, to embrace creative destruction in the context of the need to adjust to
a changing world economy, and to achieve rapid productivity growth in the
increasingly dominant services sector. The Eichengreen wage-moderation model
broke down (Cameron and Wallace 2002; Gilmore 2009), whereas regulation,
taxation, and expenditure on social transfers increased. Although these policy
shifts were understandable in the context of the pressures of the time and the
legacy of the social contracts of the earlier postwar period, they tended to slow
growth. Kneller, Bleaney, and Gemmell (1999) estimated that an increase of 1
percentage point in the ratio of distortionary taxes to GDP slowed growth by
0.1 percentage point. Employment protection impeded growth in sectors inten-
sive in the use of human capital and more innovative sectors (Conti and Sulis
2010). Product market regulation that inhibited competition slowed catch-up in
TFP (Nicoletti and Scarpetta 2005). Tables 3.8, 3.9, and 3.10 indicate that there
was cause for concern.
This account has resonance for Italy where the Golden Age growth model
had run out of steam. The service sector now had a much increased weight and
its performance became increasingly important. From 1973 to 1993, the share
of employment in services rose from 43.9 to 62.2 percent, whereas the share
in industry fell from 38.4 to 31.3 percent but service sector labor productiv-
ity growth averaged only 0.5 percent per year during this period (Broadberry,
Table 3.8 Employment protection (0–4)

1960 1980 2000 2008
Austria 1.10 1.92 2.21 1.93
Belgium 1.38 3.21 2.18 2.18
Denmark 1.90 2.30 1.50 1.50
Finland 2.30 2.30 2.09 1.96
France 0.75 2.80 2.98 3.05
Germany 0.80 3.21 2.34 2.12
Greece — — 3.50 2.73
Ireland 0.00 0.90 0.93 1.11
Italy 3.45 3.60 2.51 1.89
Netherlands 2.70 2.70 2.12 1.95
Norway 2.91 2.91 2.56 2.69
Portugal — 4.00 3.67 3.15
Spain 4.00 3.87 2.93 2.98
Sweden 0.00 3.50 2.24 1.87
Switzerland 1.00 1.00 1.14 1.14
United Kingdom 0.27 0.60 0.68 0.75
United States 0.21 0.21 0.21 0.21
Sources: Nickell (2006) and OECD (2010a).
Giordano, and Zollino 2012) and economy-wide TFP growth fell to 1.2 percent
per year.
Italy was notable in this period for a very high level of employment pro-
tection (Table 3.8); was slow to relax product-market regulation (Table 3.9); and
was hampered by regulatory procedures and costs, and by relatively high barri-
ers to entry (Klapper, Laeven, and Rajan 2006; Bianco, Giacomelli, and Rodano
2012). The estimates in Nicoletti and Scarpetta (2005) suggest that slowness to
deregulate product markets cost Italy about 0.7 percentage points per year in
the 1980s and 1990s compared with adopting a stance similar to the most lib-
eral OECD country, whereas the estimates in Caballero et al. (2004) imply that
employment protection slowed adjustment in Italy and had a labor productivity
growth cost of about 0.3 percentage points per year in the period 1980–1998
compared with the economy with the least employment protection.
At the beginning of the 1970s, several factors tended in Europe to reduce
optimal firm size (minimum efficient scale): the crisis of the Fordist organi-
zation of labor caused by the antagonistic attitude of workers in large firms
Table 3.9 Price-cost margins (PCM) and product market regulation (PMR: 0–6)
PCM PCM PMR PMR PMR PMR
Manufactures Services 1975 1990 1998 2008
Austria 1.15 1.28 5.2 4.5 2.33 1.45
Belgium 1.10 1.20 5.5 5.3 2.17 1.43
Denmark 1.11 1.25 5.5 4.7 1.59 1.06
Finland 1.18 1.27 5.5 4.6 2.08 1.19
France 1.12 1.26 6 5.2 2.52 1.45
Germany 1.13 1.25 5.2 4.6 2.06 1.33
Greece — — 5.7 5.7 2.99 2.37
Ireland — — 5.7 5 1.65 0.92
Italy 1.15 1.38 5.8 5.8 2.59 1.38
Netherlands 1.13 1.24 5.6 5.6 1.66 0.97
Norway 1.13 1.26 5.5 4.5 1.85 1.16
Portugal — — 5.9 5.3 2.25 1.43
Spain 1.14 — 5.1 4.7 2.55 1.03
Sweden 1.11 1.17 4.5 4.4 1.93 1.30
Switzerland — — 4.1 4.2 2.48 1.18
United Kingdom 1.11 1.16 4.8 3 1.07 0.84
United States 1.12 1.19 3.7 2.3 1.28 0.84
Sources: PMR indicator for 1975 and 1990 from Conway and Nicoletti (2006) and for 1998 and 2008 from
Wolfl et al. (2009); the 1975 and 1990 numbers are not comparable with those for the later years. Price-
cost margins from Hoj et al. (2007) refer to the mid-1990s.
and their demands for higher wages, the diversification and specialization of
demand, technological innovations that made equipment capital more flexible,
and reduced benefits of vertical integration of production. International com-
petition was now based more on product innovations and less on standardized
mass production, notably in automobiles (Bianchi 2002).
These factors lay at the heart of the so-called flexible-specialization model
(Sabel 1982). Italian industry shared these general tendencies with particular
intensity for two reasons. First, industrial structure was already characterized
in the 1950s and 1960s by a relatively large share of small- and medium-size
firms and by the prominence of industrial districts (Brusco and Paba 1997).
Second, after the “hot autumn,” large firms reacted by decentralizing produc-
tion because of rapidly increasing rigidities emerging in the production process
at the shop-floor level.
Table 3.10 Distortionary tax revenues and social transfers (%GDP)

a) Distortionary tax revenues
1965 1980 1995 2007
Austria 21.2 26.7 29.6 30.1
Belgium 19.5 30 32.4 32.3
Denmark 17.8 27 33.1 32.5
Finland 17.3 23.2 31.8 29.9
France 21.3 30 31.2 31.2
Germany 21.2 27.3 26.8 25.3
Greece 10 13.9 18.6 20.6
Ireland 11.8 18 19.6 22.2
Italy 15.4 21.8 29.2 30
Netherlands 22.4 31.3 31.3 26.2
Norway 17.4 27.5 25.2 31.4
Portugal 8.8 12.6 19.2 21.8
Spain 8.7 17.9 22.9 27.4
Sweden 24.1 35.7 34.8 34.6
Switzerland 11.5 19.5 21.7 22.3
United Kingdom 20.3 24.9 22.7 25.5
United States 19.1 21.7 22.9 23.2
b) Social transfers
1960 1980 1995 2007
Austria 15.9 22.6 26.6 26.4
Belgium 13.1 23.5 26.4 26.5
Denmark 12.3 25.2 28.9 26.1
Finland 8.8 18.4 27.4 24.6
France 13.4 20.8 28.3 28.4
Germany 18.1 23 26.6 25.2
Greece 10.4 11.5 19.3 21.3
Ireland 8.7 17.4 18.4 18.5
Italy 13.1 18 19.8 24.9
Netherlands 11.7 24.1 22.8 20.1
Norway 7.8 16.9 23.5 20.8
Portugal — 10.8 18.1 22.5
Table 3.10 (cont.)

Spain — 15.5 21.5 21.6
Sweden 10.8 28.6 32.5 27.3
Switzerland 4.9 13.9 17.5 18.5
United Kingdom 10.2 16.6 20.4 20.5
United States 7.3 13.3 15.4 16.2
Sources: Lindert (2004), OECD (2010b; 2011d).Distortionary taxes as defined in

Kneller, Bleaney, and Gemmell (1999) and refer to direct taxes; Ireland in 1995 and
2007 as %GNP.
The emergence of new small- and medium-size enterprises was concentrated

mostly in their historical locations in the Center and the North, shaping a
sort of “regionalized model of capitalism” based on agglomeration econo-
mies, local networks, and nonmarket mechanisms of coordination (Trigilia
and Burroni 2009), and on the accumulation of tacit knowledge (Antonelli and
Barbiellini-Amidei 2009). By contrast, the weakness of indigenous entrepreneur-
ship—the main failure of the special development policy—prevented the growth
of flexible small-to-medium size firms in the South.
These latter (twenty to fifty employees) were the main support of growth
in industry during the 1970s, in the face of policy failures and growing macro-
economic imbalances. Their performance in terms of productivity, investment,
production, and profits turned out to be significantly better than that of large
firms (Barca and Magnani 1989). Italy did, therefore, find a partial solution to
mitigate inflexibility.
New social demands emerged. They were met by a progressive widening of
the fiscal deficit. The level of Italian public debt had remained almost stationary
until the end of the 1960s, well below 40 percent of GDP. By 1980 it reached 60
percent and in 1994, at its peak before the recent financial crisis, it amounted to
125 percent of the national product.6 Italy is the only major European country
where, after the substantial reduction registered in the first years after World
War II, public debt relative to GDP climbed back to values recorded in the sec-
ond quarter of the century.
This rise stemmed from strong increases of primary expenditures in the
first half of the 1970s (from 31.2 percent in 1970 to 37.6 percent of GDP in
1975), which, however, still remained below the levels registered in France and
Germany. Social transfers rose from 13.1 percent GDP in 1960 to 18 percent
GDP by 1980 (Table 3.10). Italy looks similar to many other European countries
regarding the expansion of welfare, even if the gap to be filled with regard to
demands for social spending was wider, given the low initial conditions. What
is distinctive in Italy is that the adjustment was made by keeping fiscal pressure
constant and thus by allowing a fiscal deficit to emerge that over time led to a
rapid increase in the public debt-to-GDP ratio (Balassone, Francese, and Pace
2012). In the first half of the 1970s, intense social conflict discouraged coun-
terbalancing revenue increases. It was politically more viable to let public debt,
inflation, and the fiscal drag do the job of finding a new though unstable mac-
roeconomic equilibrium.
Moreover, the composition of revenues became less favorable to growth.
Table 3.10 shows a substantial rise in distortionary taxation between the
mid-1960s and the mid-1990s, which went along with higher social transfers
but also reflects the increased outlays for interest payments on the public debt.
Research by the OECD suggests that a growth-friendly tax system has low rates
of corporate tax and collects a high proportion of its revenue from consump-
tion taxes (Johansson et al. 2008). In both these respects, Italy was relatively
badly placed. Against the general European trend, corporate income tax rates
increased from 36 percent at the end of the 1970s to 52 percent in the mid-1990s,
whereas Italy had the lowest C-efficiency score for value-added tax in Europe.
The broad profile of monetary policies was similar in Italy and abroad;
a tendency toward accommodation (actually more pronounced in Italy), fol-
lowed at the end of the 1970s by a more restrictive stance in the context of the
“Volcker turn” and participation in the European monetary system. According
to the Governor of the Bank of Italy, Guido Carli, (Banca d’Italia 1975), mone-
tary policy could not react effectively to the slackening fiscal discipline because
this would have amounted to a “seditious act” against the State.7 Driven by
enormous nominal wage increases (17 percent on a yearly basis between 1971
and 1975; real wages increased by almost 5 percent a year), the oil shock, and
the devaluation of the lira, prices exploded.
However, some authors believe that the degree of freedom in shaping mac-
roeconomic policies was actually higher. Spinelli and Fratianni (1991), Andreatta
and d’Adda (1985), and Onofri and Basevi (1997) underline that with a more
market-oriented policy culture it would have been possible to implement more
virtuous policies in the aftermath of the first oil shock, as occurred in other
European countries. Their critique is severe; Italian economic policy in the 1970s
was basically founded on the irrelevance of the public budget constraint, on the
dependence of monetary policy on budget needs, and on a dirigiste approach of
public interventions.
Giavazzi and Spaventa (1989) argue instead that Italian macroeconomic
policy in the second half of the 1970s reduced the costs of disinflation later,
because it delivered high profit margins and financed new capital equipment
such that pressure could be more easily exerted on industry to reduce costs.
Boltho (1986), noting the still positive growth differential between Italy and the
other advanced economies, supports this argument by pointing to the beneficial
effects of expansionary policy during the whole decade on the development of
small- and medium-size firms.
In the second half of the 1970s, in the middle of a dramatic crisis threatening
the very survival of democracy, participation of the communist party in the
coalition supporting the government (1976–1979: “governi di solidarietà nazion-
ale”) allowed a deceleration of inflation and public debt growth; the willing-
ness, albeit cautious, of trade unions to take into account the compatibility of
wage dynamics with macroeconomic equilibrium induced wage moderation,
increased profits, and indirectly supported technological restructuring pro-
cesses. In 1979, the coalition broke up. Within a short time span, entrepreneurs
regained control of production processes in large firms, strengthened by the
substantial labor-saving process innovations undertaken in the preceding years
(Barca and Magnani 1989).
Around 1980, three events marked a turning point in economic policy:
(1) the participation in the European Monetary System; (2) the Bank of Italy–
Treasury “divorce”(by which the Bank was freed from the obligation of buying
unsold public debt at Treasury auctions), which was aimed at inducing virtuous
behavior by the public sector by increasing the cost of issuing new debt; and
(3) the introduction of a form of incomes policy, through the predetermina-
tion of automatic inflation-related pay raises to guide price expectations. The
first decision represented an attempt to “force” a reduction of costs in the sec-
tor exposed to foreign competition by a partial and delayed realignment of the
nominal exchange rate in response to appreciation of the real exchange rate.
The effectiveness of this policy with respect to that implemented in the first
half of the 1970s is clearly shown by different price dynamics after the two oil
shocks in 1973 and 1979.
In the 1980s, conditions for addressing macroeconomic disequilibria
looked more favorable than in the 1970s. Governments could rely on stable
majorities. The drastic fall in oil prices reduced inflation and increased, cet-
eris paribus, available resources. After 1983, the major economies entered a
long expansionary cycle. The “wage-push age” was definitely over and the
concept of incomes policy (Tarantelli 1981) was, even if painfully, gaining
some ground.8 Monetary policy, by pursuing flexibly an exchange rate target,
was an important factor in reducing inflation from 1979 to 1986 (Gressani,
Guiso, and Visco 1987).
The adjustment was, however, incomplete. Inflation reached a low point in
1987 of slightly less than 5 percent after the fall of oil prices but rose back to
6 percent at the beginning of the 1990s, two percentage points more than the
European average, mainly because of the existence of strong competition bar-
riers in the nontraded sector (Barca and Visco 1993) and a still excessive wage
growth. During 1985–1991, the nominal exchange rate changed little; competi-
tiveness, measured by goods prices, worsened by 12 percent, in terms of unit
labor costs by more than 15 percent. The current account, balanced in 1986,
weakened gradually to a deficit of 2 percent of GDP in 1991. Firms were slow to
react to competitive pressure by improving the quality of products and shifting
toward more innovation-intensive production.
The major obstacle to complete adjustment was an inability to deal with

the public debt problem. Programs to reduce deficits were regularly discarded.
Although there was some progress in the final years of the decade, primary
deficits generally remained substantial. Public debt rose further from 60 percent
of GDP in 1980 to more than 100 percent in 1991. The foreign sector purchased
significant amounts of State bonds attracted by the stability of the exchange
rate and high interest rates. The negative net investment position of the country
climbed to more than 10 percent of GDP.
The long-term implications of allowing the debt ratio to increase so much are
unfavorable for growth, as is highlighted in particular by growth models of the
overlapping-generations variety. Adverse impacts can occur through a number
of transmission mechanisms including reductions in market-sector capital for-
mation, higher long-term interest rates, and higher tax rates. Empirical research
on advanced economies has found negative effects; for example, Kumar and
Woo (2010) estimate that a 10 percentage point increase in the initial debt-to-
GDP ratio is associated with a fall of about 0.2 percentage points in growth. It
has also been suggested that the adverse effect on growth becomes substantial
after the debt ratio reaches a critical level, which has recently been claimed to
be around 90 percent of GDP (Checherita and Rother 2010).
The risks inherent in the rising public debt ratio were clearly perceived,
as shown by continuous attempts to reduce fiscal imbalances. There was no
effective policy reaction because of the structural weakness of political power,
more and more dependent on a multitude of powerful interest groups, unions
often included.9 The failure to address the increase in public debt in a far better
macroeconomic context than that of the 1970s must be considered as a major
missed opportunity.
In the period between the end of the Golden Age and the beginning of the
1990s the special development policy for the South encountered growing dif-
ficulties; reduction of the income gap came to a halt. The oil shock, changing
technological and competitive framework, and increased rigidity of the labor
market made this policy less and less effective (Iuzzolino, Pellegrini, and Viesti
2012). The progressive decline of IRI disproportionately reduced the efficiency
of investments in the South, where State-controlled firms played a decisive
role. A similar degeneration process undermined the Cassa per il Mezzogiorno,
whose technical autonomy and authority were put in question. Finally, the
attribution of relevant powers to the newly constituted Regions increased sig-
nificantly the costs of coordination of regional policies and made local lobbies
more powerful.
Special development policy tended gradually to replace rather than add
resources to the ordinary State policy. From the beginning of the 1970s up to
1992, total net current public transfers in the South became more negative by 3
percentage points of its GDP, from −3.5 to −6.5, but in the rest of the country
they plunged from −13 to −20 percent of GDP of these regions. Including labor
income in the South often reflecting a disguised social assistance policy, net
public resources flowing to the South increased slightly from 11 to almost 12

percent of GDP, with those pouring out from the Center-North from −3 to −10
percent of GDP (Magnani 1997b). The divergence in public net flows was not
caused by expenditures but by taxes, these latter directly related to the level of
incomes in the two parts of the country. However, what matters more is the fact
that the composition of public expenditure flowing into the South started to
shift more and more in favor of current transfers and labor income, with nega-
tive effects on growth prospects of the southern economy on the one hand and
the national public budget on the other (Cannari and Chiri 2006; Staderini and
Vadalà 2009). An implicit redistribution of resources therefore took place in the
aftermath of the extension of the welfare state to the whole country. From being
a factor supporting Italian growth, the relative stagnation of the South gradu-
ally became a drain on public resources.
To sum up, supply-side adjustments in the 1970s were much more limited
than elsewhere in Europe because of policy constraints resulting from the social
and political emergency. In the subsequent decade, the long shadow of the 1970s
mainly took the form of a lack of political leadership in subduing the pressure
of interest groups, which was a precondition for ensuring a sustainable path
for public finances. The crisis of 1992 exploded because of a combination of
factors affecting the whole EMS (Eichengreen 2000) and the failure to correct
the previously mentioned disequilibria. Italy was forced to exit the European
Monetary system (EMS). This crisis finally induced some long overdue macro-
economic adjustments.
From the Mid-1990s to the

Eve of the Crisis
After the mid-1990s western European catch-up of the United States in terms of
labor productivity ceased. Whereas between 1973 and 1995 real GDP per hour
worked grew at 2.6 percent per year in Europe and 1.3 percent in the United
States, between 1995 and 2007 these growth rates were 1.2 and 2.1 percent,
respectively. The end of catch-up reflected both European slowing down and
American speeding up. At about this point, employment started to grow faster
than population in Europe but it no longer did so in the United States and the
potential of ICT for productivity increased considerably, a potential that was
more fully realized by the American than the European economy. ICT expendi-
ture as a share of GDP averaged 2.2 percent in the late 1990s compared with 4.0
percent in the United States and in Sweden (Timmer and van Ark 2005) and
productivity growth was especially weak in the service sector, averaging only
0.2 percent per year between 1993 and 2007 (Broadberry, Giordano, and Zollino
2012), where ICT had strong effects in the United States. These developments
were important as proximate sources of the turnaround in relative productivity
performance.
To quite a large extent, productivity growth in Italy reflected these ten-
dencies. The growth of real GDP per hour worked fell from 2.35 percent in
1973–1995 to 0.46 percent in 1995–2007, whereas the growth of hours worked per
person went from −0.14 to +0.87 (Table 3.11). This latter can be expected to have
reduced labor productivity growth in the short to medium term if investment
failed to respond and the additional workers were lower quality (Dew-Becker and
Gordon 2008). Nevertheless, productivity growth was very disappointing even
by European standards, suggesting that there were further factors involved.
This poor performance came even though Italy went through a period of
major policy reforms during the 1990s including privatization, antitrust, bank-
ing, and company law reforms, which seemed appropriate as moves in the
direction of reform required by a higher level of economic development. The
1992 crisis added momentum to reform and “the entire political system born
after World War II came to an end” (Pagano and Trento 2003, 199). The big
devaluation of the lira in 1992–1995 delivered a sharp improvement of compet-
itiveness and confidence was for the time being restored. Significant progress
was made in reducing the public debt-to-GDP ratio, which declined from 125
percent in 1994 to 103 percent in 2004.
There is a need, therefore, to confront the puzzle of why growth perfor-
mance deteriorated rather than improved. There seem to be two key reasons.
First, Italy was relatively badly placed to exploit the opportunities of the ICT
era. The diffusion of this new technology was hindered by the small size of
firms, oppressive regulation, and shortfalls in human capital compared with the
European leaders in the take up of ICT. Second, supply-side reform did not
go far enough especially given the context of joining the Eurozone. In several
respects, including the legal system, competition policy, regulation, and privat-
ization, reforms were either incomplete or inadequately implemented.
The international evidence is that diffusion of ICT has been significantly
inhibited in countries that are heavily regulated. Employment protection has
been shown to deter investment in ICT equipment (Gust and Marquez 2004)
because reorganizing working practices and upgrading the labor force, which
are central to realizing the productivity potential of ICT, are made more expen-
sive. Restrictive product market regulation has deterred investment in ICT
capital directly (Conway et al. 2006) and the indirect effect of regulation in
raising costs has been relatively pronounced in sectors that use ICT intensively.
There has been a strong correlation between product market regulation and the
contribution of ICT-using services (notably distribution) to overall productivity
growth (Nicoletti and Scarpetta 2005). The general story is not that regulation
has become more stringent but rather that existing regulation became more
costly in the context of a new technological era.
Table 3.11 Levels and rates of growth of real GDP per person and per hour
worked, 1995–2007 ($GK1990 and percent per year)
a) Real GDP per person
Y/P, 1995 Y/P, 2007 Growth Rate 1995–2007
Norway 21,578 28,553 2.36
Switzerland 20,627 24,781 1.55
Denmark 20,350 25,060 1.76
Netherlands 18,700 24,405 2.24
Belgium 18,270 23,487 2.12
France 18,206 22,282 1.70
Austria 17,959 23,744 2.36
Germany 17,672 21,143 1.51
Sweden 17,648 25,381 3.07
United Kingdom 17,586 23,620 2.49
Italy 17,216 20,163 1.33
Finland 15,970 24,635 3.67
Spain 13,132 17,869 2.60
Ireland 12,734 23,338 5.18
Portugal 11,614 14,601 1.93
Greece 10,321 15,860 3.64
b) Real GDP per hour worked
1995 2007 Growth Rate 1995–2007
Belgium 30.37 35.74 1.37
Norway 29.82 36.72 1.69
France 29.02 35.44 1.69
Netherlands 27.75 33.84 1.67
Denmark 26.98 30.52 1.03
Germany 25.10 30.78 1.72
United Kingdom 24.33 31.65 2.22
Italy 24.29 25.63 0.46
Austria 23.50 28.68 1.68
Sweden 23.13 31.32 2.56
Finland 22.36 30.42 2.60
Table 3.11 (cont.)

Spain 22.21 23.43 0.64
Switzerland 21.92 25.82 1.38
Ireland 17.21 26.01 3.50
Portugal 13.60 15.62 1.16
Greece 11.63 16.78 3.10
Source: Conference Board (2011).Ireland is GNP.
This account clearly has resonance for Italy. Italy entered the ICT era with
relatively high levels of regulation, albeit decreasing over time as reforms took
place (Tables 3.8 and 3.9). The estimates in Tables 3.12 and 3.13 indicate that
investment in intangible capital has been low and that the productivity growth
contributions of ICT capital and intangible capital have been very modest.
International comparisons confirm that ICT investment has been held back in
Italy by regulation and a shortfall in human capital (Conway et al. 2006).
Microeconomic studies of Italian manufacturing confirm this picture while
adding further insights as to why diffusion of ICT had been relatively slow
in Italy. The take-up of ICT has been strongly correlated with firm size and
changes in organizational structure (Fabiani, Schivardi, and Trento 2005). In
Table 3.12 Investment in intangibles in the market sector, 2006 (%GDP)

Computerized Innovative Economic Total
Information Property Competencies
Austria 0.89 3.14 2.42 6.46
Czech Republic 0.71 2.80 2.93 6.45
Denmark 1.87 3.06 2.93 7.86
France 1.42 3.18 3.30 7.90
Germany 0.73 3.59 2.84 7.16
Greece 0.34 0.62 0.63 1.59
Italy 0.64 2.21 2.19 5.04
Slovakia 0.37 1.76 2.39 4.53
Spain 0.79 2.78 1.90 5.47
United Kingdom 1.55 3.16 5.84 10.54
United States 1.61 4.37 5.50 11.48
Source: van Ark et al. (2009).

Table 3.13 Market sector growth accounting with intangibles, 1995–2006

(% per year)
ICT Non-ICT Intangible Labor TFP Labor
K/L K/L K/L Quality Productivity
Austria 0.26 –0.02 0.55 0.22 1.35 2.36
Czech Republic 0.35 1.62 0.68 0.31 1.64 4.60
Denmark 0.44 0.24 0.72 0.17 0.53 2.11
France 0.12 0.31 0.48 0.40 0.69 2.00
Germany 0.20 0.48 0.38 –0.15 0.88 1.79
Greece 0.45 1.48 0.24 0.71 0.40 3.27
Italy 0.11 0.29 0.12 0.22 –0.45 0.29
Slovakia — 2.72 0.21 0.46 2.78 6.17
Spain 0.19 0.49 0.12 0.64 -0.96 0.47
United Kingdom 0.63 0.28 0.69 0.22 1.23 3.06
United States 0.40 0.24 0.83 0.18 1.33 2.96
Source: van Ark et al. (2009).

K= Capital; L= Labor. Intangibles investments are part of final output and ICT K included with non-ICT
K in Slovakia.
this context, Bugamelli and Pagano (2004) found that many firms seem to be
constrained in their ICT investment by the adjustment costs associated with
reorganization, especially if their workforce has relatively low levels of human
capital. These reflect regulatory burdens but, because they are fixed costs, they
bear very heavily on the small- and medium-size firms that have been central
to Italy’s distinctive variety of capitalism.10
Turning to supply-side policy reforms, there are a number of shortfalls that
deserve to be highlighted. One major point is that their effectiveness in promot-
ing competition has been insufficient. The retail sector is an important example.
Labor productivity growth in retailing was 0.8 percent per year in 1995–2002 com-
pared with 7.4 percent in the United States and 1.6 percent in the EU15 (McGuckin,
Spiegelman, and van Ark 2005). It is clear that productivity performance was still
impaired by regulation; barriers to entry and mark-ups in retailing remained high on
average with adverse consequences for TFP (Daveri, Lecat, and Parisi 2011). However,
in districts where competition was stimulated by the 1998 regulatory reform ICT
investment and labor productivity increased (Schivardi and Viviano 2011).
The competition-policy framework established in the 1990s has been rated
below average relative to OECD countries using criteria relating to politi-
cal independence, toughness, and investigative powers with the implication
that productivity growth has been adversely affected (Buccirossi et al. 2009);
low-efficiency producers continued to survive in many sectors (Milana, Nascia,

and Zeli 2008); and mark-ups in the service sector as a whole remained high
(Table 3.9). Failure to deregulate professional services (in 2008 Italy still had the
tightest product-market regulation in Europe after Luxembourg) has had sig-
nificant adverse effects on the productivity of sectors for which they are impor-
tant inputs (Barone and Cingano 2011). On the contrary, the reform process was
successful in the banking sector where competition increased significantly.
The volume of privatization in Italy was impressive; in terms of the pro-
ceeds, it was second only to the United Kingdom during the period 1979–1999.
However, it was mainly aimed at reducing public debt. Only 30 percent of the
value of transactions involved a transfer of control; opportunities to introduce
competition in utilities, such as electricity and gas were missed; and regula-
tion was inadequate. There were improvements in operating efficiency in sec-
tors exposed to competition but not in sheltered sectors where it seems that
privatization was simply conducive to increased quasi rents as market power
was exploited more fully (Barucci and Pierobon 2007).11
Although on the surface reforms to corporate governance might have
enabled an effective market for corporate control, in practice changes in owner-
ship and control structures (pyramids have been mostly replaced by coalitions)
have been quite limited, private benefits of control seem to have remained high,
and the number of listed companies has increased only slightly (Bianchi and
Bianco 2006). Bloom and van Reenen (2008) found that the quality of manage-
ment in Italian companies in 2006 was below leading international standards,
largely as a result of weak competition and family control, with adverse impli-
cations for productivity performance. The effectiveness of company law reforms
has been limited by established interests and the deep-rooted Italian difficulty
of linking economic and legal culture (Ciocca 2007).
The supply-side reform agenda has been also undermined by the inade-
quacy of the legal system (Bianco et al. 2007; Carmignani and Giacomelli 2010)
and the ineffectiveness of the government. The low rankings of Italy in the
World Bank’s Governance Indicators reported in Table 3.14 underline this point.
Similarly, Italy has a low “ease of doing business” ranking (eightieth in the most
recent year) in the World Bank’s Doing Business report with enforcement of
contracts seen as especially poor (157th).12
Other important factors for long run growth are less responsive to policy,
at least in the short run. Despite progress, especially after World War II, the
gap in human capital measured by the number of years of education remained
significant compared with the other advanced countries. The percentage of per-
sons aged twenty-five to sixty-four who attained at least an upper secondary
education was around 32 percent in the second half of the 1990s, almost ten
points below OECD average. With respect to tertiary education, the gap wid-
ened: 12 percent vis-a-vis 24 percent (OECD 2010a).
Whereas in terms of the quantity of education Italy has slowly caught up,
quality has lagged behind. The evidence provided by student competencies is
Table 3.14 Governance indicators (-2.5 to 2.5)

a) 1996
Government Regulatory Control of Rule of Law
Effectiveness Quality Corruption
Austria 1.984 1.154 2.120 1.841
Belgium 1.935 0.971 1.350 1.406
Denmark 2.027 1.213 2.222 1.828
Finland 2.114 1.089 2.221 1.914
France 1.755 0.766 1.353 1.520
Germany 2.006 1.072 2.134 1.633
Greece 0.836 0.746 0.511 1.098
Ireland 1.732 1.224 1.486 1.589
Italy 0.919 0.649 0.505 1.050
Netherlands 2.056 1.285 2.178 1.734
Norway 2.064 1.063 2.216 1.928
Portugal 0.999 1.028 2.015 1.276
Spain 1.570 0.878 1.248 1.354
Sweden 2.010 1.075 2.203 1.763
Switzerland 2.146 1.082 2.166 1.946
United Kingdom 1.884 1.469 2.171 1.662
b) 2007
Government Regulatory Control of Rule of Law
Effectiveness Quality Corruption
Austria 1.776 1.649 2.049 1.928
Belgium 1.502 1.365 1.303 1.297
Denmark 2.235 1.855 2.426 1.964
Finland 1.907 1.511 2.408 1.861
France 1.433 1.255 1.433 1.378
Germany 1.606 1.549 1.698 1.698
Greece 0.661 0.850 0.319 0.798
Ireland 1.614 1.780 1.727 1.735
Italy 0.333 0.869 0.270 0.403
Netherlands 1.708 1.735 2.159 1.738
Norway 1.978 1.331 1.925 1.905
Table 3.14 (cont.)

Portugal 0.902 1.084 0.990 1.007
Spain 0.960 1.186 1.008 1.083
Sweden 1.942 1.569 2.206 1.855
Switzerland 1.966 1.620 2.134 1.816
United Kingdom 1.622 1.801 1.716 1.658
Source: World Bank. Governance matters indicators.Indicators are normalized such that the median = 0
in each year and so are not strictly comparable over time.
quite clear in this regard. The picture is especially worrying with regard to
cognitive skills as measured by performance in international tests, such as
the OECD PISA studies. Italy now ranks very low, especially in mathematics,
and its average performance has been declining steadily since the mid-1970s
in stark contrast with such countries as Finland and Sweden (Hanushek and
Woessmann 2009). The econometric evidence suggests that this has exacted a
serious penalty in terms of an adverse effect on growth.
Among the possible reasons for the relatively low quality of education in
Italy, one must exclude a shortfall in educational spending; on the contrary,
Italy spends more per student than many countries that achieve much bet-
ter results. Instead, a relaxation of educational standards in the 1970s and an
inability to achieve coherent reforms seem to have played a significant role
(Bertola and Sestito 2012). Moreover, international comparisons show that effi-
ciency of schooling resources is enhanced by accountability, autonomy in hiring
decisions, and effective competition within the school system, which all raise
standards (Woessmann et al. 2007). The issue is the organization of the school
system, which has been ineffective in addressing principal-agent problems in
the delivery of education. Examined through this lens, Italy has lagged behind
other countries especially in terms of lack of autonomy of schools in providing
incentives and sanctions to teachers; in recent years, accountability has been
weakened through not having external exit examinations (Boarini 2007). In
the Golden Age, given the prevailing technology, the lack of formal education
was not a serious constraint on growth because informal knowledge formation,
such as on-the-job training, compensated. However, at more advanced stages of
technological development, the gaps in formal education, in particular tertiary
education, have mattered because it is essential in fostering innovation (Bertola
and Sestito 2012).
Another important structural factor potentially hindering growth is
Italy’s “anomalous” position in international trade, which has its roots in the
strength of small- and medium-sized firms producing in industrial districts
(De Benedictis 2005). Revealed comparative advantage for Italy exhibits high
persistence. Compared with other G7 economies Italy’s exports remain skewed
toward low-technology and labor-intensive sectors, such as textiles and footwear,
and away from high-technology activities. This means that Italy is more exposed
to competition from China and other dynamic Asian economies and is less
well-placed to benefit from fast-growing sectors in world trade (Lissovolik 2008)
while export performance, especially in distant markets, is held back by the
small average size of Italian firms (Barba Navaretti et al. 2011).
The implications of the historical legacy reflected in this trade configu-
ration should not be exaggerated. The “market-crowding” impact on export
growth has been much smaller than relatively slow growth in the EU15 (Italy’s
main market) and trends in the real exchange rate (Breinlich and Tucci 2010).
There has been an adverse trend in the terms of external trade but the effect
only reduced real income growth by 0.1 percentage point over the ten years to
2006 (Bennett et al. 2008). Over time, however, the Italian economy is being
subjected to a greater need to adjust to the changing international division of
labor than such countries as France, Germany, or the United Kingdom. The big
issue concerns the flexibility of the Italian economy; an index recently compiled
by OECD economists places Italy twenty-fourth out of twenty-six countries in
terms of ability to cope with globalization.13
European integration moved forward in the 1990s culminating in the estab-
lishment of the European Monetary Union (EMU) in 1999. Despite forced exit
from EMS in 1992, Italy became a founder-member of the Eurozone. The deci-
sion to join the EMU sought to introduce competitive pressures into the system
to stimulate efficiency improvements and thus to promote growth even in the
short run by a general improvement of expectations, thereby counterbalancing
at least partially the deflationary effects of the huge correction to the public
deficit implemented to join the EMU.
In conjunction with the decision to participate in the EMU, a radical reform
of regional policy took place, benefiting from the strong European Union com-
mitment to regional and social convergence. The basic aim was to spur growth
of the whole country by refueling the catching-up process of the South, which
had been interrupted in the 1970s, to offset the loss of the exchange-rate policy
instrument and the severe fiscal clampdown to meet the Maastricht criteria.
A new regional policy was launched, centered on a place-based approach that
looked at innovation as the primary driver of development so as to enhance the
potential comparative advantages of the southern regions.
Participation in the EMU was a major change in the framework for macro-
economic policy: inflation and nominal interest rates converged rapidly toward
the European average. For the first time in thirty years, price stabilization was
finally achieved.
It also had, however, supply-side implications through the intensifica-
tion of competition. EMU membership can be thought of as a commit-
ment technology; put differently, “Italian vices are overcome by importing
European virtues,” as Guido Carli, Governor of the Bank of Italy (1960–1975)
and Minister of the Treasury (1989–1992), emphasized retrospectively (Carli
1996). With better macroeconomic discipline, interest-rate convergence,
and improved prospects for fiscal sustainability, investment could respond

positively. Overall, it might be hoped that joining the Euro could be good for
growth. In any event, Italy’s participation in the EMU amounted to achieving
the goal of the postwar generation of Italian leaders, anxious to anchor Italy
within Europe. It was ultimately a political decision as was the creation of the
EMU.
At the same time, EMU membership was not a risk-free strategy, especially
for a country with weak productivity growth and a high public debt-to-GDP
ratio, given that the Eurozone is not an optimal currency area and the European
Central Bank’s choice of interest rates might not be ideal from an Italian point
of view. There clearly were dangers from a loss of international competitiveness
and this has materialized. During 1999–2009, the real exchange rate measured
by prices of production in the manufacturing industry appreciated by 7.5 per-
centage points, compared with an appreciation of 5 points in France and no
change in Germany. The loss of competitiveness in the whole economy mea-
sured in terms of unit labor costs was higher at 13 percentage points, compared
with a loss of 5 percentage points for France and a gain of 13 percentage points
for Germany.
Ex post, the experience of EMU membership has been much less comfort-
able than had been hoped ex ante. The benefit to fiscal sustainability antici-
pated from reduction of the gap between the interest rate and the growth rate is
threatened by the ineffectiveness of supply-side reform, weak productivity per-
formance, loss of competitiveness, and fears about the political will to maintain
budget discipline. Investment and growth are potentially undermined rather
than stimulated by a high real exchange rate and debt overhang. The growth
rate up to the outbreak of the financial crisis (1999–2008) was half of that of the
Euro area and of the average for the period 1980–1999.
One question obviously arises. Did a superior policy alternative exist?
Would growth prospects have been more favorable in the case of nonparticipa-
tion? Would it have been easier to implement the necessary structural adjust-
ments? The analysis put forward in the previous sections suggests that the
answer to all these questions is no. The experience of the 1970s is especially
helpful in this regard. At that time, the structural weaknesses of the Italian
economy, although less relevant because of the more favorable competitive and
technological context, were already quite evident. The (much-used) freedom
of maneuver granted by the floating exchange rate did not trigger any sub-
stantial policy interventions aimed at correcting them. On the contrary, the
outcome was an unstable macroeconomic framework marked by inflation and
fiscal laxity, two factors notably pernicious for growth in the medium-long
run. Either inside or outside the EMU, supply-side reforms conducive to rais-
ing the rate of productivity growth were required; the pressure to make them
would have been weaker without the prospect of joining the Euro. However,
the consequence of not reforming well enough may eventually be more severe
if a sovereign debt crisis is precipitated.
Conclusions
After the Golden Age, Italy experienced increasing difficulties in adjusting its
economy to the changing external context and to the requirements for sustain-
ing catch-up growth at a higher level of economic development. The adjustment
issue is common to advanced countries but the difficulties experienced in Italy
look particularly severe. Italy had a greater need for reform after the success of
the early postwar period and had more problems in making effective reforms.
In the Golden Age it was different. The Italian performance in terms of
growth and productivity was spectacular even taking account of the catching-up
effect. The postwar settlement was heavily conditioned by the external policy
environment but the main policy choices were not disrupted by harsh conflicts,
reflecting somehow the sense of national responsibility of the political and eco-
nomic leadership emerging from the war. The wage moderation determined
by the unlimited labor supply in the agricultural sector, the features of human
capital particularly suited to the existing technologies, the impulse to indus-
trialization given directly and indirectly by the large State-owned firms, the
effective allocation of resources provided by the banks controlled by the State,
the capacity of private entrepreneurs in enhancing their performance especially
in the traditional sectors, the liberalization of trade, and participation in the
Common Market were all growth-promoting factors.
At the beginning of the 1960s, after the “economic miracle,” this model was
put under pressure and attempts to correct the destabilizing forces generated
by the model itself failed. The wage and oil shock around 1970 and the decline
of Fordism engendered everywhere in Europe—albeit in different forms and
at varying speeds—macro and micro adjustment processes. Italy changed rel-
atively little. Having arrived near the technology frontier, the economy proved
too slow to adjust to the new context, despite success in mitigating inflexibilities
by developing a regionalized model of capitalism based on small and medium
firms.
Cushioned by inflation and devaluation, growth remained relatively high in
the 1970s. In the subsequent decade, despite improved conditions for addressing
macroeconomic disequilibria (the long expansionary cycle of the major econ-
omies, the end of the “wage push era,” the deceleration of inflation, the new
monetary policy after joining the EMS) structural adjustments were neglected,
in particular with regard to fiscal discipline and competition policies in shel-
tered sectors. The catching up of the South came to a halt.
Major supply-side reforms were eventually implemented in the aftermath of
the 1992 crisis and also in connection with policies undertaken in the European
Union. Nevertheless, in the second half of the decade growth fell below the
European Union average. These reforms were an important step in the right
direction but ultimately fell short of what was required. Although increasing
the pressure for adjustments through price and exchange-rate stability and more
stringent constraints on fiscal policy, participation in the EMU did not help as
far as the improvement of growth prospects was concerned. Clearly, this has
made Italy’s position in terms of fiscal sustainability weaker and has made the
country more vulnerable in the crisis that has erupted since 2007.
Why did policy reform prove unable to stimulate growth? More specifically,
what were the major difficulties in implementing sufficient structural adjust-
ments after the Golden Age, despite the growing awareness of their necessity?
These are the crucial questions we must try to answer. We can tentatively list a
number of not unrelated reasons.
The first refers to a long-standing feature of Italian society: the existence
and severity, except for very limited periods, of conflicts between opposing
groups and parties. In part, but by no means only, these were connected to the
big ideological divide between the strong communist-oriented opposition and
the ruling parties. Reforms in the history of the country are rare; much more
commons are periods of violent conflicts or of policy stalemates because of the
veto power of opposing actors. In the 1970s, this feature stands out most clearly
and made reform almost impossible. In the 1980s, the “divided society” started
to take other forms, less based on (declining) ideologies and more on the grad-
ual proliferation of many consolidated interest groups, each one seeking to gain
rents at the expense of others. This basically explains the inadequacy of the
adjustment in public finances.
Regarding the second possible reason, after the fall of the Berlin Wall the
demise of the two main parties, the Communists and the Christian Democrats,
worsened the picture. It may seem paradoxical in light of the end of the ide-
ological divide, but these two forces were somehow able, each one within its
area of influence, to represent the different interests of their constituencies in
a policy vision that reached beyond them and looked at the perspectives of the
country as a whole. Their disappearance strengthened instead the emergence of
distributional coalitions at the expense of encompassing organizations (Olson,
1982) and stabilization (Alesina and Drazen 1991).
The third reason concerns firms. Their capability to exploit favorable con-
ditions varied through time. They were able to do so during the Golden Age
thanks to low wages and the opening of the economy to external competition.
In the 1970s, they overcame the emergency because of devaluation and generous
fiscal policy; at the end of the decade large firms were able to renew the capital
stock while small firms reacted by developing an original locally based model.
Later, however, when the technological context started to change and required
more product innovations, more ICT investments, and corresponding changes
in the organization of the production process, Italian firms got into increasing
difficulties that still continue. The difficulty of achieving efficient allocations
of entrepreneurial resources resulting from closed corporate governance struc-
tures centered on family-controlled and pyramidal groups proved to be a major
competitive handicap in this context. The gradual elimination of the exchange
rate lever in the face of mounting competition from the emerging markets and
the increased stringency of fiscal policy could not be overcome. One can argue
about the relative importance of firm endogenous and contextual factors but
there seems to be little doubt that there is a historically rooted weakness of
large private firms in Italy compared with other major European countries. The
importance of State-owned enterprises (born from the ashes of the large indus-
trial and financial private conglomerations) between the 1930s and the 1990s—a
unique case in Western Europe—indirectly reflects this fact. In any case, what-
ever the historical reasons, this implies a greater need for supply-side policy
reform compared with elsewhere.
The fourth reason is related to this conclusion. There might be a structural
problem in the implementation of change because of lack of political leadership
in reforming the public administration to increase its effectiveness. The impor-
tance of and the reasons for this have been widely debated during the history
of united Italy and invests all the domains of economic policy. We conjecture
that this weakness is related to the increasing influence of interest groups that
invade the public administration and the polity. In any event, because the qual-
ity of institutions and public services are important for growth, especially in
the context of coping with globalization, lagging behind on this front entails
serious risks.
The disappointing performance of the South in the last thirty years shows
this very clearly because it is in these regions that these lags are mostly concen-
trated. The funds used were remarkable, comparable with those of the golden
years of special development policy. However, the new policy failed to meet
its ambitious objectives mainly because of the inadequacy of national policies,
whose target is the whole national territory rather than regional policy per se
(Cannari, Magnani, and Pellegrini 2010). Education, justice, and security are
growth and productivity promoting factors. Their weakness explains much of
the unsatisfactory performance of the Italian economy. The Doing Business indi-
cators reported in Table 3.15, which are strictly related to the quality of public
services and administration, are in the South even weaker than in the rest of
Italy, and far below the average of European countries. The factors hindering
growth of the Southern economy in the last twenty years are of the same nature
of those that curb the Italian economy as whole. In the South they are, however,
more powerful. In this sense, the Southern question is today more than ever the
magnifying mirror of Italy’s difficulties.
The poor quality of public services brings us to the final point: changes in
the political institutional design so as to increase the possibility of taking sub-
stantial policy decisions. The theme has quite a tradition in the political econ-
omy literature. The issue concerns the relationship between political institutions
and the functioning of the economy. In particular, it has been often argued
that the electoral rule is an important factor for the economic performance of a
country (Persson and Tabellini 2005). In Italy, the crisis of 1992 marked the end
of the so-called First Republic. Widespread criticism was addressed in particu-
lar to the strictly proportional electoral law for its alleged feature of producing
Table 3.15 Doing business indicators: time needed to complete procedures

2008 (1)
Country Starting a Dealing with Registering Enforcing
Business Licenses Property Contracts
Time (days) Time (days) Time (days) Time (days)
Austria 28 194 32 397
Belgium 4 169 132 505
Denmark 6 69 42 380
Finland 14 66 14 235
France 7 137 123 331
Germany 18 100 40 394
Greece 38 169 22 819
Ireland 13 209 38 515
Italy (Rome) 13 257 27 1,210
Netherlands 8 230 7 514
Norway 7 252 3 310
Portugal 7 327 42 577
Spain 47 233 18 515
Sweden 15 116 15 508
Switzerland 20 154 16 417
United Kingdom 13 144 21 404
DB Italy (2008) (2)
Area Starting a Dealing with Registering Enforcing
Business Licenses Property Contracts
Time (days) Time (days) Time (days) Time (days)
Italy NW 13.2 414.8 10.6 1,826
Italy NE 13.3 442.3 10.4 1,866
Italy Center 12.1 355.5 11.2 2,095
Italy South and Islands 25.3 585 12.2 2,140
(1) Source: World Bank Doing Business. (2) Sources: Bianco and Bripi (2010).
Weighted averages of regional values in the area (using regional GDP as weights).
a plethora of parties, thus often not allowing the government to rule with the
necessary stability because of the power of even small players and the resulting
tendency to look for compromises and even to change majorities to survive.
The principle of “alternation” was invoked, so that clear policy options could
be implemented by the winning coalitions during their mandate. A majority
rule was introduced in 1993; it remained in force till 2005, when it was replaced
by an adjusted proportional system. The results of the majority rule in terms
of stability of the governments and the number of parties were, however, not
encouraging (Bordignon and Monticini 2011). This suggests that easy solutions
in terms of institutional engineering do not exist as far as the structure of the
political system and, a fortiori, as far as the capacity to implement structural
economic reforms are concerned.
Notes
1. Balassone, Francese, and Pace (2012), Fig. 18.2, p. 518, in this volume.
2. The parity of the lira was set at 625 per US dollar at the end of 1949. The US
proposal of a more devalued parity was successfully resisted by the Italian
government (Asso, Biagioli, and Picozza 1995).
3. In the first years it was subject to the supervision of the International Bank for
Reconstruction and Development, which heavily financed the start-up of the
Cassa.
4. This was very much the case in the 1950s when for the industrial sector real wage
and labor productivity grew at 5.36 percent and 5.06 percent, respectively; it was
less so in the 1960s when real wage and labor productivity growth averaged 5.61
percent and 4.45 percent, respectively (Broadberry et al. 2012).
5. Gordon (2008) points out that state-sponsored early retirement has very high costs
in terms of reduced consumption, which are clearly much greater than any gain in
terms of additional leisure time.
6. Balassone, Francese, and Pace (2012), Fig. 18.2, p. 518, in this volume.
7. With the support of the International Monetary Fund there was a serious attempt
in 1974 to impose monetary restriction as had been successfully done in 1963;
however, despite initial improvements in the balance of payments and in inflation
in the subsequent cyclical recovery, the monetary stance soon turned permissive.
8. However, the degree of the difficulties in progressing along this road is indicated
not least by the fact that the main instigator of these proposals, Ezio Tarantelli,
was assassinated by left-wing terrorists in 1986.
9. This historical feature of Italian society is sharpened especially by the progressive
loss of influence of traditional popular parties, in particular the Christian
Democratic party that had ruled the country since 1945, which in the past had
managed at least partially to reconcile the different demands by taking into
account the conditions for sustainable growth.
10. In the mid-1990s, mean employment in Italian manufacturing firms was only
42 percent of the EU15 average (Pagano and Schivardi 2003).
11. Sheltered sectors include energy companies, banks, municipal utilities, airport
management companies, Autostrade, and Telecom Italia.
12. It should be recognized that there are substantial regional variations in
bureaucratic burdens on business within Italy; they are generally more onerous in
the South and the Islands (Bianco and Bripi 2010).
13. The index reflects regulation, education and skills, labor market flexibility, the
innovation framework, and active labor market programs (Rae and Sollie 2007).
Chapter 4
ITALY, GERMANY,
JAPAN
FROM ECONOMIC MIRACLES
TO VIRTUAL STAGNATION
andrea boltho
Introduction
Most chapters in this volume place Italy in an international context by looking
at how it fared relative to other countries in a number of areas. This one is more
openly comparative and directly contrasts Italy’s macroeconomic experience
since World War II with those of Germany1 and Japan (often referred to as IGJ
in what follows). The most obvious reason for this choice is the course of eco-
nomic history since 1945.2 IGJ were defeated in war, enjoyed rapid growth in the
reconstruction period, experienced “economic miracles” in the Golden Age, faced
sharp decelerations after the first oil shock, and have recorded the slowest growth
rates in the Organisation for Economic Cooperation and Development (OECD)
area since the mid-1990s. Other countries have shared some of these trends; none
have had quite so similar developments. Confirmation is provided by Table 4.1,
which shows for per capita gross domestic product (GDP) an IGJ performance
well above that of comparable economies in the first two periods and well below
in the last one.3
There are, of course, many other similarities as well as glaring differences
in the economic structures and histories of IGJ. Among the former, one could
list high household savings; a bank-centered financial system; and ownership
italy, germany, japan 109
Table 4.1 Italy, Germany, Japan: growth of GDP per capita (average
annual percentage changes)
1946–1953 1953–1973 1973–1995 1995–2011 1946–2011
Italy 8.5 5.1 2.3 0.4 3.4
Germany 10.7 4.8 1.9 1.4 3.6
Japan 8.0 8.0 2.2 0.6 4.1
a
Rest of OECD area 2.7 2.9 1.8 1.5 2.2
Sources: Baffigi (2011); Conference Board (2012); Maddison (2003).

a
The “Rest of the OECD area” (which excludes IGJ) is defined as Western Europe (excluding
Turkey), North America (excluding Mexico), Australia, and New Zealand.
set-ups that, however much they may differ from each other, differ even more
markedly from the Anglo-American paradigm (Carlin 1996; Barca et al. 2001).
Among the latter are very different inflation histories, trade union behavior,
and importance of regional problems. In what follows some of these issues are
examined primarily from an Italian standpoint, with Germany and Japan being
used as illustrations of how differently or similarly structures evolved or pol-
icies reacted. It should be noted that the approach is largely descriptive and
many of the conclusions are based on subjective judgments.
The Chapter follows (boring) chronologic lines, examining the reconstruc-
tion years (1945–1953); the Golden Age (1953–1973); the post–oil shock period
(1973–1995); the recent years of semistagnation (1995–2011); and the issue of
regional differentials.
Reconstruction
In IGJ reconstruction turned out to be a much smoother process than had ini-
tially been feared given the post–World War I experience of a brief boom soon
reversed by recession, inflation, and hyperinflation (Armstrong, Glyn, Harrison
1991). The amount of war-time destruction had been more limited in Italy than in
the other two countries (Armstrong, Glyn, Harrison 1991). Hence, Italy returned
to prewar levels of output by the late 1940s to early 1950s, somewhat earlier than
the mid-1950s of Germany or Japan, but in all three countries recovery was
remarkably speedy. Some of the reasons for why reconstruction turned out to be
so much more successful than after 1918 are common to all the major belliger-
ent OECD countries. They have to do, inter alia, with a different domestic policy
stance in Western Europe and a different external policy stance in the United
States (Boltho 2001a). Turning more specifically to IGJ, one striking similarity
was the inflation and subsequent price stabilization experience. Inflation, ram-
pant initially, was curbed by a sharp monetary squeeze in Italy in 1947, by a major
currency reform in Germany in 1948, and by a very restrictive fiscal stabilization

plan in Japan in 1949. And in all three countries, but especially in Germany and
Japan, the demand shortages arising from these policies were greatly relieved by
the outbreak of the Korean War and the economic boom that ensued.
A more important similarity was the early solution given to uncertain-
ties about the postwar institutional set-up. Worries were widespread in the late
1940s, given strong worker militancy everywhere (Armstrong, Glyn, Harrison
1991) and the threat, particularly felt in Europe, of encroaching Soviet power.
Although a shift to a command economy was not really on the cards, such
countries as Britain or France were engaging at the time in large-scale nation-
alizations and indicative planning. The presence of US troops in IGJ made such
policy shifts much less likely, but initially (and in Italy and Germany at least
until the 1948 elections and currency reform, respectively) business felt unsure
about its future role. In the end an open and liberal market system was chosen
in all three countries, but there was no certainty of this at the outset.
A much discussed issue is whether the period saw the shattering of so-called
distributional coalitions (Olson 1982). Subsequent growth in IGJ, it has been
argued, was greatly helped by the purge of prewar elites and by the destruction
of cartels, lobbies, and other pressure groups whose rent-seeking activities sap
the vitality of an economy. Yet, this factor does not seem to have been impor-
tant. A recent survey of the evidence showed that there is little support for the
Olsonian hypothesis in Germany or Japan (Heckelman 2007); similar studies of
Italy are not available, probably because “Mancur Olson did not attract much
interest” in the country (Da Empoli 1993, 81).
In other words: “Although the war may have disturbed the earlier constel-
lation of institutional arrangements and interest groups, it did not prevent them
from being rapidly reconstituted” (Eichengreen 2007, 54). Thus, in Germany, the
main distributional coalitions “re-emerged . . . with ideas, ideologies, practical
purposes and personnel that were in full continuity with Weimar times” (Paqué
1996, 97). In Italy too, there is little evidence of a breakdown of prewar structures.
Indeed, one of the main economic achievements of Fascist Italy, the 1933 creation
of the large state-holding company IRI (Institute for Industrial Reconstruction),
was preserved (despite initial US resistance) with virtually the same manage-
ment (Barca and Trento 1997). It was only in Japan that some changes turned
out to be growth promoting: zaibatsu dissolution raised competition and allowed
junior managers to achieve power earlier than would otherwise have been pos-
sible (Kosai 1986), land reform stimulated agriculture, and labor reform raised
incomes and demand (Nakamura 1981). These changes resulted from US reforms,
however, not from a breakdown of the prewar system.4
Even if an Olsonian bonfire of distributional coalitions did not occur, the
period provided a window of opportunity for radical changes in institutional
set-ups. The opportunity was more fully seized in Germany and, especially, Japan
than in Italy, in part because the US occupation authorities tightly supervised the
former two countries, whereas Italy was left broadly in charge of its reconstruction.
Thus, in Italy an old liberal tradition reasserted itself. The controls of the Fascist
economy were dismantled relatively quickly (by the standards of what was hap-
pening elsewhere in Europe) and a return to free trade, in particular, was rapidly
achieved (Graziani 1972), but there was none of the purging of top managers and
cartel busting that occurred in Germany and Japan (Barca et al. 2001).
Germany, just as Italy, also saw a return to a long-standing liberal tradition
that contributed to monetary reform and rapid decontrol. Interestingly, how-
ever, Germany’s liberal instincts were tempered by the search for a “third way”
(Abelshauser 2004), which began laying the ground for what became known as
the Soziale Marktwirtschaft. No doubt encouraged by the New Deal–influenced
US occupation authorities, some of the participants in the German discussion
at the time advocated “liberal interventionism” and a “strong state” (Abelshauser
2004, 95), so as to moderate the social costs of unfettered markets.5 The outcome
was the gradual introduction of welfare provisions and codetermination, measures
that probably helped to foster social consensus. Nothing of the sort happened
in Italy. On the contrary, polarization between a conservative business class and
a radical trade union movement (polarization that in milder form had already
existed before World War I) became entrenched in these years (Magnani 1997a).
Japan’s prewar liberal tradition had been much weaker than that of Italy
or Germany. Hence, there was little demand for rapid decontrol and “the sys-
tem that emerged after reform was by no means a truly market-based system;
instead it was characterized by a substantial degree of government interven-
tion” (Teranishi and Kosai 1993, 15). Widespread land reform was also impor-
tant. This not only contributed to subsequent agricultural growth, but also led
to much greater income and wealth equality (Kosai 1986), an outcome that may
have helped later economic success. Italy’s efforts in this area were much more
timid and less successful.6
The reconstruction period may thus have opened an institutional gap
between Italy on the one hand and Germany and Japan on the other. The lat-
ter two countries, whether of their own volition or under American pressure,
adopted some fairly radical reforms that paved the way for a subsequent degree
of consensus that had not existed before the war. Italy’s reforms were less far-
reaching and the country reverted to the nonconsensual pre-Fascist liberal
order. Had Italian reformers been more audacious, or had the United States
been more influential or assertive, subsequent developments in the country
might well have been more favorable.
The Golden Age

Developments in the period from the end of reconstruction to the first oil
shock are well-known and broadly similar in IGJ. Output and employment
growth were exceptionally rapid (indeed, Germany and Japan enjoyed virtual
full employment most of the time); export market shares rose sharply (if at
different speeds); and welfare state provisions (if of different generosity) were
made widely available. Not for nothing, the experiences of IGJ in these years
were often referred to as “economic miracles”7 even if (blot on the picture) there
was also a move from near price stability at the outset to high inflation by the
early 1970s. All three countries faced, of course, a world economy that grew at
unprecedented rates. In addition, trade was liberalized (with Italy and Germany
also joining a customs union), and the terms of trade moved in IGJ’s favor.8
Demand management was little used by IGJ (indeed, in Japan, cycles may
well have been policy generated) (Ackley and Ishi 1976). Yet, fiscal and mon-
etary policies may still have helped investment by coordinating their stance
in a growth-promoting way. In all three countries, fiscal policy was broadly
orthodox, whereas monetary policy was broadly accommodating. Budgets were,
through most of the period, kept in balance or even small surplus (thereby add-
ing to the supply of savings). Italy was a partial exception, but even here deficits
were contained to levels well below those of earlier or later eras. Money sup-
ply, on the other hand, grew rapidly (thus facilitating investment), without this
leading to inflation in view of the concomitant buoyant growth in the demand
for money. Even that paragon of anti-inflationary credibility, the Bundesbank,
allowed broad money supply growth rates in the 1950s and 1960s of as much
as fourteen percent per annum, as did Italy (while consumer price inflation
remained negligible).
Behind these various factors lies something all three countries shared:
catch-up. High growth and investment were fostered by a backlog of opportuni-
ties vis-à-vis the United States and by the profits provided by elastic labor sup-
plies (Kindleberger 1967a). Although full employment was eventually achieved
in the urban sector of IGJ, underemployed labor was still present until the end
of the period in the Italian and Japanese countryside, or in Southern Europe
for Germany. The rapid productivity growth that buoyant investment gener-
ated, together with the low wage settlements that elastic labor supplies permit-
ted, were further ingredients in the virtuous circle of high investment and high
export growth. Catch-up provides a compelling explanation for the Golden Age
in IGJ (as well as for the rest of the OECD area). Even a very simple specifica-
tion of the hypothesis throws a good deal of light on the 1953–1973 differential
growth experience (Figure 4.1); Italian and German growth can be almost fully
“explained” by their relative position at the outset. Only Japan (and Ireland)
stand out as partial exceptions.
Backwardness provided the opportunity. Social capability then exploited it
(Abramovitz 1986). Defining, let alone measuring, the concept is impossible. Yet
selected socioeconomic aspects can, plausibly, be thought of as being impor-
tant in facilitating the exploitation of a catch-up potential. Three are looked at
next: (1) educational achievements, (2) the presence of cooperative institutions,
and (3) the pressure of competitive forces. Educational achievement is easiest
Growth rate of GDP per capita

Ch.Yi = (logYi 1973 – logYi 1953) % p.a.
7
GR
P
E
5 A
D
I F
SF B
NL
N DK CH
3 IR S CN
UK AU US
Ch.Yi = 27.7 – 2.76 log (Yi)1953 NZ
(8.2)
–
R2 = 0.77
1
2 3 4 5 6 7 8 9 10 11
Country’s GDP per capita in 1953 (Yi 1953) in 1990 ppp dollars (1000s.)
Figure 4.1 Convergence: 1953–1973. Source: Basic data from Maddison (2003).
to quantify. Table 4.2 presents estimates of the educational attainment of the

total and adult populations. At the outset and through the period Germany and
Japan stand out. This factor might well have facilitated, inter alia, the exploita-
tion of foreign technologies.9
Turning to the possibility that institutions may foster cooperative behav-
ior that, in turn, enhances growth, two not mutually exclusive approaches are
worth noting: the idea that trade union structures are important in directly
determining inflation/unemployment outcomes and in indirectly influencing
macroeconomic ones (Calmfors and Driffill 1988); and the alternative view that
particular institutions and policies encouraged cooperative solutions in some
West European countries, greatly helping to secure moderate wage settlements
and high investment rates (Eichengreen 2007).
Calmfors and Driffill (1988) argue that centralized, all-encompassing national
unions, or decentralized, enterprise unions, are preferable to sectoral-industrial
unions, and place Germany and Japan in the first and second category,
Table 4.2 Italy, Germany, Japan: educational attainments

Population Aged 15–64 (equivalent Population Aged 25 and Over
years of primary education) (average years of total schooling)
1950 1973 1950 1970
Italy 5.5 7.6 4.1 5.2
Germany 10.4 11.6 4.9 5.2
Japan 9.1 12.1 6.1 7.5
Sources: Barro and Lee, 2010; Maddison, 1995.

respectively, while relegating Italy to the third one. Further refinements have
argued that in Japan centralized coordination between unions and employers’
federations dominates (Soskice 1990), but the ultimate conclusion has seldom
been put in doubt. The evolution of unionism, largely dictated by history, could
thus be one explanation for the better employment performance of Germany
and Japan relative to Italy’s.
Eichengreen’s (2007) view is that implicit work force–enterprise bargains
(in which labor foregoes immediate wage claims in exchange for higher invest-
ment and, therefore, higher real incomes in the future), secured faster growth
in some European countries than in others. Germany fits this hypothesis,
because it had institutions and policies, some going back to Weimar days,
others developed early in the period (e.g., codetermination), that could be
seen as encouraging cooperation. Similar institutions and policies, however,
can hardly be found in Italy. Japan is not covered by Eichengreen, but there
is sufficient circumstantial evidence suggesting that the country’s labor force
was ready to accept longer-term commitments (e.g., the presence of “life-time
employment,” at least in large-scale firms, and the significant share of com-
pensation accruing in the form of bonuses).10 All this suggests that for com-
plex historical and institutional reasons, Germany and Japan were in a more
favorable position than Italy to exploit relative backwardness with less social
strife and conflict.
A not dissimilar conclusion may be drawn from an alternative viewpoint
that stresses not so much cooperation as the forces unleashed by competition.
IGJ all moved away from the controlled prewar economies, but at different
speeds. Of the three, Germany embraced competitive forces most vigorously.
It opened itself fully to the rest of the world, even adopting unilateral tariff
reductions in the 1950s. It also passed robust anticartel legislation. Italy largely
matched Germany’s opening to external competition, but was much less ready
to thwart domestic anticompetitive forces. Monopolies or oligopolies had been
widespread in prewar Italy and little was done to dismantle them after the
war (Rossi and Toniolo 1996; Barca 1997). This was particularly true for the
State-owned corporations that dominated banking and large-scale industry (De
Cecco and Giavazzi 1993). On the surface, Japan moved least in the direction of
more competition. The liberalization of foreign trade was slow and patchy and
antimonopoly legislation lacked teeth. Yet, interestingly, many observers argue
that domestic competition was fierce, as the keiretsu conglomerates fought for
market share (Tsuru 1976; Yamamura 1982).
The foregoing would suggest that Germany’s policies were first best, whereas
Italy and Japan were held back in establishing vibrant and competitive econo-
mies by the pressures of domestic vested interests in one case and by mercan-
tilist attitudes in the other. Yet, arguably, Japan’s combination of competition
at home and protection vis-à-vis the rest of the world may have been supe-
rior to Italy’s opposite set of policies. A comparative look at the two countries’
international performance shows large market share gains in both cases (as it
%
Germany
15
12 Japan
Italy
6
0
1950 1960 1970 1980 1990 2000 2010
Figure 4.2 Export performance. Share in world exports of manufactures (3-year moving
averages). Sources: General Agreement on Tariffs and Trade, International Trade (various
years); World Trade Organization database.
does for Germany) (Figure 4.2), but also points to a significant difference in
specialization patterns. In the early 1950s, Italy and Japan shared comparative
advantage in broadly similar lines of activity; over time, however, divergence set
in, as shown by changes in their revealed comparative advantages (Boltho 2001b).
Italy’s specialization changed only slowly and the country remained commit-
ted to, admittedly, increasingly sophisticated consumer goods; Japan, instead,
moved into high-tech activities and this process was almost certainly helped
by the protection its capital-intensive industries enjoyed. Active in a sheltered
but still intensely competitive environment, Japanese firms invested massively,
slid down their average cost curves as domestic demand grew, and eventually
entered the world market, a process that has been aptly called “import protec-
tion for export promotion” (Krugman 1984).
Overall, however, Italy broadly matched the growth rates of Germany and
Japan in the Golden Age, and this despite some less favorable preconditions.
If shortfalls there were, these lie not so much in macroeconomic performance,
but in the labor market and social policy areas. Italy, unlike Germany and
Japan, did not achieve full employment largely because of its pronounced
regional differentials. It also faced a large wage shock at the end of the 1960s.
So did Germany, but its wage increases were not accompanied by the wave
of strikes that were an integral part of the Autunno caldo movement,11 nor
did they bring about lasting changes in labor market regulation, as was the
case in Italy. The Italian literature tends to lay the blame for this episode
on the whole development process since the war: “In some sense the social
conflicts of those years were an almost natural response to the speed and
complexity of Italy’s economic development. In a relatively short time-span,
the country had moved from a mainly agricultural structure to one of wide-
spread industrialization, with extraordinary migration flows . . . and with a
huge increase in the rate of urbanization” (Signorini and Visco 1997, 54). More
specifically, the intensity of strike activity in 1969–1970 has, at least in part,
been attributed to the very poor working and living conditions that faced the
huge number of migrants who arrived in the North of the country (Valli 1977;
Castronovo 1995).
There is a clear contrast here with how Germany and Japan coped with
similar phenomena, since migration and urbanization were hardly uniquely
Italian features. Just after the war, Germany saw the immigration of 10 million
refugees from Eastern Europe and Japan saw the repatriation of 5 or 6 million
nationals from the erstwhile empire. Their incorporation into the labor force
was relatively smooth. Both countries then witnessed further internal migration
(Japan’s almost certainly larger than Italy’s) as agricultural employment dwin-
dled.12 Germany, in addition, received some 6½ million foreigners. The 3½ to
4 million Southern Italians who moved to the Center-North between 1955 and
1973 were not an impossible number to manage.
Where Italy thus seems to have failed (at least in relative terms) was in its
inability to accompany rapid economic change with parallel changes in infra-
structure and social welfare provisions. This inability, in turn, led to an over-
reaction. The late 1960s and early 1970s saw the hasty adoption of generous
welfare benefits and the beginning of indiscriminate handouts for business,
measures that gave the politicians much greater scope for interfering with eco-
nomic policy-making. Many of the fiscal problems encountered in the 1970s
and 1980s stem from the belated and misguided responses to the late 1960s cri-
sis. Migration and welfare reform were clearly managed more smoothly and
successfully by the other two countries.
The experience of the late 1960s thus points to a major Italian shortcoming
relative to Germany and Japan. Administrative ability (by politicians and the
civil service) seems to have been in short supply, leading to more pervasive rent-
seeking, slower judicial procedures, worse legislation, and so forth. Evidence in
support of this judgment is not available for the late 1960s, but over the last
thirty years indicators have emerged that put Italy into a much less favorable
position than the other two countries, be this in the areas of an intrusive reg-
ulatory environment, the provision of law and order, the control of corruption,
the presence of trust, and so forth (Mauro 1995; Knack and Keefer 1997). This is
confirmed by more recent World Bank investigations for 1996–2010. In all but
one of the six governance indicators covered by that institution, Italy is signifi-
cantly below Germany and Japan. An even more damning picture is painted by
survey evidence on infrastructure quality: in recent international comparisons
of 125 countries, Germany was ranked sixth, Japan sixteenth, and Italy seventy-
third (World Economic Forum, various years).
Slowdown
A bird’s–eye view of developments in this period shows that trends were not
that dissimilar in IGJ. All three countries slowed down relative to the Golden
Age (Table 4.1), largely because the potential provided by catch-up had greatly
diminished. Yet, on average, they still grew at or slightly above the OECD’s
growth rate at the time. All three experienced recessions, two in the wake of the
oil shocks and a third one in the early 1990s, and all three saw strong upswings
in activity in the late 1970s and late 1980s. The parallels, however, stop here
because in other respects IGJ went their separate ways. By far the most glaring
contrast was in macroeconomic policies, with Italy behaving in ways that were
almost opposite to those of Germany and Japan.
This was particularly so for fiscal policy. Italy’s budget deficit averaged some
10 percent of GDP for twenty years and the public debt-to-GDP ratio rose to
120 percent by 1995. Public debt also rose in Germany and Japan, but this only
happened late in the period, in response to the costs of unification in one case
and of recession in the other. In Italy, the reasons for fiscal incontinence are to
be found instead in the politicians’ aim to buy social peace. “Frenetic activism”
(Arcelli and Micossi 1997, 280) was the defining characteristic of a policy that
was used to raise pensions, improve health provisions, boost public payrolls,
subsidize industry, and so forth. Political expedience rather than economic
rationality ruled decision-making: “The struggle for income shares was shifted
from the factory floor to the state’s budget” (Maier 1999, 281). Conversion to a
more orthodox stance came only late in the period, as the deadline for entry
into the European Monetary Union approached.
Monetary policy was permissive in the second half of the 1970s, but was
tightened in the early 1980s as suggested by the level of real short-term inter-
est rates (roughly measured by using an ex post deflator). These were virtu-
ally identical to those of Germany and Japan (and significantly higher than
Germany’s in the years 1981–1990). Two events were important in the mone-
tary policy conversion to greater orthodoxy: entry into the European Monetary
System in 1979 and a first step toward granting more independence to the Bank
of Italy, by freeing it from the obligation to buy Treasury bonds, in 1981 (Basevi
and Onofri 1997). Interestingly, however, real long-term rates, although posi-
tive,13 remained below those of the more prudent Germany and Japan. Clearly,
having a large pool of domestic savings greatly facilitates public sector financ-
ing, as also shown by Japan’s experience in recent years.
Yet, despite relative monetary tightness, Italian inflation remained in dou-
ble digits until the mid-1980s, significantly outstripping that of Germany and
Japan. One reason for this may have been the lack of competition in many ser-
vice sectors (Ciocca 2007) (the same was probably true in Japan, but much less
so in Germany). A second reason had to do with the attitude of the largest
trade union confederation, which opposed any form of incomes policy until
Other OECD
8 countries
Germany
Japan
7
Italy
5
1970 1975 1980 1985 1990 1995 2000 2005
Figure 4.3 The “Freedom” Index. Indicator of government interference with the
economy. Note: Values go from zero to ten; higher values denote greater economic
freedom. Source: Gwartney, Hall, and Lawson (2011).
as late as 1992 (Ciocca 2007). German and Japanese unions were much more
conscious of macroeconomic constraints. A third reason is linked to the public
sector’s continuing increases in employment, in wages, and in income mainte-
nance transfers (Arcelli and Micossi 1997). On the other hand, the hope that
European Monetary System membership would have had favorable expectational
effects on wage bargaining, now that Italy’s monetary policy was, de facto, in
the hands of the Bundesbank, did not materialize (Egebo and Englander 1992).14
Partly as a consequence, sharp nominal depreciation led to no real depreciation;
indeed, the opposite was the case until 1993.
In addition, the country was also plagued by excessive regulation. Labor
market rigidities were almost certainly more pronounced than in Germany or
Japan, be this in the area of employment protection or in that of collective bar-
gaining, given the virtual absence of coordinated wage negotiations (Nickell,
Nunziata, Ochel 2005). Foreign exchange and price controls were pervasive: at
the end of the 1970s the government directly or indirectly may have controlled
up to 30 percent of the items in the consumer price basket (Arcelli and Micossi
1997). More generally, the Fraser Index of “Economic Freedom” (Gwartney, Hall,
Lawson 2011), a measure that tries to quantify how a government interferes with
market forces, placed Italy significantly below Germany and Japan in the 1970s
and 1980s, despite some progress in 1985–1995 (Figure 4.3).
Italy thus suffered from both macroeconomic mismanagement and excessive
microeconomic interference. One would expect this to have led to serious eco-
nomic difficulties. Conversely, the lesser regulations and controls of Germany
and Japan, and their more restrained fiscal and monetary policies, should have
facilitated a better performance than Italy’s. Yet, real output, employment, and
productivity rose as or more rapidly in Italy than they did in Germany or Japan.
Nominal developments in the three countries may have been very different, but
real ones were not. Two possible (and not mutually exclusive) explanations for
such a surprising outcome can be advanced: the first one argues that the costs
of fiscal profligacy and partial monetary accommodation are perhaps not as
high as is often thought; the second one points to other forces that, at least par-
tially, offset Italy’s “wrong” policies.
For the earlier part of this period, there is some research that suggests that
the policy mix chosen by the Italian authorities was not that suboptimal after
all (Boltho 1986; Giavazzi and Spaventa 1989). The latter authors, in particular,
argue that the initial monetary accommodation of the second oil shock allowed
high profits, which sustained later investment demand. The inevitable disin-
flation costs were thus lower than they otherwise would have been. Gradual
disinflation was more growth promoting (or less growth retarding) than the
United Kingdom’s shock therapy of the time, or the unnecessarily strict policies
followed by Germany through the period (Carlin 1996).
The second explanation stresses something that arguably went “right”
in Italy at the time: the employment shift to medium- and small-scale firms
(SMEs), particularly in manufacturing. This shift was neither unique to Italy
nor to the period. It was, however, more pronounced in Italy, partly in response
to the rigidities introduced into large factories by the strike waves of the late
1960s. Table 4.3 shows a rough proxy for this phenomenon (the importance of
firms or establishments with ten to ninety-nine workers). These firms’ rising
employment share, while predating the Autunno caldo, was especially marked
in the 1970s and 1980s, in contrast to smaller changes in Germany or Japan.
The added flexibility that this generated probably helped Italy to hold on to
its share of world manufacturing exports in these years (Figure 4.2), whereas
Germany and Japan suffered pronounced losses (admittedly from much higher
initial levels).
Two interpretations of this period are possible. According to one, Italy suf-
fered from prolonged macro and microeconomic mismanagement and grew
only thanks to its proverbial flexibility. Had it embraced orthodox policies with
greater conviction, and deregulation and reform with more vigor, its perfor-
mance would have been much more favorable. An alternative view, although
accepting the importance of flexibility, questions the policy judgment. Germany
epitomized macroeconomic orthodoxy, yet its overall performance was below
that of Italy.15 As for Japan, thanks partly to financial deregulation, it found
itself in a bubble and bust whose consequences are still with the country today.
Perhaps, after all, high inflation and large budget deficits are not as destruc-
tive of economic activity as the orthodox literature suggests. Italy eventually
converged on orthodoxy, but its gradual shift in that direction may have been
preferable to more immediately austerity, given in particular that the country
Table 4.3 Italy, Germany, Japan: importance of

small firms (share of manufacturing employment in
establishment or firms with 10–99 employees)
1961 1971 1981 1991 2001
Italy 26.4 a 28.3 33.6 38.9 41.8
Germanyb 18.3 17.4 22.2 20.5c 22.5
d
Japan 43.7 40.3 41.4 41.7 41.7
Note: The data may not be strictly comparable across countries.

a
Eleven to one hundred employees.
b
The data are approximate because definitions changed in the
period and East Germany is included from 1991. A very rough
attempt was made to try to make the data comparable.
c
1990.
d
1959.
Sources: Ciocca, 2007; Japan Statistical Yearbook (various issues);
Statistisches Jahrbuch (various issues).
did not benefit from the wage bargaining institutions and social consensus of
Germany and Japan.
Stagnation
In next decade and a half IJG shared one common feature: they all expe-
rienced near stagnation in per capita income growth and were the slowest
growing of the twenty-two countries of the “old” OECD area.16 This appar-
ent similarity masks, however, different initial causes: Italy had to follow very
restrictive fiscal policies in the late 1990s to fulfil the European Monetary
Union’s entry requirements, Germany had to digest the costs of unification,
and Japan had to come to terms with the bursting of its bubble. Although
Germany recovered strongly at the end of the “Great Recession” thanks to ris-
ing exports made possible by labor market reforms and a prolonged phase of
wage moderation, Japan has continued to struggle: because of price deflation,
nominal GDP in 2011 was below its value for 1995. As for Italy, it hardly grew
between 2001 and 2011.
One possible explanation for such trends could lie in the globalization
process, which affected IGJ differently according to whether their industrial
structures were complementary to or competitive with those of emerging econ-
omies. Germany and Japan were likely to benefit more from (and be hurt less
by) this new competition than was Italy, given that their exports are more
heavily weighted in favor of high-tech and investment goods.17 Germany, in
addition, greatly benefited from the opening of Eastern Europe, an area with
ITALY - TRADE WITH GERMANY - TRADE WITH JAPAN - TRADE WITH

EASTERN EUROPE EASTERN EUROPE CHINA
20 20 20
15 15 15
10 10 10
5 5 5
0 0 0
1990–91 1995–96 2000–01 2005–06 2009–10 1990–91 1995–96 2000–01 2005–06 2009–10 1990–91 1995–96 2000–01 2005–06 2009–10
Figure 4.4 Trade with Eastern Europe and China (percentage shares in total exports plus
imports). Source: International Monetary Fund, Direction of Trade Statistics.
which it had had historically close relations and with which trade rose sharply
(Figure 4.4).18 Something similar happened to Japan’s trade with China. Italy,
for obvious geographic and historical reasons, was left behind. Moreover, as
the importance of foreign trade rose, so did the role of the real exchange rate.
Here Italy lost ground to Germany and Japan, reflecting its virtual absence of
productivity growth (Figure 4.5). Italy’s loss of competitiveness was particularly
severe inside the Eurozone, because unit labor costs rose by more than 30 per-
cent relative to Germany between 1999 and 2011.
A further tentative explanation for Italy’s relative failure may, paradoxically,
come from the country’s earlier successes. Globalization may have weakened the
SMEs that dominate the traditional industrial districts (Ciocca 2007). Not only
do they have to compete with emerging countries that specialize in similar prod-
ucts but enjoy much lower labor costs, but they also find it more difficult and
expensive, because of their size, to delocalize, something that larger German or
Japanese firms did on a significant scale in Eastern Europe and China, respec-
tively.19 A production model that seemed well suited to the European market at
the end of the twentieth century may perhaps be less appropriate to the more
globalized world of the early twenty-first century.
A second set of explanations turns to institutional reasons for relative stag-
nation. It has been argued that the institutions that Europe (and, arguably,
Japan) developed during the Golden Age became gradually less suited to the
world’s changing conditions at the turn of the century (Eichengreen 2007). In
an environment of rising technologic uncertainty, the need is for venture cap-
ital and flexible financial markets, not for bank-based systems (Eichengreen
2007). Similarly, new dynamic sectors require research and development and
human capital, rather than fixed investment. Even within research and develop-
ment, the emphasis has to change from the incremental innovations for which
150 Italy
130
110
90 Germany
70
Japan
50
1995 1997 1999 2001 2003 2005 2007 2009 2011
Figure 4.5 Real exchange rates (indices; 1995 = 100). Normalized unit labor
costs in manufacturing. Source: International Monetary Fund, International Financial
Statistics.
Germany, for instance, is well known, to the radical spurts more typical of US
firms (Hall and Soskice 2001).
In addition, Europe and Japan’s institutions are often accused of being scle-
rotic. Given the emergence of nimbler competitors, public sectors have to be
more efficient, marginal tax rates lower, and welfare provisions less generous;
even more importantly, competition in product and, especially, labor markets
must be encouraged (OECD 1989). There is room to cast doubt on some of these
propositions. The evidence linking, for instance, labor market reforms to lower
unemployment outcomes is virtually nonexistent (Howell et al. 2007). Still, few
would doubt that there are sclerotic institutions in IGJ. One piece of evidence that
might indirectly support this is the relative presence or absence of foreign direct
investment, on the plausible assumption that multinational corporations shun
overregulated economies. It turns out that between 1995 and 2010 (or between
1980 and 2010, for that matter), foreign direct investment inflows in percent of
GDP have been lower in IGJ than in any single other OECD country.20
A third and linked set of arguments suggest that IGJ were also reluctant
to change their institutions, at least relative to what was happening in other
advanced economies. Figure 4.3 had already shown how the reform efforts
of IGJ were relatively modest, indeed nonexistent in Italy, since 2000. More
detailed data on selected aspects of regulation present a mixed picture (Table
4.4). In Italy there seems to have been some progress in the ease with which
business is conducted, but there was none in the legal area. Judicial procedures
still take an inordinately long time and the presence of the rule of law seems to
have sharply decreased relative to what was happening elsewhere. In addition,
Table 4.4 Italy, Germany, Japan: institutional reforms (selected

indicators)
Rule of Lawa Starting a Closing a Enforcing
Businessb Businessc Contractsd
Italy 2003 0.98e 16 39 1,390
2010 0.38 6 58 1,210
Germany 2003 1.62e 27 50 403
2010 1.63 12 53 394
Japan 2003 1.39e 21 93 242
2010 1.31 16 93 360
e
Rest of OECD area 2003 1.54 12 71 309
2010 1.61 8 78 366
Note: The data may not be strictly comparable across countries.

a
Deviations from world average.
b
Average of number of procedures and time spent (in days) to register a new firm.
c
Claimants’ recovery rate (in percentage) from an insolvent firm.
d
Duration of legal procedures (in days) needed to resolve disputes.
e
1996.
Sources: World Bank, “Worldwide Governance Indicators” and “Doing Business” Databases.
economic performance must also have suffered from the presence, through
much of the period, of what must have been the worst Prime Minister Italy has
had since World War II.
Such slow progress in reform would not have come as a surprise to Olson,
who argued that as democracies grow in peace time, so does the importance of
their distributional coalitions. These, in turn, “slow down a society’s capacity to
adopt new technologies and to reallocate resources in response to changing con-
ditions, and thereby reduce the rate of economic growth” (Olson 1982, 74). IGJ
may not have swept away their distributional coalitions after the war, but they
may well have presided over a gradual build-up in their importance through
time. The evidence in favor of this thesis, however, is not very strong. Trade
unions and monopolies/oligopolies are the two major culprits of Olsonian insti-
tutional sclerosis. Yet, the importance of unions has clearly shrunk over the last
ten to twenty years, after labor market deregulation, globalization, and struc-
tural changes reducing the importance of heavily unionized public enterprises
or large-scale factories. Thus, most OECD countries, including IGJ, have seen
significant declines in unionization and in strike activity (Table 4.5). Restrictive
product market practices must also have been weakened by deregulation and,
more importantly, by the much higher degree of competition brought about
by freeing world trade through successive General Agreement on Tariffs and
Trade/World Trade Organization liberalization rounds and, within Europe, by
the 1992 Single Market Programme.
Table 4.5 Italy, Germany, Japan: importance of

trade unions and strikes
Italy Germany Japan
Trade union densitya
1960 24.7 34.7 32.3
1970 37.0 32.0 35.1
1980 49.6 34.9 31.1
1990 38.8 31.2 25.4
2000 34.8 24.6 21.5
2010 35.1 18.6 18.4
Strike activityb
1950–1959 679 98 715
1960–1969 1,402 22 250
1970–1979 1,503 53 124
1980–1989 621 27 10
1990–1999 158 11 2
2000–2008 86 5 0
a
Union members in percent of total employees.
b
Working days lost per thousand employees.
Sources: Bean, 1989; Economic and Labour Market Review
and Employment Gazette (various issues); Flora, Kraus, and
Pfenning, 1987; International Labor Organization, Statistical
Database; Labour Market Trends and Monthly Labor Review
(various issues); OECD Database.
It is true, however, that in IGJ (and in other OECD countries), resistance

to change seems strong. Low social mobility could be one reason, particu-
larly for Italy. A recent survey of intergenerational income persistence sug-
gests, for instance, that in Western Europe this is lowest in Italy, together
with Spain (Causa, Dantan, Johansson 2009), and according to earlier work
certainly also lower than in Germany (D’Addio 2007) (no data were found
for Japan). One would need, however, evidence on whether this has declined
through time before arguing that it may have added to Italy’s lack of dyna-
mism in recent years. A more plausible candidate for this could come from
trends in the wealth of the population. Figure 4.6 shows trends in the ratio
of net household wealth to income in IGJ and in four other major OECD
countries. Abstracting from the fluctuations that came with the bursting of
bubbles in Japan in the early 1990s and in Britain and the United States in the
late 2000s, what the chart clearly shows is that IGJ, and Italy in particular, are
among the wealthiest societies on Earth. It is not implausible to suggest that
9
Italy
Japan
7
Other countries*
Germany
5
3
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Figure 4.6 Wealth/income ratios (total household net assets in percent

of disposable income). *Weighted average of Canada, France, United Kingdom, and
United States. Source: OECD, Economic Outlook (various issues).
there could be a link between “higher private wealth, a reduced propensity to

undertake effort and risk, and a deceleration in the pace of economic devel-
opment” (Ciocca 2007, 346).
Finally, one further reason for semistagnation could come from rapid ageing.
In 2010 IGJ had the highest shares in the world of those over 65 in their popu-
lations (Figure 4.7). The links between demography and economics are complex.
Yet, common sense suggests that there must be some truth in the simple saying
that: “old men do not like change; old men do not take new initiatives.” The
difficulties in reforming the welfare state can clearly be linked to ageing, as
the median voter’s age rises and he or she is increasingly attached to his or her
health and pension benefits. Similarly, decelerating productivity growth could
be linked to lack of new initiatives. Survey evidence suggests, for instance, that
older people are less entrepreneurial21 and that there is less entrepreneurial
activity in ageing countries.22 If there is something in this hypothesis, then at
least a common, if partial explanation for why IGJ performed relatively poorly
in recent years would be forthcoming.
The Regional Problem

Regional differentials in output, employment, and living standards exist in all
countries. They are, however, particularly pronounced in Italy, at least compared
POPULATION LEVELS THE AGING POPULATION

(1990 = 100) (share of people age 65 and up
in total population)
125 %
27
Japan
Other OECD
120 countries
24
Italy
115
21
Germany
110
4.0
Italy 18
Other OECD
countries
105 Germany 15
Japan
100 12
1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015
Figure 4.7 Demography. Source: UNPD, World Population Prospects
Database (2010 Revision).
with those of Germany and Japan. The left-hand panel of Figure 4.8 presents
a simple measure of geographic inequalities: the (weighted) coefficient of var-
iation of regional GDP per capita for eleven regions in IGJ (and for sixteen
regions in Germany after unification). The chart speaks for itself. Throughout
the period, Italian differentials are by an order of magnitude larger than those
of Germany and Japan.
Weighted coefficient of variation “Poor” region’s GDP per capita in %

for per capita regional GDP of “rich” region (current prices)
0.30 90
“Poor” W. Germany/
Italy “Rich” W. Germany
(11 regions)
80
Japan North & Islands/
0.25 Central Japan
70
Mezzogiorno/
Center-North
0.20 60
Japan Germany
4.0
(11 regions) (16 regions) 50
East Germany/
0.15 West Germany
West Germany 40
(11 regions)
0.10 30
1970 1975 1980 1985 1990 1995 2000 2005 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Figure 4.8 Regional income differentials. Sources: Italian, German, and Japanese
national accounts.
A feature of Italy’s differentials is that they correspond to a clear-cut division

between the Center-North and the South of the country, much more so than do
the (smaller) German and Japanese differentials. The income gap between the
Mezzogiorno and the Center-North of Italy is plotted in the right-hand panel of
Figure 4.8 together with tentative estimates of roughly similar gaps in Germany
and Japan. For Germany, the choice of a comparable indicator is simple after
1991. Unification brought together two geographically separate regions at very
different levels of development. Before 1991, however, West Germany’s richer
and poorer regions were spread across the country. The indicator used shows
the ratio of GDP per capita in four poorer Länder to that of the other more
fortunate seven Länder.23 As for Japan, it was split into a Central and relatively
rich area and a more peripheral part made up of the Northern region, together
with the islands to the South.24 Here too, the Italian gap stands out for its size
and persistence. Even East Germany, despite suffering from a much larger gap
vis-à-vis the West at the time of unification, has managed to close a good deal
of the difference.
A question this raises is how much Italy’s performance was affected by
such a major territorial divergence. One possible way to answer this question
is to assume that, contrary to what happened, Italy would have conformed
to a regional convergence rule that has been shown to apply to a number of
advanced economies (Barro and Sala-i-Martin 1995). According to this rule, the
gap between poor and rich regions has declined by some 2 percent per annum,
be this in the United States, in Japan, or in Western Europe. Had Italy shared
in this convergence process, the GDP per capita (constant price) differential
between North and South would have shrunk over the period from nearly 40
to 10 percent, and the overall growth rate would have been higher.25
The results just obtained assume, however, that nothing else would have
changed had the Mezzogiorno been more successful. This is clearly an untena-
ble proposition. Thus:
1. More rapid income and employment growth in the South would have
reduced migration flows to the Center-North; this, in turn, would have
made for higher wages and lower international competitiveness, at least
in the 1950s and 1960s;
2. However, a more successful Southern economy might itself have
developed some competitive tradeable sectors;
3. Equally, a more successful Southern economy would have required a
smaller public policy effort; tax rates might thus have been lower and/or
other public expenditure higher.
A first step in quantifying such a counterfactual is to assess the diminished push
for migration in the presence of faster income convergence in the 1950s and 1960s
(net migration fell drastically after the mid-1970s). Although the actual income
gap in the years 1955–1973 (for which migration data exist) fell only slightly, it
would have shrunk from nearly 40 to just over twenty percent of Northern per
capita GDP had the Mezzogiorno converged at 2 percent per annum. Assuming
an elasticity of migration with respect to changes in this gap of −2,26 migration
to the Center-North in the years 1955–1973 would have been reduced by perhaps
90,000 people per annum. Even assuming that migrants had a high participa-
tion rate (70 percent) and that half of them entered manufacturing (both rather
extreme assumptions), the reduction in the Center-North’s industrial work force
over the period would have been at most of some 7 to 8 percent.
The evidence on the so-called wage curve shows that labor supply changes
have only small effects on compensation levels. A consensus estimate is that
the wage elasticity with respect to unemployment in developed countries is of
roughly −0.1 percent (Blanchflower and Oswald 1992; Nijkamp and Poot 2005).
Using such a figure, and assuming a 10 percent reduction in the Center-North’s
labor force, would have resulted in only a 1 percent increase in the wage level
and, perhaps, an even lower increase in unit labor costs (because lesser labor
availability might have led to higher productivity). Given an export elasticity
with respect to the real exchange rate of −1,27 annual export and GDP growth
would have been reduced by perhaps 1 and 0.2 percent, respectively, thus not
fully undoing the impact of faster Southern convergence.
This very simplified calculation ignores, however, forces operating in the
opposite direction. First, the North might have engaged in more capital-deepening
investment. Second, in the presence of higher growth, the South might have
developed some competitive tradeables, in line with a hypothesis that fast
growth leads to increased exports (Krugman 1989). Third, and most impor-
tantly, if the strikes of the late 1960s, which led to significant increases in labor
market rigidities, were in part a response to badly managed migration flows, in
the presence of less migration Italy’s economic history could have been differ-
ent. Quantifying these various effects is beyond the scope of this chapter, but
an impressionistic judgment might be that they were at least as important, if
not more so, than any negative first round effects of a somewhat lower labor
supply elasticity to Northern industry in the years 1955–1973.
In addition, a more successful South would have required less aid. Over
the period as a whole, this may have averaged 1–1½ percent of GDP per annum
(Boltho 2010). Assuming that as the income gap shrank help to the South would
have diminished, Italian public expenditure and/or taxation would have been
lower than it was. A conservative estimate might put the potential savings at ½
percent of GDP per annum. Had this been reflected in lower taxes, it might have
had a (small) positive impact on entrepreneurship. Had it been used in more
productive expenditure (e.g., infrastructure rather than income maintenance or
subsidies), it could have had (somewhat larger) positive effects on growth. And
to these benefits should be added the likelihood of less rent-seeking and crime
(fostered by high levels of public spending).
All this leads to an obvious conclusion: more rapid expansion in the South
would have raised overall growth, some of the Autunno caldo’s costs might
have been avoided, public funds would have used been more productively, and
there might have been less crime. Even if a somewhat higher real exchange rate
would have penalized exports in the Golden Age, it could still be argued that
had Italy’s regional problems been more similar to those of the two other coun-
tries, its growth over the period might well have come somewhere in between
those of Germany and Japan and well above what was recorded.
A comparison with Germany’s experience is also instructive in showing
why East Germany has been more successful in closing its initially much larger
income gap vis-à-vis the West. East Germany benefited from massive public
investment in infrastructure. More importantly, the West German institutions
that it adopted were almost certainly superior to Italian institutions in terms of
“a functioning legal system, control of crime and corruption, efficient adminis-
tration of taxes” (Carlin 2010, 12). In addition, it was able to decouple itself from
Western wage-setting mechanisms and labor costs declined rapidly in relative
terms (Carlin 2010).28 It will be remembered that Italian unions had followed
the exact opposite policy by enforcing wage equalization across the country in
the late 1960s.
Conclusions
IGJ have shared a number of similarities since World War II, most notably suc-
cess. Growth of per capita income was rapid through much of the period; living
standards are among the highest in the world; relatively generous welfare provi-
sions (undreamt of in 1950) protect most of the population from sudden rever-
sals of fortune; and educational and health standards are much higher than
they were sixty years ago. In addition, IGJ are also very open to the rest of the
world and are, if not welcoming, at least accepting the invigorating inflows of
immigrants (Germany more so than Italy, and Italy more so than Japan).
Yet, looked at from the standpoint of Germany and Japan, there are disap-
pointing features in Italy’s performance. The relative lack of substantial reforms
in the reconstruction years is one of them. Conversely, and surprisingly per-
haps, a more permissive macroeconomic policy stance may not have been as
pernicious as is commonly thought. In the 1970s and 1980s, when the monetary
and fiscal policy divergences between Italy on the one hand and Germany and
Japan on the other were at their peak, Italy’s performance was just as good if
not better than that of the two other countries. Policy orthodoxy after all may
not always be conducive to rapid growth.
More important are three other differences: (1) administrative inefficien-
cies, (2) the continuing underdevelopment of the Mezzogiorno, and (3) the
near-permanent state of conflict in industrial relations. German and Japanese
administrative efficiency, functioning institutions, and infrastructure quality
seem to be, on available evidence, greatly superior to Italy’s. Regional problems,
never serious in Japan, were severe in Germany after unification, but have so far
been tackled rather successfully. Industrial relations were exceptionally peaceful
in Germany and Japan compared with Italy (Table 4.5).
Behind these differences lies a further one with much older roots: the com-
parative incapacity of the Italian state to efficiently run a modern economy.
This is easily seen in the area of regional development where vast funds were
wasted, often in rent-seeking and corruption. But it also permeates industrial
relations. Seldom did the state play a pacifying role (as in various ways it did in
Germany and Japan). The mismanagement of internal migration in the 1960s is
one example of government shortcomings; the almost total failure of promot-
ing reforms between 2000 and the very end of 2011 is another. While Germany
(through tax policy) and Japan (through industrial policy) helped the formation
of so-called patient capital, Italy had no such ambitions. Its corporate sector gave
priority to short-termism, capital flight, and requests for public aid. Ultimately,
Italy paid the price for remaining profoundly divided between a business class
that looked only for immediate profits, and a trade union movement whose sig-
nificant anticapitalist component was largely oblivious to economic constraints
(Salvati 2000). Germany was spared such ideologic conflicts (Hennings 1982),
whereas Japan never really had them.
As rightly argued (Salvati 1984), Germany and Japan have shown through
time a capacity to efficiently take and manage major decisions, a capacity that
Italy lacks. Had the country had a more efficient state and more cooperative
industrial relations, its regional split would probably have been less severe, and
growth would almost certainly have been higher. Would such an alternative
outcome have been possible? There are episodes in Italy’s postwar history that
suggest that the potential for a better performance was there: rapid industrial
growth in the 1950s, often led by state-run firms; partial North-South conver-
gence in the 1960s; a successful incomes policy in the early 1990s; and a deter-
mined fiscal policy in the late 1990s. Unfortunately, they were sporadic. Yet,
despite all this, the country’s performance was very respectable. Italy today
enjoys living standards that are not much below those of Germany and Japan
and grew nearly as rapidly as they did. The regret is that so much more could
have been achieved.
This is particularly true at present. The last fifteen years have seen very
slow OECD growth, particularly so in IGJ. Some reasons for this are common
(e.g. demography and, possibly, the dampening effects of rapid wealth accumula-
tion). Japan, in addition, is still reeling from two decades of deflation. Germany,
however, has been able through concerted company and union efforts to regain
external competitiveness. Germany’s wage flexibility is particularly noteworthy.
In the East it has promoted convergence; in the West it has stimulated exports.
Italy cannot claim a Japanese-type excuse and has, contrary to Germany, lost
competitiveness since the Euro came into being. More importantly, little pro-
gress is evident in the three areas singled out in this chapter as having hindered
performance relative to Germany and Japan. Industrial relations have improved
somewhat, but more because of the erosion of union power than because of any
effort to build a social consensus, whereas the Mezzogiorno’s relative backward-
ness has hardly changed. Given the virtual absence of reforms, at least until
2012, it is difficult to see how the country can, despite the continuing vitality of
its SME sector, return to significantly higher growth rates.
Acknowledgments
Andrea Boltho is Emeritus Fellow, Magdalen College, University of Oxford. The
author is grateful to Wendy Carlin, Marcello De Cecco, Michele Salvati, and
Hans-Jürgen Wagener for helpful comments.
Notes
1. Germany stands for West Germany until 1991 and for the whole country thereafter.
2. Interesting parallels in the three countries’ histories occurred also in the nineteenth
century, when Italy and Germany were unified and Japan saw a momentous
internal transformation.
3. As with any periodization, issue could be taken with the time spans here shown.
Although any choice of terminal years is arbitrary, it is believed that for present
purposes it reflects a not unreasonable compromise given the histories of the three
countries here considered.
4. America also imposed a Constitution under which Japan renounced war and
curtailed its military spending. Avoidance of that burden may have contributed
to the country’s growth (Kosai 1986), more so probably than in Germany or Italy,
which also sheltered under the US security umbrella. Over the twenty years to 1973,
defence expenditure amounted to just over 1 percent of GDP in Japan, as against 2.7
and 3.4 percent in Italy and Germany, respectively.
5. Actual implementation of these ideas took time. The 1949 Constitution vaguely
referred to the principle, legislation on social housing came in 1950, on
codetermination in 1951–1952, but a significant reform of the pension system had to
wait until 1957. Still, even this came well before similar measures in either Italy or
Japan.
6. Rough estimates suggest that Italy’s reform in the early 1950s transferred between 6
and 10 percent of total acreage from large to small farmers, of which less than half
was expropriated (Graziani 1972; Ciocca 2007). In Japan, by contrast, close to 40
percent of total acreage was, de facto, confiscated in the late 1940s and transferred
to the erstwhile tenants (Kawagoe 1993).
7. The words “miracolo economico” and “Wirtschaftswunder” regularly appear when
the period is mentioned in the Italian and German literature. The Japanese, less
given to hyperbolae, refer to it under the more neutral words of “kōdō seichō jidai,”
or era of high economic growth.
8. Between 1953 and 1972 (just before the first oil shock), the ratio of export to
import prices rose by 1½ and 2 percent per annum in Germany and Japan,
respectively (Italy saw a more modest 0.3 percent annual improvement).
9. The data shown in the table cover only the formal educational system. This
understates the achievements of Germany and Japan. In the former, a large share
of the young obtains apprenticeships qualifications after leaving school; in the
latter the same result is achieved by widespread provisions of on-the-job training.
10. Few, in any case, would doubt that Japan possessed at least some of the
characteristics of “co-ordinated capitalism” that Eichengreen (2007, 3) considers
crucial: “solidaristic trade unions, cohesive employers associations, and
growth-minded governments.”
11. International Labor Organization data show that the number of working days lost
in strikes in 1969–1970 averaged over 29 million in Italy, as against only 170,000 in
Germany.
12. In Japan, gross internal migration into the richer areas averaged 1.5 percent of
those regions’ population between the early 1950s and 1973; in Germany and Italy
the figure was 0.8 percent (net migration from “poor” to “rich” was, however,
smaller in Germany than in Italy; no comparable figures were found for Japan).
13. Real long-term bond rates (deflated by the ex post GDP deflator) averaged 4.0 and
3.3 percent for the period as a whole in Germany and Japan, respectively, but only
1.8 percent in Italy. They would probably have been even lower in Italy if a more
appropriate “expected inflation” indicator had been used to deflate the nominal
rates.
14. In the end, this was not so surprising. Earlier British and American experience
had already shown that the effects on expectations of “regime changes” can be
significant for financial markets but are hard to detect on labor markets.
15. It is true that it was burdened with the costs of reunification after 1991, but the
growth shortfall was already more than one decade old.
16. On a per capita basis, France, Denmark, and Portugal are below Germany’s
1.4 percent annual growth, but are still way ahead of Japan’s and Italy’s dismal
figures.
17. Thus, according to the World Bank, the share of high-tech goods in total
exports in 1995–2010 was 22 percent in Japan and 14 percent in Germany, but
only 7 percent in Italy. Investment goods (defined as SITC categories 71 to 77)
represented 44 percent of Japanese sales abroad in 1995–2008, as opposed to 30
and 28 percent in Germany and Italy, respectively.
18. Imports are also shown in the chart because outsourcing figures strongly in
Germany’s trade links with Eastern Europe. Indeed, outsourcing and the threat to
jobs this represented are almost certainly a major explanation for why earnings in
Germany have grown much more slowly than they have in Italy since the creation
of monetary union.
19. There may well be some truth to the simple view that it is much easier for
Siemens or Sumitomo to be in China than it is for Sassuolo (the capital of
the Italian ceramic tile industry) given the multitude of firms of which it is
composed. This being said, numerous firms in Italy’s clothing industrial districts,
in particular, have outsourced some of their activities to Eastern Europe.
20. The only, small, exception is provided by Germany, which in the years 1995–2010
was somewhat more attractive than Greece, but still well below all the other
OECD countries.
21. The EU’s Eurobarometer surveys on entrepreneurship thus show that the
percentage of people thinking of creating, or having created, a new enterprise is
significantly higher among those aged twenty-five to thirty-nine years and, to a
lesser extent, forty to fifty-four years, than it is among those over fifty-five.
22. International surveys of entrepreneurship, as those presented by the Global
Entrepreneurship Monitor, show that entrepreneurial activity tends to be lower in
countries with a high percentage of the elderly than it is in “younger” economies.
23. The four poorer ones (with GDP per capita below the West German average
in both 1960 and 2008) are Niedersachsen, Rheinland-Pfalz, Saarland, and
Schleswig-Holstein.
24. The Northern region is made up of Hokkaidō and Tōhoku; the Southern islands
are Shikoku, Ky ūshū, and Okinawa.
25. Over the 1953–2008 years, for instance, annual per capita GDP growth would have
been 3.7 rather than the recorded 3.4 percent, with the South itself growing at 4
instead of 3.1 percent.
26. Looking at the literature on the response of regional migration flows to changes
in relative regional incomes (controlling for other variables, such as unemployment
and distance), an earlier summary conclusion was that “most of the elasticities . . .
have been greater than 1.0 but less than 3.0” (Gallaway, Rydén, Vedder 1975, 262).
For present purposes, use was made of (a rounded-up) result obtained for Italy
over the 1958–1974 years (1.8 for relative wages) (Salvatore 1977).
27. There are few reliable figures for international trade elasticities for the 1950s and
1960s. A well-known survey of the time could not find statistically significant
results for Italy (Houthakker and Magee 1969). For eight other advanced countries
for which such results were obtained, the average estimate was of the order of −1
(Houthakker and Magee 1969).
28. Wage moderation was one component of this decoupling. Rapid productivity
growth in the tradeable sector was another, thanks in part to industrial policy and
in part to a return to historical specialization patterns (Carlin 2010).
Chapter 5
THE ITALIAN
ECONOMY SEEN FROM
ABROAD
marcello de cecco
Foreign economists, economic historians, and policy makers looked at Italy with
keen eyes after it became a united country. They were interested to learn whether
the economy of a country that had in the seventeenth and eighteenth centuries
regressed to the role of agricultural raw material exporter after having been in
the Middle Ages and the Renaissance the premier site of European industry,
trade, and finance could redress itself and join the Industrial Revolution, mak-
ing good use of its population and territory, which gave it the potential to be
among the great powers of Europe.
By what means this would happen and following which model was particu-
larly interesting to foreign observers. Political unification was in itself regarded
as a miracle, and other declining countries, or countries that had long smarted
under foreign dominion, saw in Italy an example to emulate. Some adopted the
Italian tricolor as their flag (e.g., Hungary and Ireland). Zionists were also keen
students of the Italian experience, because the return of an ancient people after
two thousand years of division as a potential modern great power augured well
for an even older people who had for even longer been subjected to loss of land,
dispersal, and persecution.
the italian economy seen from abroad 135
Natural and Unnatural Development
Therefore, the greater part of the capital of every growing society is, first,
directed to agriculture, afterwards to manufactures, and last of all to foreign
commerce. This order of things is so very natural, that in every society that
had any territory, it has always, I believe, been in some degree observed. Some
of their lands must have been cultivated before any considerable towns could
be established, and some sort of coarse industry of the manufacturing kind
must have been carried on in those towns, before they could well think of
employing themselves in foreign commerce.
But though this natural order of things must have taken place in some
degree in every such society, it has, in all the modern states of Europe, been, in
many respects, entirely inverted. The foreign commerce of some of their cities
has introduced all their finer manufactures, or such as were fit for distant
trade; and manufactures and foreign commerce together, have given birth to
the principal improvements of agriculture. The manners and customs which
the nature of their original government introduced, and which remained
after that government was greatly altered, necessarily forced them into this
unnatural and retrograde order. (Smith 2009)
Adam Smith saw the Italian republics and states since the Middle Ages as
archetypal examples of “this unnatural and retrograde mode of development.”
Their example influenced all the countries of Europe. Smith was not surprised
that the Italian city states had been exposed to volatility of fortune and fatal
decline. He was at pains to show that their decline had not been brought about
by the discovery of America. Italy’s decline had if anything preceded that event
and Italy had somewhat recovered after the discovery of America, whereas
Spain and Portugal declined.
Smith believed that the small states of the Italian peninsula, which had expe-
rienced a meteoric rise in the early Middle Ages and fast decline afterward, had
introduced an unnatural mode of development, avoiding what he considered the
natural one. This natural mode did not depend on the vagaries and volatility
of foreign commerce and plunder (the latter included in the category of primi-
tive capital accumulation); rather, capital accumulation began in agriculture and
proceeded to industry through reinvested savings and finally extended to foreign
trade. Smith’s model of natural development had a profound impact on econo-
mists and politicians all over the world. Among them were foreign students of
the Italian economy, writing after him, who having visited the peninsula or lived
there for an extended period of time reflected on Italy’s decline.
Smith also influenced the Italians who engineered Italy’s comeback as a
political and economic power in the middle of the nineteenth century. The size
of the country mattered to them, because it could permit a more stable and
durable growth experiment, which ought to be based on modern agriculture
affording a degree of capital accumulation sufficient to permit the installation
of modern industry. Hence, their goal was to unite the entire country.
Thus, for the first seventeen years of the new Kingdom of Italy the governing
elite (La Destra storica) applied Smith’s “natural development” model. For them,
agricultural modernization came before industrialization.
Industry-Led Development
or Balanced Growth?
After the Destra storica lost power in 1876, Italian governing elites opted for
industrialization at all costs as a necessary condition for increased international
political power. Ricardo won the day against Adam Smith. However, in Italy
perhaps a bit later than in other Continental European countries, Ricardian
free trade gave way to protectionism as a necessary condition for industrializa-
tion. Not all foreign observers believed it was the right choice. British observers
advised that Italy join free trade Europe. Richard Cobden had made, earlier on
in the century, a very successful tour of Italy preaching just that.
The Piedmontese adopted free trade before unification, especially to receive
capital and direct investments from France and Britain, and then extended it to
the heavily protected South after unification. Cavour, ever the great realist, did
not declare unilateral free trade. Rather, he signed a large number of trade trea-
ties with the principal powers with which Italy and before it, the preunification
states, had or hoped to have important commercial relations.
The Southern Kingdom, a couple of decades after removal of the Bourbon
King, had chosen the model of American protectionism, preached by Alexander
Hamilton and imitated in the German states by Friederich List’s Zollverein.
This caused the enmity of the British. As the Florentine and Genoese had done
in previous centuries, their merchants had thoroughly exploited all the poten-
tialities the Southern Kingdom offered in the way of imports and exports. In
particular, British merchants had virtually monopolized the export of sulphur,
which was extracted by primitive methods and with much human suffering in
the mines owned by Sicilian noblemen (Giura 1973; Davis 1982). Sulphuric acid
was considered essential for industrialization and its price went through a veri-
table bubble in the early 1830s. After a few years, the bubble burst and the price
declined as fast as it had risen, causing intense economic and social distress.
Following its protectionist strategy, which had been introduced in 1823, the
Neapolitan government in 1838 chose to stabilize the slumping price of sulphur
by restricting exports, limiting them by one-third and auctioning the rights to
the Sicilian sulphur mines, taking them away from de facto British control, to
a newly formed monopoly run by a French company (in which the Duchess of
Berry, sister of the Neapolitan King, was rumored to have an interest).
The British government reacted, after representations were made by British
merchants to their government, by a very open threat of naval intervention,
made by the foreign minister Palmerston. This led to the actual seizing of
Neapolitan merchant vessels in the open seas. The vessels were taken to Malta
until the dispute was resolved. Other ships under the Neapolitan flag were
blockaded in Corfu and the commander of the British fleet was told to be ready
to blockade the Gulf of Naples. This act of open imperialist bullying, an almost
perfect case of gunboat diplomacy, was ordered in disregard of the advice of the
British crown’s legal experts. It was, however, presented by Palmerston under
the guise of a doctrinaire dispute between protectionists and free traders. The
“objective principles of modern economic science” were wheeled out in defence
of the status quo with the sulphur mines in the letter the British foreign sec-
retary wrote to the Neapolitan King, after the latter had claimed his sovereign
right to impose a monopoly on an economic activity conducted in his domains
and of treating foreigners in a manner different from his own subjects.
In countries where Government is arbitrary and despotic—wrote Palmerston—
and subject to no responsibility or control, it may often happen that caprice,
want of political knowledge, prejudice, private interest, or undue influence,
may procure the promulgation of unjust and impolitic edicts, inflicting much
injury upon the people of such state, interfering with the legitimate industry
of individuals, deranging the natural transactions of commerce and causing
great detriment to private interests and to national prosperity. (Giura 1973)
Palmerston then proceeded to draw an essential difference between a state
monopoly and one granted by a sovereign to an individual.
No doubt royal monopolies—he wrote—are . . . very objectionable ways of
raising a revenue. They interfere injuriously with private enterprise, prevent
the full development of the natural commercial resources of the Nation, and
check the consequent increase of the public revenue; but in all the countries
where the science of Political Economy has been imperfectly understood, such
monopolies have constituted one of the sources of income for the Crown.
(Giura 1973)
However scientifically and practically wrong they might be, he noted, state
monopolies were not prohibited under the treaty of commerce signed between
Naples and Great Britain in 1816. However, the case of sulphur was different, he
affirmed, because the sulphur trade had been completely private from the start
on both trading sides, and the imposition of a monopolistic restriction was a
serious prejudice to the rights of British merchants and Her Majesty’s govern-
ment had every right to come to their help.
Palmerston made an additional didactic remark to his opponent: the
Neapolitan Government “appears to imagine that sulphur is an article found
only in Sicily, and that Providence has rendered all mankind dependent on that
single island for a commodity which is extensively required for various uses”
(Giura 1973).
Sulphur, on the contrary, is to be found in many parts of the world and
the persistence of the Sicilian monopoly, Palmerston affirmed, will bring
other supplies into cultivation and the price will fall. When this result is
accomplished—he concluded- the Government of Naples may perhaps regret

that it allowed itself to listen to a scheme suggested by individual cupidity,
which can only be carried into effect by sacrificing the interests of the many
to the avarice of the few, which violates the national faith, and which must
involve the Crown of Naples in a difference with a Power, whose fleet and
armies have protected and preserved for that Crown the very island where the
subjects of that Power are now about to be exposed to treatment oppressive
and unjust. (Giura 1973)
Thus, Palmerston showed that the Neapolitan Crown was scientifically
backward and incorrect, politically offensive, ungrateful, and would also be eas-
ily proved to be militarily weak compared with Britain.
The Neapolitan response was fast in coming, in a letter personally dic-
tated and signed by King Ferdinand. There, the king showed his ire at being
defined as politically despotic and ignorant of economic theory. He wrote that
his country did not take lessons in political economy from anyone, least of all
England, because it had been the birthplace of such economists as Genovesi,
Galiani, and Broggia, all earlier and just as great as the most eminent in the
world. He stated flatly that Palmerston was also wrong in his arguments about
monopoly, and that he had been contradicted even by his own legal advisers.
The ebullient and arrogant foreign secretary, however, was not to be
deterred by this display of theoretical and argumentative prowess. He also
had a personal axe to grind with the Neapolitan Crown, because Carlo di
Borbone, a cadet brother of the king, had married Penelope Smith, a beautiful
Irish girl who was Palmerston’s niece but did not belong to the aristocracy.
For marrying beneath his rank, Carlo had promptly been disowned by his
brother and left without means of support, to fend for himself and his wife
in London.
Palmerston, fired by political, ideologic, and personal motivations, ordered
the British fleet to cruise out of Malta and seize all Neapolitan merchant ves-
sels they found; to seize them also in Mediterranean ports, such as Corfu; and
finally to appear in all its persuasive strength in the Gulf of Naples. In private
letters Palmerston also mentioned his determination to blockade the Kingdom
of Naples altogether from the sea.
The Neapolitan government appealed to other Italian princes, to the conti-
nental powers of the Congress of Vienna, and to France. It received general sym-
pathy, and expressions of readiness to mediate, but not much else. In the end,
mediation managed to bring the dispute to a lengthy resolution. As J. Goodwin,
British consul in Naples, noted at the time, the British had made sure that the
Bourbon king would take theoretical free trade lectures seriously:
Reprisals were made upon Neapolitan commerce by the British fleet in the
Mediterranean, the result of which was that the (monopoly) contract was
dissolved by a Royal decree of 1st July, 1840. (Goodwin 1839)
After this ideologic-military spat, the Bourbon dynasty never recovered

the special relationship it had enjoyed with London. The Kingdom of Naples
became, for the British, the scourge of Europe, as William Gladstone famously
called it in 1850.
The Neapolitans were utterly defeated in their attempt to behave as a
European power of the first rank. In economic terms, the defeat was less bru-
tal, but the political implications of this demonstration of British imperialism
were profound, because no other Italian state after that tried to go the pro-
tectionist route. In Piedmont, Cavour embraced free trade. After his death in
1861, his political heirs extended the free trade regime to united Italy, including
the southern provinces where protection had lingered. Effects were devastating,
especially for the South, also induced by the new kingdom’s choice of a mon-
etary standard that overvalued the lira in the hope of attracting foreign capi-
tal (see Chapter 2 by James and O’Rourke on Italy’s postunification monetary
policies).
Werner Sombart on Italian

Commercial Policy
A very lucid analysis of Italy’s commercial policy since unification was pro-
vided in the early 1890s by Werner Sombart (1896). In his view, the new king-
dom had chosen the wrong path to development by extending Piedmont’s free
trade to the whole of the country. Sombart also believed that had Cavour lived
to govern the country he had so cleverly put together, he would not have done
that because he knew that what was a good policy choice for a small coun-
try, such as Piedmont, would not be appropriate to a large and uneven one,
such as united Italy. Sombart provided statistics on the level of protection that
existed in the various kingdoms before unification, which clearly showed that
the Bourbon kingdom was the most protected one. He remarked that the small
Italian states before unification could not adopt a custom’s union, such as the
German Zollverein, because it would have meant giving economic leadership
over the whole Italian peninsula to the Austro-Hungarian government, thus
going against all the Risorgimento was about.
He provided statistics to show how the economy of the South had wilted
in the years after unification, being subjected to the harsh winds of free trade,
and how the entire country’s imports had swollen in the same years, while
exports remained stagnant. He noted that in 1860 Italy had some industrial
plants but could not be said to have an industrial sector, even in its most devel-
oped parts. He added that the shift to protectionism in the 1870s was gradual
and followed similar policy changes that were decided by neighboring coun-
tries, in particular by France. He very perceptively remarked how close had
been the integration between the economies of the two “Latin sisters,” and how
economically painful would be for Italy the commercial war declared against
France in 1887, how Italy was led into it by France’s decision to abandon the
free trade adopted by Napoleon III, and how Italy’s switch was also influenced
by foreign politics.
Sombart made an equally perceptive set of remarks regarding Italy’s deci-
sion to industrialize under the Sinistra governments. He was convinced that
the Italians had adopted industrialization as their main policy goal to affirm
their national will to be a great power, in an age when industry and modernity
seemed to go hand in hand and all leading countries had become industrial-
ized. This prevalence of politics over economics seemed altogether reasonable
to him. He believed that if a country stuck to “natural” economic activities dic-
tated by geography and natural endowments, it would lose control over its own
destiny, and be exposed to the vagaries of the international cycle, but that once
that path was abandoned, protectionist policies required very careful planning
and could easily misfire. Accordingly, he noted that the earliest duties had been
imposed on foreign trade by the Italian government not to promote industry or
agriculture, but mainly to boost fiscal revenues in a country where taxation was
difficult to impose and manage.
When Sombart wrote his article the great industrial spurt of the late 1890s
and early twentieth century had not yet begun in Italy; he dealt with the indus-
trialization of the 1880s. He did not have any objection to the Italian decision
to provide heavy protection for the steel industry. It seemed clear to him that
no industrialization effort could take place in a large country as Italy that was
not based on national steel production, even if the country did not have coal.
He expressed admiration for the steel works that were built by Stefano Breda
in Terni. To him this was evidence that Italians could realize large-scale,
state-of-the-art, projects in leading industrial sectors.
However, Sombart was too good an economist not to know that the lira’s
return to convertibility brought about by the Sinistra government in 1882 had
negative consequences on the competitiveness of the Italian economy, particu-
larly of the newly born industry. He noted that devaluations worked like protec-
tive measures and that their efficacy depended on domestic prices rising earlier
and faster than domestic wages, shifting income distribution in favor of capital
and against labor.
Smith, Palmerston, and Sombart are excellent examples of the mix of ide-
ology, high-level economic theory, and more down-to-earth considerations with
which foreigners have traditionally approached the reality of modern Italy.
Examples can be found in Gerschenkron’s crossing of swords with Rosario
Romeo on primitive accumulation, in the role of German banks in Italian
industrialization, and in the misconceived protection of basic industries; in Vera
Lutz’s polemic about the Italian government’s Southern industrialization policy;
in Andrew Shonfield’s and Posner and Woolf’s admiration for Italian publicly
owned industry; and in the more recent debate about small-scale industry and
industrial districts inspired by Brusco and Becattini but made popular among
world economists by Piore and Sabel and even by a political science analysis of
North-South difference as that proposed by Robert Putnam. All are looking at

different facets of the same subject, as discussed next.
Bonnefon Craponne: A Contemporary

Witness of Italian Turn-of-
the-Century “Big Push”
After an early belief shared by many foreigners and Italians that Southern soil
hid fabulous riches and that enlightened and efficient administration would
bring them to fruition, the realization of Southern backwardness and of the
scarcity of resources hit foreign observers as it did Italians, and advice on how
to resolve the arch problem posed by Italian unification would be forthcoming
from abroad for the next 150 years. In the eyes of foreigners, the coincidence
of a rapidly modernizing North and an increasingly backward South made the
Italian growth experience a sonderweg, a special case. Many foreign observers
thought it could be solved if the Southern regions specialized in agriculture and
tourism. After a much bigger case of economic renaissance in Germany, for-
eigners began considering whether integration with the German Empire may be
better for Northern Italy than special relations with France, which had been the
experience of the previous two hundred years. Northern Italy was the region
involved because it was clear that there the Italian elites would conduct their
experiment with rapid industrialization.
Still, there was no widespread contemporary awareness by foreigners of the
success of the Italian industrial spurt in the two decades leading to World War
I. After the war, keener observers took note of what had happened but the pre-
war and wartime growth of Italy’s new industrial structure was overshadowed
by the more urgent problems posed by Italy’s huge foreign indebtedness and by
the need to reconvert the new industrial structure to postwar world economic
conditions.
There were exceptions. Perhaps the most interesting among prewar observ-
ers was Louis Bonnefon Craponne, a French silk producer based in Piedmont,
who was the first chairman of the Unione Industriale of Torino and later of the
Confederation of Italian Industry. He published in Paris, in 1916, what can be
considered perhaps the best contemporary work, L’Italie au Travail, a book writ-
ten before the outbreak of World War I (Bonnefon Craponne 1916, 1991).
He was highly competent; a graduate of one of the elite Paris grandes écoles,
the Haute Ecole en Sciences Commerciales; a true lover of his adopted country;
and a not uncritical admirer of what the Italians had managed to do especially
in the ten years of what is now call the Giolittian economic miracle. His book is
an extremely lively, well-documented, and statistically backed description of the
growth trajectory that some of the most successful sectors of Italian industry
had experienced since unification. It includes a very thoughtful chapter on
la Questione meridionale, clearly inspired by a man the author thought very
highly of, Francesco Saverio Nitti. He was, however, able to distance himself
from Nitti’s passionate approach to the subject.
Bonnefon started as a silk producer, closely connected to the Lyon silk
market, but then moved on to take part in the explosive boom of the Italian
automobile industry in the first decade of the twentieth century. Naturally, his
chapters on silk cocoon production, the silk industry, and the auto industry
are particularly brilliant, but he is extremely well informed and informative on
other sectors, such as the hydroelectric power industry.
It is only through the brilliant pen of this French grand commis that one
gets a pulsating feeling of what must have been the heady experience of fast
growth in Northern Italy in the first decade of last century. He quotes produc-
tion levels in the most dynamic sectors, giving a body to those figures through
extremely competent descriptions of the production processes adopted, and of
the technology levels at which Italian industry was able to rise in such a short
time in such sectors as automobiles, tires and cables, hydroelectric power, and
cotton and wool. In his descriptions one is able to fully appreciate the modern-
ization of Northern Italy, its growing distance from Southern Italy, the essential
role played by emigrant remittances in the Northern miracle, the problems with
the young and militant workers’ unions, and the pitfalls to be avoided.
Bonnefon also fully understood the dualism between large- and small-scale
industry and vividly describes the self-made former workers, the well-educated
engineers, or upper class former cavalry officers, such as Giovanni Agnelli, both
types of industrialists sometimes even coexisting in the same sectors. He did not
overlook the workers, whose recent provenance from the peasantry he stressed,
because of the advantages and disadvantages that rapid social change entails,
which helped explain why such hardworking people in the end were less pro-
ductive than their French, British, and German counterparts. Bonnefon was a
positivist living in an age of positivists, in a city where that persuasion was rife.
His book, in the original French edition, is difficult to find, although an
incomplete copy can be downloaded from the Internet, offered by a Canadian
university (http://www.archive.org/details/litalieautravail00bonn). A new French
anastatic reprint has recently come out and an excellent translation into Italian
was made and published in 1991 by the Unione Industriale of Torino, but was not
commercially distributed and is difficult to find. For these reasons, Bonnefon
Craponne is hardly a household name in Italy today. He certainly was not men-
tioned by either author in the Gerschenkron–Romeo debate. He does not appear
in Risorgimento e Capitalismo (Romeo 1959) or in Economic Backwardness in
Historical Perspective (Gerschenkron 1962). Nor is he mentioned in the index
appended to an important collection of essays put together by Caracciolo (1969).
More recent works, such as Castronovo’s history of FIAT (2005), make full
use of the book. Bonnefon’s book, however, is today known only to specialist
historians, although it ought to have been among those suggested to university

students of history, economics, and engineering in the year of celebration of
the 150th anniversary of the birth of modern Italy. His down-to-earth, yet vivid
and scientifically cognizant prose has not aged at all in a century. Reading it
calls back the enthusiasm of a decade essential to Italian economic and political
history.
The Economic Recovery

Administration’s Country Study
on Italy and Its Consequences on
Theory and Policy Making
What should one make of the Italian mixed economy, with large-scale industry
chiefly owned and run by the State? This question occupied foreign students of
the Italian economy after World War II, especially during and after the Italian
economic miracle. Before that, however, foreign advisers were involved in plans
for the reconstruction of the Italian economy after the war and its adaptation to
the new free trade environment created by the Bretton Woods Agreements. The
launch of the Marshall Plan and its application to Italy gave rise to a famous
dispute between the young Keynesian American administrators of the Marshall
Plan and the Italian authorities, led by the central bank and its then governor
and future president of the Republic, the distinguished economist Luigi Einaudi.
He thought foreign financial aid should be destined to help stabilize the Italian
currency and not to fund Keynesian public works to alleviate Northern unem-
ployment, which according to him had structural causes. After the Marshall
Plan administrators published a “country study” (Economic Cooperation
Administration 1949) on Italy that was sharply critical of Italian poststabiliza-
tion policy choices, Italian economic policy makers cleverly managed to mobilize
conservative foreign economists, such as Friederich and Vera Lutz, who agreed
with the Italian government’s set of priorities and policy sequencing.
The report by the young American administrators of the Marshall Plan
titled “Italy-Country Study,” which appeared in February 1949 but was written
in the last months of 1948, was slender in size but it proved to be the first mover
in the postwar debate about what models of economic development ought to be
applied to the case of Italy, the ideal starting point of the Gerschenkron–Romeo
debate. It has been condescendingly called a product of “rough Keynesianism.”
It certainly was Keynesian to the core, but rough it was not.
The appearance of this report was traumatic for the Italian governing elites
who had, starting from the authoritative advice and policy making activities
of Einaudi, governor of the central bank and budget minister in De Gasperi’s
cabinet, devised a very different policy sequence to follow the just achieved
stabilization of the lira. De Gasperi and Einaudi had bet on the positive elec-
toral consequences of their stopping in its tracks the inflation that had burned
Italian monetary savings and the real value of the huge public debt inherited
from Fascist war making. They won their bet. There were more people in favor
of the deflation that followed than there were people who attributed their being
unemployed to it. The fact that inflation had destroyed the real value of cash
earned through black market sales of all sorts of goods did not inflame farm-
ers and the stock exchange and commodity speculators into voting against the
government, and certainly did not persuade them to vote for the Left, the true
fear of the Americans.
The authors of the Country Study reported that inflation had been initiated
by the Italian authorities, when they had allowed banks to sell the holdings of
government debt they had been forced to absorb during the war and to lend the
proceeds to their commercial and industrial clientele. The authorities, especially
Treasury minister Epicarmo Corbino, an extremely obdurate economist who
believed in free competition whatever the cost, had repealed all rules that pre-
vented banks from opening new branches and competing for clients, with the
result that industrial production and imports grew because of pent up demand
for goods but also because of speculative inventory accumulation. A wild stock
exchange boom also ensued, another product of easy credit.
When Corbino’s influence was finally neutralized, open inflation was ram-
pant and it took Einaudi, then Governor of the Bank of Italy, and Menichella,
former Director of the Institute for Industrial Production (IRI) and then
Director General of the Central Bank, to put up a joint effort to fight it back.
Stabilization of the lira was achieved at the cost of deflation, a deflation that
was only mitigated by a large devaluation of the Italian currency and by special
government intervention to rescue the engineering industry with subsidies.
All these aspects were mentioned in two brilliant articles by Albert Hirschman
(1948a, 1948b) written just after the stabilization had been successfully per-
formed. Hirschman had earned an economics degree in Trieste just before the
war and had deep knowledge of the Italian economy. He worked for the Board
of Governors of the Federal Reserve, and as a result was careful with words, but
neither did he mince them. The authors of the Country Study probably read one
of the articles because it appeared in the American Economic Review. Hirschman
wrote his papers after having spent time in Italy to collect information. There is
a good chance that he had met his Marshall Plan colleagues.
The Country Study was written in the same vein as Hirschman’s articles.
He had underlined the importance of devaluation of the lira for the success of
stabilization. He emphasized the importance of “real” variables, such as com-
modity prices, in dampening price rises in Italy after the autumn of 1947. He
also underlined the partial freeing of exporters’ foreign exchange earnings,
which had been used to import raw materials and other essential products,
rather than being parked in foreign bank accounts.
The authors of the Country Study irked Italian policy makers and
conservative economists when they began their report by quoting the very high
number of unemployed people who lived in the cities of the industrial North of
Italy and by affirming that increasing employment was the primary aim of eco-
nomic policy. They thought that aim could not be achieved if the deflation after
stabilization was allowed to persist. A vigorous reflationary policy was man-
datory, also to allay permanently the threat of Communism. They added that
a massive dose of public investment was the only way to bring this about, to
substitute for weak consumption demand to be expected because of low wages
and unemployment and especially for the extremely timid performance of pri-
vate investment after the inflationary bubble had been successfully punctured
by the authorities’ fast and determinate measures of mid-1947. Private entrepre-
neurs, wrote the Country Study, seemed not to have gained, after the resound-
ing Christian Democrats electoral victory of April 18, 1948, enough confidence
that Communist takeover was definitively out of the picture to take out their
money and invest it in new productive capacity. In any case, private industry
thought capacity utilization was still low because of the deflation after stabiliza-
tion and that there were enough unused plants and machinery, not to mention
workers, to supply almost any increase in demand in the immediate future.
Public investment, the Country Study wrote in no uncertain tones, was
the only way to decrease present unemployment in the North and to increase
productive capacity in the less immediate future, and to avoid bottlenecks
that would appear in crucial and strategically important industrial sectors. Its
authors also wrote that public investment could be financed by the ample funds
made available by Marshall Plan aid and accumulated in the special treasury
counterpart account, where the proceeds of the sales of Marshall Plan aid goods
were deposited. It was for this, they added, that the ECA program had been
devised.
That is where the postwar dispute on models of development and capital
accumulation began, much earlier than it would be taken up by academic econ-
omists. The Keynesian economists of the ECA had in mind a progenitor of what
would later come to be known as the Keynesian growth model, very similar to
what Gerschenkron seemed to have in mind when he wrote his articles some
years later. Public investment to increase capacity and employ workers would be
at its core. In the immediate postwar years, however, no primitive accumulation
was required to realize it, unless Marshall Plan aid could be defined as primi-
tive accumulation. Foreign aid replaced credit creation by German-style banks
that no longer existed in Italy or extraction of agricultural surplus through tax-
ation of rich landowners or through relative price movements between indus-
trial and agricultural goods, which penalized the latter.
The authors of the Country Study also wrote that, to boost fixed invest-
ment in infrastructure and new industrial capacity, publicly owned industry
(whose size had been greatly increased in the 1930s through the creation of IRI
to rescue large-scale industry and banks that owned it) should be called to play
the protagonist’s role, because IRI owned most of the firms capable of planning
and executing large-scale investment projects, to be financed with ECA funds.
The Country Study remarked that IRI had not yet begun to plan a coordi-
nated industrial effort, such as the one now necessary for Italy to move to a fast
growth trajectory, but that they ought to be asked to do it now that resources to
finance that giant effort were made available by the ECA. They thought no one
in private industry had the resources and the size to replace IRI in this role.
The Italian authorities, however, did not agree with the course traced by
the ECA economists in the Country Study. They much preferred to use the
counterpart funds to increase gold and foreign exchange reserve, to give once
again a solid base to the Italian monetary system. Some of them also believed
that Italian unemployment was not caused by a deflation-induced fall in effec-
tive demand. They thought it was structural and could not be reabsorbed by a
rapidly outlived demand boost to be obtained by increasing industrial capacity
through fixed investment and infrastructure building funded by the state (e.g.,
see Eichengreen 2007). They also feared that inflation was not permanently
subdued and would be resurrected by a sudden increase in international com-
modity prices, leading to inventory speculation by Italian industrialists.
In the following decade, the years of Italy’s economic miracle, events showed
that the authors of the Country Study and the Italian economic authorities
were both right. There had been Keynesian unemployment in Northern cities
and disguised unemployment in agriculture all across Italy. The Korean War
spurred another bout of speculative inventory accumulation by Italian firms
and merchants, and the foreign reserves the Italian authorities had prudently
piled up could be used to balance the country’s international accounts.
The war also boosted foreign demand for Italian industrial goods, and that
caused employment and capacity use to rise without unduly pressuring wages.
The low level of the lira made Italian industry fully competitive with foreign
producers.
At the same time, IRI firmly placed itself at the core of the new Italian
growth trajectory. It managed to close the historic gap that Italy showed in
integral-cycle steel production by building, against the violent hostility of pri-
vate steel makers who used scrap iron in electric steel mills, a new steel plant
in Genoa with American machinery supplied by the Marshall Plan. American
refinery equipment was also obtained to build new oil refineries and reequip
existing ones, thus helping to close another historic trade gap, that caused by
coal imports. Higher-value refined oil products were exported and low-value
ones were burnt as fuel in the thermoelectric plants also imported from
America. Moreover, IRI engaged in a huge program of motorway construction.
ENI, the other large publicly owned firm, found natural gas in the Po Valley
and built a complete pipeline network to make it available to Italian industry
and reduce the fuel bill Italy paid to foreigners.
Thus, often the same men who had played down the advice of the young
authors of the Country Study put the content of that advice into practice. At
the end of the decade, Gardner Ackley coyly remarked that there must have
been plenty of Keynesian unemployment in the late 1940s to allow such a large
and rapid supply increase in the 1950s, while millions of Italian workers had at
the same time been migrating to Europe, the Americas, and Australia (Ackley
1957). Full employment would finally occur in the North of the country in the
early 1960s, rapidly pushing up wages and causing a balance of payments crisis
that Italy, now on the Bretton Woods fixed exchange rate standard, could not
meet by devaluation. Fodor (2000) and Cavalieri (2009) provide an analysis of
the monetary assistance offered by the US administration to the Bank of Italy
during the 1963–1964 balance of payments crisis.
Dualism in Economic Development

In the 1970s, David Abulafia, a distinguished Cambridge economic historian,
published his work on the Italian economy of the late Middle Ages, where he
showed that the dualism of the Italian economy, with a developed Center-North
and an underdeveloped South, could be traced back as far as the fourteenth
century (Abulafia 1977). This was not as far-fetched as what other scholars
had done before him, to show that dualism in the Italian economy dated back
to classical times. Arnold Toynbee, the most radical among them, had writ-
ten that the underdevelopment of Calabria was to be attributed to the revenge
the Romans had taken on its autoctonous inhabitants and the devastation they
had wrought on their homeland, after the Calabrians had sided with Hannibal
(Toynbee 1965).
Dualism, or uneven development, is thus a concept that permeates Italian
economic and social history. It reemerged in the 1950s, when a vigorous growth
process finally started in the Northern part of the country, whereas the South
stagnated and even regressed. In this period the Italian authorities asked for
foreign advice when Italy requested United Nations help to develop the South.
Paul Rosenstein Rodan, Hollis Chenery, and Richard Eckaus were consulted
(Eckaus 1961). That attracted foreign interest much more than what was hap-
pening to the industrialized North in the new trade liberalization environ-
ment. The Northern “miracle” took foreigners largely by surprise, hence their
interest in the mixed economy model, which had prevailed in Italy since the
rescue of banks and industry in the 1930s. This model had admirers, such as
Andrew Shonfield and Michael Posner, and serious critics, such as Friederich
and Vera Lutz.
The debate began with an article published by Vera Smith, a conservative
English economist married to the German economist Friederich Lutz (Lutz 1956).
The couple started visiting Italy for extended periods, at the invitation of the
Bank of Italy. The purpose pursued by the Italian authorities in inviting them
to work on the Italian economy was reported by Paolo Baffi in a well-known

article (Baffi 1985).
In the first article, in another published a little later (Lutz 1958), and in a
subsequent book (Lutz 1962), Vera Lutz built a model of the Italian economy
characterized by some pathologic features, which in her opinion caused the
divergence between North and the South to come about and to persist in time.
Her articles coincided with the preliminary work for and then the launching of
the Cassa per il Mezzogiorno, an institution created by Donato Menichella and
inspired by US President Roosevelt’s Tennessee Valley Authority, and supplied
with large resources to build public works and infrastructures in the Southern
regions with the declared aim of bridging the gulf that existed between eco-
nomic conditions in the two parts of Italy. In the same years, the Vanoni Plan
was also launched, with the aim of speeding up growth rates in the whole of
Italy but in particular in the more backward regions. Foreign economists were
recruited to help with both efforts.
Vera Lutz’s articles had the aim of inserting doubts into the minds of the
Italian governing elites, which were swinging in favor of both intervention
plans, as to the soundness of their theoretical foundations. They started from
classical and Keynesian premises. She, on the contrary, based her reasoning on
strictly neoclassical principles.
According to her analysis, the glaring dualism that persisted between North
and South as far as levels and rates of growth were concerned was the result
of one simple fact: large-scale industry, mostly located in the North, was dom-
inated by powerful unions that imposed much higher wage rates to the entre-
preneurs than the relative availability of factors of production in Italy justified.
This artificial wage setting, dominated by a strong monopoly of labor resources
exercised by the unions, compelled firms to use more capital-intensive tech-
niques than the ones labor availability in the economy would have suggested,
thus inducing the economy to warrant a less than full employment demand for
labor.
Large-scale industry, as a result, did not grow as fast as it might have, and
labor supply was partly employed by small-scale firms, which were allowed, by
the relative weakness or even absence of unions from their shop floors, to pay
much lower wages and ensure much worse working conditions than those pre-
vailing in large-scale industry.
According to Vera Lutz, because of the presence of powerful unions the
Italian economy was therefore suffering from an inadequate growth rate; a
dualistic wage structure; and a highly dualistic economic structure where very
capital-intensive big industrial plants were surrounded by a plethora of small
firms, where big industry paid higher wages than they should have, where labor
conditions were very different in the two sectors, and where small-scale firms
were concentrated in the Southern regions and in nonindustrial sectors. In
addition, greater industrial concentration than would have been justified by the
labor supply of the country was another unfortunate result of the excess wage
rates secured by the unionized labor force of the big industry sector. This led to
monopoly and excess profits.
Monopolistic wage-setting in the large-scale industry sector thus led,
according to Vera Lutz, to monopolistic prices and behavior on the part of the
entrepreneurs in the same sector. Resources were siphoned off from the rest of
the economy and starved it of necessary capital.
How to get out of this dangerous impasse in which the Italian economy
had been cornered by too strong unions? According to Mrs. Lutz, the answer
was simple: wages in the capital-intensive sector had to be kept from rising long
enough to allow the relative reduction of capital intensity in that sector and an
increase of its growth rate so that the sector would start absorbing labor again
and thus reduce the size of the backward small firm sector.
On the contrary, if wages resumed their rise in the capital-intensive sec-
tor, the latter’s capital intensity would grow further and the growth rate of the
whole economy would slow down, and advantages of capital intensity and of
high wages would be enjoyed only by capitalists and workers in the high-wage,
capital-intensive sector. Geographic and sectoral dualism, far from declining,
would probably increase further.
It is clear that Vera Lutz’s analysis had profound implications for the growth
strategy the Italian leadership was launching, aided by very eminent foreign advi-
sors (e.g., Paul Rosenstein Rodan, Hollis Chenery, and Harvey Leibenstein) and
with the help of large soft loans from the World Bank. Had her line of reason-
ing been accepted, the first move on the part of Italian politicians should have
been to try and break the hold the unions had on wages in the capital-intensive
sector. Without this preliminary action, all attempts to increase employment
levels by public works and direct investment by state industry were destined to
have only a small and short-lived success. If one adds that, according to Mrs.
Lutz, a dualistic economy would also work to increase agricultural prices and
depress industrial prices, Southern excess supply of labor could only be relieved
by mass emigration to the North, investment in employment-creating public
works, and even directly in new industries in the South being largely useless.
It is thus not surprising to see that Vera Lutz’s articles were subjected to
extremely heavy criticism on the part of economists who did not accept neoclas-
sical theory. The first line of criticism was taken by Luigi Spaventa, then a very
young and brilliant Cambridge-trained economist, alone or writing with Luigi
Pasinetti, who also rose to international eminence in later years and with the
mentioned Gardner Ackley, an American Keynesian economist, who had good
knowledge of the Italian economy and who would later serve as US ambassador
in Rome (Spaventa and Pasinetti 1960; Spaventa and Ackley 1962).
Spaventa and Ackley replaced Lutz’s analysis with one based on classical
Keynesian theoretical premises, to which they also added the results of Sylos
Labini’s work on oligopoly (Sylos Labini 1956). Their model yielded results
opposite to those of Lutz: it was oligopoly in the modern part of the economy
that reduced the growth rate of the whole economy and maintained divergence
between modern and backward parts. A reduction of oligopolistic power (i.e., an

increase in competition in the modern part of the economy) was thus required
to raise the aggregate growth rate and reduce dualism.
Other foreign economists, such as Chenery and Leibenstein and especially
Kindleberger, also contributed to the study of Italian dualism. Kindleberger
(1966) used Arthur Lewis’s analysis of growth with unlimited labor supply. He
attributed to the exhaustion of excess labor supplies the end of the so-called
supergrowth the Italian economy had shown in the late 1950s and until 1963.
Sudden and very large wage increases had stopped the virtuous circle of Italian
postwar development. His work was criticized by Italian economists who noted,
for instance, that in 1963 full employment had been achieved only in Northern
Italy, whereas unemployment persisted in the South.
Eminent foreign economists were thus working in the 1950s and early
1960s to explain the Italian economy’s persistent dualism. It was Mrs. Lutz who
started the debate and drove the discussions. In retrospect her line of argument
was the one that had the strongest influence on Italian public debate for years
to come, despite the many theoretical weaknesses of her basic model. Double
wage standards in different areas of the country and the break-up of union
power continue to be suggested as solutions to the dualism by which Italy is
still affected 150 years after unification. Finally, belonging to this season of for-
eign publications on Italy, one cannot but recall also the impressive study on
Italian public enterprises by Posner and Woolf (1967).
Gerschenkron and Romeo on Primitive

Accumulation and the “Big Push”
Needless to say, many foreign economic historians and contemporary observ-
ers studied the “Italian case.” In particular, one of the most relevant contribu-
tions was made by Alexander Gerschenkron. While the “dualism in economic
development” debate raged, an equally heated one involved Gerschenkron and
another eminent economic historian, Rosario Romeo. They were soon joined by
other Italian and foreign economic historians and economists.
The debate focused on the role of capital accumulation in the crucial phase
of economic development, which at the time was referred to as the “big push,”
a strong acceleration in the rate of growth of an underdeveloped country that
would finally allow it to break away from underdevelopment and take a fast
growth path.
More Stalinist than the Marxian economists whose views he challenged,
though by no means a Marxist himself, Romeo advanced the opinion that in
the first fifteen years after Italian unification, the Destra storica had adopted
the correct approach in its attempt to bring Italy among developed countries
in the shortest possible time (Romeo 1959). In his view, the politicians who
had replaced the Destra after 1876 had pursued the same strategy, at the core
of which was the extraction of investible surplus from agriculture to shift it
to infrastructure building and then to industry. This was a direct criticism of
Antonio Gramsci’s view of the failed agricultural revolution as the key to under-
standing why united Italy had not experienced a bourgeois revolution (Gramsci
2007). By not distributing land to peasants, Gramsci noted, demand had not
been created for industrial goods; hence, slow industrial development and the
very slow and timid emergence of a modern bourgeoisie.
Romeo’s view was that it had been exactly the failure to redistribute land
that had allowed the government to extract the surplus from agriculture. Who
could have kept poor peasants who had come into land ownership from eat-
ing up the product they were able to produce themselves? By keeping land in
the hands of the landlord class, the Italian government had been able to tax
landlords heavily, because agricultural wages had not been allowed to grow.
With some justification, Romeo accused the Italian Marxists of not having read
enough classical political economy, to have directly shifted loyalties from pre-
war idealism to Marxism for purely political reasons (hatred of the Fascist dic-
tatorship that had plagued Italy for twenty years). In his opinion, “primitive
accumulation,” a favorite expression of Italian Marxists, had to be interpreted
as the extraction of existing resources from a stagnant sector to invest them
in a dynamic sector, such as industry, or in indispensable public works, such
as the building of a railway network. The latter course was the one chosen by
the Destra storica and it was a first indispensable step leading to a strategy of
industrialization.
Romeo was clearly inspired by the literature on growth theory and growth
models developed in those years in British and American universities by such
people as Joan Robinson, Ragnar Nurkse, and Arthur Lewis. He referred in
particular to the articles on Italy Gerschenkron had published in English in
Italian journals (Gerschenkron 1962).
Gerschenkron’s reaction to this peculiar use of his work was ambivalence.
He praised Romeo and criticized his Marxist opponents, but he also reaffirmed
what he considered his more important views of the Italian experience with
economic development. He thought that railway building, much as it had been
useful to unite the country, had been very weak as a factor of development
promotion, because most of the track and rolling stock had been imported. He
thus believed that a meaningful growth strategy was that initiated in the 1890s,
after the great banking crisis, by replacing the failed French-type banks with
German banks, which had exported to Italy their banking model and directly
promoted industrial investment, as they had done in Germany. In Italy they
had not managed, however, to dispose of their industrial investments, recov-
ering their financial resources for another round of investment because of the
shallowness of the Italian stock exchange. Gerschenkron also affirmed that the
industrialization policy of the 1880s, which had directly promoted the steel
industry by giving it huge resources and heavy protection, much as it might

have promoted Italy’s status as a great power, from the economic point of view
had been mostly a waste of resources, because it had penalized the much more
promising engineering industry, which had been ineffectively protected and
was made to bear the costs of expensive homemade iron and steel products.
Gerschenkron also criticized the choice made in the 1880s to protect the textile
industry, which was hardly an innovative industrial sector.
Romeo had used a partial and lopsided version of the Gerschenkron view,
one that did not accept Gerschenkron’s criticism of the development strategy
adopted by the Sinistra governments in the 1880s. Gerschenkron told him as
much in a debate they had in Rome and in a review of Romeo’s book (Caracciolo
1969). Unlike Romeo, he had no interest in defending the pre-Fascist Italian
governing class from Marxist attacks. He based his reasoning on his own sta-
tistics of Italian industrial value added, which he rated as better than the ones
constructed by the Italian national statistical institute. Gerschenkron’s series
were then revised and improved by his Italian pupil, Stefano Fenoaltea, and in
turn used by Angus Maddison (Maddison 1991) in his construction of histori-
cal gross domestic product series, which have remained unchallenged until the
present volume (see Chapter 6 by Alberto Baffigi), if not by the Spaniard Albert
Carreras (1992).
Finally, several other foreign economic historians produced memorable
works on Italy: John Davis, who recently has been focusing on the social his-
tory of Italy; Jon Cohen (1972, 1988), who was particularly fascinated by the
Italian Fascist regime; and Peter Hertner, who wrote abundantly on German
capital in Italy.
Small Is Beautiful, Industrial

Districts, and the “Third Italy”
In the 1970s and 1980s, foreign observers were confirmed in the opinion that Italy
was a sonderweg. Not only did the divergence between North and South persist,
but there emerged even a “Third Italy,” Italy’s answer to the oil crises of 1973 and
1979, which seemed to defy and even negate world trends by promoting small-scale
industry and launching its products on world markets. This new historical turn
received outsize interest, as foreign economists echoed the research of some of
their Italian colleagues who were studying what came to be known as “industrial
districts,” singing the praises of “informal horizontal integration” among small
firms that did not merge but remained self-standing (Becattini 2000).
Foreign economists joined their enthusiastic Italian colleagues in extol-
ling the virtues of the “Central Italian” model of balanced and nondestructive
industrial growth, based on small-scale firms springing up in an environment
where agricultural sharecropping had prevailed for centuries and local social
and political institutions that favored socially cohesive choices existed. Foreign
sociologists and political scientists were eager to jump on the band wagon, some
of them like Robert Putnam even going back to medieval Italy’s experience with
the “Comuni liberi ” to explain why contemporary localized production meth-
ods based on social cohesion and cooperation had emerged in the Center and
Northeast regions (Putnam 1994). They contrasted this with what prevailed in
the South, where Edward Banfield had several decades before found inspiration
for his theory of “Mediterranean familism” (Banfield 1958).
The Third Italy model was so successfully propagandized abroad by foreign
social scientists that even politicians, such as Bill Clinton when he was governor
of Arkansas, came to inspect it directly, visiting Reggio Emilia and Modena to
see their small firms and their welfare institutions, such as the famous infant
schools of Reggio.
Conclusions
Italy has been the object of attention and study by foreign scholars since ancient
times. This chapter discusses the main phases of Italy’s development process,
beginning in the early nineteenth century, seen through the eyes of interna-
tional experts. This approach has the advantage of providing a more detached
and disenchanted view of the country’s successes and failures than what would
emerge from an assessment of solely Italian economists’ views.
The interest Italy created in foreign observers did not evaporate soon after
the country’s political unification. On the contrary, it increased and became
more multifaceted as Italy evolved, moving from a peripheral agricultural back-
ward country to a core industrialized international power. As is natural, in
some periods when economic growth was strong, views were positive, and Italy
was set out as an example for other countries; in other periods, generally of
sluggish growth and increasing inequality and social conflict, positions were
more critical and pessimistic.
However, because of some peculiarities of the Italian economic structure,
its institutions, and its development path, not all scholars were able to correctly
comprehend the growth dynamics and the future prospects of the nation. The
assessment provided in this chapter only focuses on those experts who better
understood and gauged Italy’s problems. This perspective was often attained
by spending long periods in Italy (recall, for example, Bonnefon Craponne’s
biography); by holding key political positions that involved lengthy contacts
with Italian authorities (e.g., in Gardner Ackley’s case); and by writing together
with Italian scholars (e.g., Gardner Ackley wrote elbow-to-elbow with Luigi
Spaventa).
This deeper knowledge of Italy’s workings often meant that the foreign
observers mentioned stimulated lively and long-lasting national and interna-
tional debates on the country. These discussions, furthermore, did not remain
at a theoretical or abstract level. In some cases the views supported affected
and molded Italian policy makers’ decisions (the debate which arose around the
Country Study is, in this sense, emblematic).
part ii
SOURCES OF
GROWTH AND
WELFARE
Chapter 6
NATIONAL
ACCOUNTS, 1861–2011
alberto baffigi
Introduction
A great deal of new quantitative research has been produced over the last three
decades that has considerably changed the received interpretation of Italian
economic development as described by the old national accounts reconstruc-
tions. Against this backdrop, the Bank of Italy, the Italian National Institute
of Statistics (Istat), and the University of Rome “Tor Vergata,” together with
academics from other institutions, produced new estimates of national accounts
time series, covering the 150-year period after political unification, and con-
sistent with the most up-to-date results. We obtained a new gross domestic
product (GDP) series from the supply and demand sides. For the supply side,
value-added at factor cost for eleven sectors and GDP at market prices have
been estimated; for the demand side, public and private consumption and three
categories of investment goods are provided. All the time series are at current
and constant prices. Hence, sectoral and aggregate deflators are available for the
entire 150 years (see data appendix in this volume).
This chapter presents the new dataset. Not all the methodologic details are
reported fully in the following pages. They are presented in detail in the data-
base NA150, available on the Bank of Italy’s Web site (see references), together
with all time series reconstructed and the procedures used in this research.
It is worth recalling some of the advantages of organizing the main results
in Italy’s quantitative macroeconomic history in a single framework, built on
modern national accounts concepts. First, it is a prerequisite for a thorough,
158 sources of growth and welfare
complete, and consistent interpretation of the whole of Italian economic history

since unification; international comparisons also benefit from such a recon-
struction. The quantitative sources used to reconstruct the time series are frag-
mentary by nature; their heterogeneous origins and quality could, in principle,
prevent their use as sources for a consistent interpretation of the 150 years of
Italy’s economic history. The study of a country’s economic evolution requires
the availability of consistent statistical material over a long time span; many
features of the economic system need to be cross-examined. In some ways an
effort of “translation” is required to make all the available sources and results
speak the national accounting language. Indeed, our work is an exercise in
translation and, like all translators, we were faced with numerous options and
had to make many choices.
Second, ensuring transparency and accessibility to our data and calcula-
tions is a tenet of this project. A prerequisite for such a broad and complex
exercise in connecting and homogenizing various and assorted statistical mate-
rial is a systematic inventory of all primary and secondary sources, and this is
an important by-product of our efforts. Our methodologic choices together with
primary and secondary sources are documented in this chapter. The aim is to
make all data and documentation easily accessible to scholars and students. We
regard our work as an “open source” enterprise: replicability and detailed docu-
mentation are important features of the new data. We believe the quality of the
data used in our national accounts reconstruction to be generally high accord-
ing to international standards.
We followed a two-layer approach. The first layer contains the input of our
work, and the second is national accounts reconstruction in action. The first
layer involved collecting and extending the results on different sectors obtained
with different methodologies in different moments by different authors. More
research was needed, however, before we could proceed to make national account
estimates. Some of the results forming the overall picture are part of this pro-
ject, namely the new estimates of the tertiary sector’s value-added from 1861
to 1951 by Battilani, Felice, and Zamagni (2011); the bank sector value-added
(1861–2010) estimated by De Bonis et al. (2011); industrial value-added between
1928 and 1938 by Giugliano (2011); and the new benchmark for 1871 by Baffigi
et al. (2011). In the second section, a brief survey of the first layer is sketched.
Appendix 6.1 provides short abstracts of the original “first layer” research
included in the project.
This chapter is mainly about the second layer of the research, which aimed
to reconcile and connect all the available results within national accounts con-
cepts and definitions.1 All the inputs had to square to give shape to the national
accounts time series. Methodologic details are provided only for the second
layer of the project (Appendices 6.2–6.5, which should not be read before the
second section). The third section is an overview of the new time series over
the 150 years of Italian national life. The fourth and fifth sections are case stud-
ies: they show some historiographic implications of our data, respectively, for
national accounts, 1861–2011 159
the fifty years after unification (the industrialization years) and for the interwar
years. Some reflections are set out in the concluding section.
Earlier Studies
The first complete system of national accounts conceived as a support for Italian
economic history research was developed by Istat and published in 1957, early
by international standards (Istat 1957). In the following decade, Istat’s estimates
formed the base for the work by the Ancona group led by Giorgio Fuà, with
a central contribution by the statistician Ornello Vitali. Although an impor-
tant pioneering effort, these attempts unfortunately failed to fully meet some of
the basic requirement for scientific work, such as transparency and replicabil-
ity: a common feature of such early studies was their scanty documentation.
Despite these reservations, however, the data were widely used by Italian and
foreign scholars. A new edition of Fuà’s book, containing only minor changes,
was published at the end of the 1970s.2 In the meantime, a new empirical
research strategy had been pursued for some years by Stefano Fenoaltea, who
used a large array of new historical sources with acumen and originality. This
work led to new estimates of disaggregate industrial value-added at constant
prices for 1861–1913 (Fenoaltea 2006, 2011b). Carreras (1983) produced a new
index of Italian industrial production from 1861 to 1980. Meanwhile, Federico’s
research had produced more solid knowledge of agriculture during the first five
decades after unification (see Federico 2003c and references therein). In 1990,
Roberto Golinelli and Milena Monterastelli reconstructed national accounts
from 1951 to 1990 to obtain data consistent with the most recent international
accounting system (European System of Accounts [ESA], 1979). In 1991, Angus
Maddison reconstructed the GDP series at constant prices from 1861 to 1989,
using Fenoaltea’s data (Maddison 1991a). In 1992, a team coordinated by Guido
Rey and sponsored by the Bank of Italy on the occasion of its centenary pro-
vided detailed national accounts for 1911: the year of the first Italian census
of industry and commerce was taken as a benchmark. The project involved a
later estimation of other benchmark years to be used as a constraint in a gen-
eral reconstruction of annual national accounts time series from 1890: a 25 x 25
input-output matrix was estimated; supply and uses accounts at the same dis-
aggregation level were calculated. This rather ambitious task was still far from
accomplished when Rossi, Sorgato, and Toniolo (1993), searching for a mea-
sure of aggregate productivity, provided complete national accounts time series
stretching from 1890 to 1990.
Fenoaltea was still working on his project, building industrial production
series for yet unavailable sectors. Moreover, between 2000 and 2002, three new
benchmarks were produced by the Rey–Bank of Italy group for 1891, 1938, and
150 anni - NA time series

Banca d’Italia – Istat – Tor Vergata – Bologna
Istat (1970–2010)
Battilani-Felice-Zamagni (1861–1950)
De Bonis, Farabullini, Rocchelli, Salvio (1861–2010)
Istat (1951–1970)
Federico (1861–1913)
Carreras-Felice (1911–1938)
Fenoaltea (1861–1913)
Giugliano (1928–1938)
Ercolani-Fuà (1861–1951)
Baffigi-
Rey – Banca d’Italia Benchmarks
Battilani- Picozzi-Rey
Felice-Triglia-
Zamagni
1861 1871 1891 1911 1938 1951 1970 2010

Figure 6.1 Information used in the reconstruction project.
1951. A couple of years later Fenoaltea achieved a first reconstruction of GDP at

constant 1911 prices for the period 1861–1913.
The state of the art for Italian historical data at the time we began working
on our project is summarized by the solid items in Figure 6.1. The initial year
in the new project was shifted back to the very origin of the Italian state, 1861.
A Sketch of Our Methodology
Supply-Side Estimates
To obtain reliable historical data reconstructions, two information sets are
required: information about variables’ levels is needed; then, information about
dynamics is required to capture the cyclical movement of the economic variable
to be estimated. The first information set allows the construction of national
accounts for particular years, considered as benchmarks, years for which sources
are deemed more reliable than for other years, or simply years for which sources
have been more deeply studied in the literature. The benchmark years are con-
nected exploiting the second information set, which provides information about
dynamics (i.e., about movements that occurred over the period between two
benchmark years). Benchmarks are like pillars of a bridge that bear a suspended
path, the path travelled by the variable to be estimated.
Indeed, our reconstruction strategy starts from benchmark years, which are
treated as cornerstones. We had four of them (1891, 1911, 1938, and 1951), con-
ceived as the pillars of a bridge spanning from the industrialization years, at the
end of the nineteenth century, to the much better known scene of post–World
War II. After 1951, the path was a much smoother and easier one to the most
recent national accounts. Because we wanted to extend our reconstruction to
the earliest economic history of Italy, we built a new benchmark for 1871, even
though users of our data should keep in mind that quality of statistical infor-
mation is not high for the very first years after unification. We also wanted to
get closer to the most recent years in our history so we included the new 1970
benchmark, built by Luisa Picozzi in Rey et al. (2012).3
Since 1970, official national accounts were provided by the Italian statistical
office (Istat)4. The data conform with the ESA 1995 standard, which is based
on concepts, classifications, and definitions that are quite different from the
pre-ESA ones, on which the benchmarks are based. As a result, to obtain the
150-year-long series we had to adopt a two-step approach.
First, we looked for appropriate sources to interpolate the benchmarks to
produce time series consistent with the pre-ESA standard, over the 1861–1970
period. This is the bearing structure of our project. The statistical material,
the first layer of our project, is shown in Figure 6.1. For each sector we con-
sider in our reconstruction, it provides us with information about value-added
at current prices and/or value-added at constant prices and/or implicit deflators.
These three aggregates are linked and, given two of them, the third is uniquely
determined: in each case we let the least reliable be determined by the other
two. For example, for the period 1861–1911 the level of Fenoaltea’s industry data
at 1911 prices was taken as a given, whereas Ercolani’s (1978) implicit deflators
were used to get information only about price changes and not about levels: in
fact, we use them as proxies to get deflators that are consistent with the bench-
marks and with Fenoaltea’s data. Thus, we can find ourselves in one of the four
typical cases described in Table 6.1, where we explain our interpolating strat-
egy as depending, for each sector and each between-benchmarks period, on the
answer to two questions about time series’ levels reliability and, when at cur-
rent prices, about their being or not being equal to benchmark years’ estimates.
Some specific information about our sources and methodology can be found in
Appendix 6.2, whereas the simple method used for interpolating by means of
proxy time series is described in Appendix 6.3.
Second, after the pre-ESA 1861–1970 reconstruction was implemented, we
had to connect those series with the official Istat 1970–2010 national accounts
series. We decided to take the levels of 1951 benchmark and of 1970 official
data (not equal to the 1970 pre-ESA benchmark) as given: pre-ESA estimate
dynamics were used to interpolate the two. Before starting our work, we had
to solve a classification consistency problem: our eleven pre-ESA sectors were
not consistent with the ESA 1995 classification on which the official Istat time
series (1970–2010) are based. The definitions are very different and it is not
a trivial task to homogenize such classifications. We therefore had to refer to
more highly aggregated series that provide a common ground between the two
national accounts standards. We had to cope with a trade-off between the degree
of sectoral detail and the length of the series: to obtain a 150-year-long series we
Table 6.1 Proxies and benchmarks: our interpolating strategy

Is the current prices time series reliable “in level” and
consistent with the benchmarks?
Yes No
Yes Case 1 Case 2
(1) Use current prices and (1) Calculate implicit deflators
constant time series for benchmark years as the
(2) Calculate the deflator time ratio between current prices
series as the ratio between values and constant prices
current prices and constant (2) Interpolate the
prices value-added time series “benchmark” deflators using
available deflators as a proxy
Is the constant prices (3) Use the deflator in (2) to
time series reliable “in obtain a current prices time
level”? series
No Case 3 Case 4
(1) Use the current prices time (1) Interpolate the benchmark
series values using the current prices
(2) Use a reliable deflator to time series as a proxy
obtain constant prices (2) Use a reliable deflator to
obtain constant prices time
series
Note: The table refers to a hypothetical sector and to a given period, limited by two benchmark current
prices estimates.
had to lose some information concerning the 1861–1970 period.5 Our solution is
summarized in Table 6.2, where column 1 lists the twenty-five pre-ESA sectors
used in the benchmarks, the second column reports the aggregated sectors used
to connect the benchmarks, and the third column displays the four aggregated
sectors used for the “long” series 1861–20106: (1) agriculture; (2) industry includ-
ing energy (i.e., total industry minus constructions); (3) construction; and (4)
services. The main elements of our supply-side reconstruction are reported in
Appendix 6.2.
Demand-Side Estimates
We considered the results obtained for the supply side as constraints for the
demand-side estimates. In working on the demand side we could not rely on
solid recent work as we had for the supply side. We decided to be guided by the
strongest. Given the GDP level at current market prices, we obtained an estimate
of total internal uses as total sources (GDP plus imports of goods and services)
Table 6.2 Sector classifications

Benchmarks Between benchmarks 1861–2010 Series
(pre-ESA
classifications): 1861–1970
Agriculture Agriculture Agriculture
Mining Mining
Foodstuffs
Tobacco
Textiles
Clothing
Leather
Wood
Metal-making
Manufacturing Industry including energy
Engineering
Minerals
Chemical
Coal and petroleum products
Rubber
Printing
Other manufacturing
Utilities Utilities
Construction Construction Construction
Commerce, hotels, and Commerce, hotels, and
restaurants restaurants
Transportation and Transportation and
communications communications
Banks and insurance Banks and insurance Services
Miscellaneous services Miscellaneous services

Public administration Public administration
Location of buildings Location of buildings
minus external uses (exports of goods and services)7. The various elements of
internal uses, estimated independently, are then imposed to meet this constraint
by consistently rescaling their sum. In the end, our demand side is made up of
consumption (public and private) and some categories of investment goods (see
Table 6.3 Investment classifications

1861–1970 aggregated estimates 1861–1970 disaggregated 1861–2010
estimates
Construction Housing Housing
Public works
Nonresidential construction Nonhousing
Plant machinery and transport Plant machinery and Plant machinery and
equipment transport equipment transport equipment
Other investment goods Other investment goods Other investment goods
Inventory variations Inventory variations
below). For the demand-side reconstruction we also moved from the estimates
provided by the benchmarks, interpolated by using the indicators presented in
Appendix 6.4. For investments, the benchmarks provide information about the
amount of investment goods produced by each sector. Our aim, however, was to
estimate investment series classified by categories of goods. Thus, we took the
construction and mechanical engineering sectors because they evidently produce
two identifiable and meaningful categories of investment goods: “construction”
and “plant, machinery, and transport equipments,” respectively. We aggregated
all the other investment goods in a residual category (see Appendix 6.4, section
3). We ended up with three categories of investment goods: (1) construction; (2)
plant, machinery, and transport equipments; and (3) other investment goods.
As with the supply side, we started by estimating time series for the
period 1861–1970, framed in the pre-ESA national accounts standard. We
then interpolated the 1951 benchmark with the first (1970) official year using
the growth rates of pre-ESA time series as proxies. In our main estimates,
changes in inventories are not separated from fixed investments. An esti-
mate of inventories has been made for practical reasons, but we regard it as
a less robust result.8 Similarly, practical reasons have brought us to provide
a disaggregation of investment in construction, which is not included in our
main estimates.
As in the case of the supply side, we had to cope with different classifications
of the series in the pre-ESA and ESA standards. In particular, although in the
pre-ESA frame (1861–1970) investment in construction is divided into housing,
public works, and nonresidential construction, in the ESA frame only housing
and nonhousing are reported (nonhousing being the sum of public works plus
nonresidential construction). However, in the official (1970–2010) tables, invest-
ments are presented net of inventory variations; the total value of the latter is
separately reported. Thus, to link our 1861–1970 estimates with the official 1970–
2010 investment data, we had to use our fixed investments estimates, providing a
separate series for inventories variation. Table 6.3, column 1, displays the invest-
ment classification used in our main estimates; columns 2 and 3 contain the
more disaggregated items for 1861–1970 and 1861–2010 estimates, respectively.
Our main supply and uses estimates (1861–2010) are reported in Table A1
(current prices) and Table A2 (constant 2010 prices) in the data appendix in this
volume. In line with our “open source” philosophy, other tables are included in
the NA150 Excel file published on the World Wide Web, including information
about calculations and intermediate procedures (see references).
Deflator Estimates
Deflators were obtained for GDP and for supply- and demand-side items. In
our estimates, reference years vary across subperiods and, in particular, 1861–
1911 is based on 1911 prices, 1911–1951 on 1938 prices, 1951–1970 on 1963 prices,
and 1970–2010 on 2010 prices. This means that, for each item (i.e., sectoral
value-added on the supply side; and consumption and investment items on the
demand side) deflator time series are segmented by subperiod. This feature
must be kept in mind when using our series at constant prices. In particular,
when a base year for all 150 years is calculated, the resulting series at constant
prices suffers from potentially serious nonadditivity problems (on this issue see
Appendix 6.5).
The New Series: An Overview

(1861–2010)
A broad picture of the main features of the new data is provided by the GDP
time series. Figure 6.2 shows the log of GDP at constant prices, normalized to
zero in 1861. It can be interpreted as an approximation of rates of change with
respect to 1861. Given the deep trough of World War II and subsequent acceler-
ation, the earlier events described by the series are of a smaller magnitude. In
particular, it took almost eighty years to double the initial per capita GDP: the
highest GDP level since unification was reached in 1939, one year before Italy
entered the war. It doubled again in the early 1960s.
The evolution of Italy’s economic structure is described by the sectoral
shares, a calculation that is now possible thanks to one of the new features
introduced by our reconstruction (i.e., the estimates of sectoral value-added at
current prices).9 In Figures 6.3–6.5, the structure of the economy is shown for
three periods: (1) 1861–1911, (2) 1911–1951, and (3) 1951–1970.
350
300
250
200
150
100
50
0
18 1
18 1
19 6
19 6
19 6
19 1
19 1
19 6
19 6
20 1
18 1
66
76
86
18 1
01
11
21
19 6
19 6
19 6
19 1
19 6
19 1
71
81
19 6
91
20 6
06
7
0
6
4
5
5
6
9
18
18
18
18
19
19
19
19
19
19
Figure 6.2 Constant prices GDP per capita (semilog scale; 1861 = 0).
In the first period, the structural change in the Italian economy, as broadly
described by the shares of value-added of the three large sectors, shows a stable
share for industry, a slowly declining share for agriculture, and a growth in the
weight of the tertiary sector. This evolution hides an interestingly mixed con-
tribution of changing quantities and relative prices. Again, our reconstruction
of sectoral deflators (one of the new, characteristic elements of the new national
accounts database) allows us to identify quantity and price contributions to
changes in shares. This issue is dealt with in the following section, referring to
the period 1861–1911.
Turning to the demand side, Figure 6.6 shows the downward trend of the
share of total resources channelled to private consumption, with a fall during
0.5
0.45
Agriculture
0.4
0.35
Services
0.3
0.25
Industry
0.2
61
69
71
73
75
77
79
81
83
85
87
89
99
01
03
05
07
09
11
93
95
97
63
65
67
91
18
19
18
18
18
18
18
18
18
18
18
18
19
19
19
19
19
18
18
18
18
18
18
18
18
18
Figure 6.3 Sectoral values added (percentage shares, 1861–1911).

0.55
0.5
0.45
Services
0.4
0.35
Agriculture
0.3
0.25
0.2
Industry
0.15
0.1
11
13
15
17
19
21
23
25
27
29
31
33
35
37
39
41
43
45
47
49
51
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
World War I and after 1929. Figure 6.7 shows the accumulation rate (investment/
GDP ratio), which fluctuates around 5–6 percent during the first decade after
unification, a value typical of a backward economy. It increases from the early
1870s until 1873 (the so-called triennio febbrile, the feverish triennium); after
ups and downs around 10 percent, it drops back to 7–8 percent after 1887; and
investment activity begins to accelerate sharply at the end of the century until
the crisis of 1907 when Italy’s accumulation rate reached a peak that was only
attained again during the second postwar “economic miracle.” An all-time peak
in the accumulation rate was reached in 1963.
0.5
Services
0.4
Industry
0.3
0.2
Agriculture
0.1
0
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19

92.0%
87.0%
82.0%
77.0%
72.0%
67.0%
62.0%
57.0%
18 1
18 6
71
18 6
18 1
86
18 1
96
19 1
06
19 1
16
19 1
19 6
19 1
19 6
19 1
19 6
19 1
56
19 1
66
19 1
19 6
19 1
19 6
91
20 6
01
06
6
6
7
8
2
2
3
3
4
4
5
7
7
8
8
9
18
18
18
19
19
19
19
19
19
20
Figure 6.6 Private consumption/GDP ratio.
Industrializing Italy (1861–1913)

Before Fenoaltea’s reconstruction of industrial data for the period 1861–1913, the
prevailing interpretations depicted Italian industrialization as a sudden and
revolutionary structural break occurring at the end of the nineteenth century,
the effects of which spanned the Giolitti period (1898–1913) with an interrup-
tion only during World War I. Fenoaltea’s time series are the backbone of our
reconstruction, which thus largely shares the time profile of his time series.
34.0%
29.0%
24.0%
19.0%
14.0%
9.0%
4.0%
18 1
18 6
18 1
76
18 8
86
18 1
19 6
19 1
19 6
19 1
19 6
21
19 6
31
19 6
19 1
19 6
19 1
19 6
19 1
19 6
19 1
19 6
19 1
19 6
91
20 6
01
06
6
6
7
9
9
0
0
1
1
3
4
4
5
5
6
6
7
7
8
8
9
18
18
18
19
19
19
20
Figure 6.7 Accumulation rate (investments/GDP, 1861–1970).

280.000
260.000
240.000
220.000
200.000
180.000
160.000
140.000
120.000
100.000
61
63
65
67
69
71
73
75
77
79
81
83
85
87
89
91
93
95
97
99
01
03
05
07
09
11
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
19
19
19
19
19
19
base 1871 base 1881 base 1891 base 1901 base 1911
Figure 6.8 GDP levels (1861 = 100). The underlying series are calculated at the following
base years: 1871, 1881, 1891, 1901, and 1911.
This new pattern of growth introduces a completely new view in the commonly
accepted historiographic perspective of Italy’s industrialization. There seem to
be no Rostowian or Gerschenkronian take-offs or big spurts. Natura non facit
saltus, so Fenoaltea argued.
Is this a conclusive result? I will not try to give an answer here, but rather
point out that deflators for sectoral values added, which is one of the main
novelties of our reconstruction, may widen the debate, which has so far been
confined to 1911-prices time series.10 If we assume that innovations pushed the
prices of some industrial sectors down and that, for a given demand curve,
growth in the output of those products is observed, then we can expect that
aggregating sectoral values added with 1911 relative prices may underestimate the
total growth in value-added. This is nothing new; it is known that Alexander
Gerschenkron taught economic historians about this index number problem as
early as the 1950s.11 In fact, the 1911 reference year, which is more or less located
at the end of an important wave of industrialization, may bias downward the
Giolittian acceleration in the growth rate.
This intuition seems to be corroborated by using our new deflators. Deflators
are weights we use to aggregate quantities, so I used different base years defla-
tors to aggregate our eleven sectoral values added. The results of the exercise
are summarized in Figure 6.8, where GDP estimates from 1861 to 1911 are pro-
vided at 1871, 1881, 1891, 1901, and 1911 prices. The lines in the graph show that
changes in base years produce observable effects only from the 1880s onward;
before that time the change in base year does not seem to matter. If we take this
index number bias as a measure of economic development (Ames and Carlson
0.36 1.05
0.34 1
0.95
0.32
prices
0.9
0.3
0.85
0.28
0.8
0.26
0.75
0.24
quantity 0.7
0.22 0.65
0.2 0.6
18 1
18 3
18 5
18 7
18 9
18 1
18 3
18 5
18 7
18 9
18 1
18 3
18 5
18 7
89
18 1
18 3
18 5
18 7
19 9
19 1
19 3
19 5
19 7
19 9
11
6
6
6
6
6
7
7
7
7
7
8
8
8
8
9
9
9
9
9
0
0
0
0
0
18
18
Figure 6.9 Prices and quantity contributions to industry’s shares of total value-added.
d I, t QI , t
Industry’s share of value-added is equal to dTOTT, t QTOTT, t , where d = deflator,
Q = value-added in volume, I = industry, and TOT = whole economy. The lines in the
d Q
graph represent, respectively, the factors d I, t and Q I, t .
TOT, t TOT, t
1968), the preliminary analysis seems to indicate that some acceleration in the
path toward industrialization already took place during the 1880s, whereas a
second more robust wave occurred during the Giolitti period. On this point, a
future line of research should aim to reconstruct deflators at a higher level of
disaggregation, with special focus on the manufacturing sectors, of which we
could estimate only an aggregate deflator.
Deflators also can be profitably used to gain insight from the analysis of
structural changes. In Figure 6.3 we noted the stable share of industry over
the fifty postunification years. Using sectoral deflators we can decompose
the shares at current prices, considering relative prices and quantity effects.
Figure 6.9 shows that quantity tended to push up industry’s share throughout
almost the entire period, whereas relative price movements offset the expan-
sion in real production. Interestingly, the quantity effect is greatest in the 1880s
and in the Giolitti period, which provides hints for a periodization of Italy’s
industrialization.
Some other interesting new features of our data emerge if we look at the
demand side. In the old Ercolani series, private consumption per capita fell
sharply during the third war of independence (1866) and then stagnated at
those low levels until the end of the century when a recovery led it back close
to its initial level. By contrast, our new series, after a similar fall in 1866, shows
a strong recovery from 1873 to 1887, when consumption per capita reached a
level similar to the 1865 peak. It fluctuated around a slightly lower level until
0.52
0.5
0.48
0.46
0.44
NEW
0.42
0.4
Rossi-Sorgato-Toniolo (1993)
0.38
Ercolani-Fuà (1978)
0.36
0.34
61
63
65
67
69
71
77
79
81
83
85
87
89
91
93
95
97
99
01
03
05
07
09
11
73
75
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
19
19
19
19
19
19
18
Figure 6.10 Private consumption per capita (millions of 1911 lire).
1900, when a new strong recovery started, lasting until 1909, which was a new
historical high (Figure 6.10).
New features also characterize our investment series. In Figure 6.11 the new
series of investments in plant and equipment at constant 1911 prices is compared
with earlier estimates: it is interesting to note the faster pace of our series in
important historical periods, such the beginning of the 1870s, the 1880s, and
above all the Giolitti period until the 1907 crisis.
4000
3500
3000
New
2500
2000
1500
1000
500
Ercolani-Fuà (1978) Rossi-Sorgato-Toniolo (1993)
0
61
63
65
67
69
71
73
75
77
79
81
83
85
87
89
91
93
95
97
99
01
03
05
07
09
11
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
19
19
19
19
19
19
Figure 6.11 Investments in plants, machinery and transport equipment (millions

of 1911 lire).
Two Wars and a Great

Depression (1911–1951)
Numerous studies populate the difficult interwar period in Italy, many of which
tend to stress the inadequacy of available quantitative macroeconomic evidence.
New national accounts reconstructions were eagerly awaited by many schol-
ars and we have tried to fulfil their expectations. Unlike our estimates for the
period 1861–1911, for which we could use the data of Fenoaltea and Federico, the
new time series for the four decades 1911–1951 are based on the use of hitherto
little-exploited statistics.
The two ovals in Figure 6.12 highlight the main changes introduced by
our work. The one on the left refers to Italy’s economic performance during
World War I. Broadberry (2005) noted that available national accounts series
“all show an extremely large increase in Italian GDP during World War I,
which is hard to square with both the experience of other countries during
World War I and the generally pessimistic tone of the literature on the Italian
war economy” (305).
The new GDP series in the period examined by Broadberry follows a much
more moderate path. The main innovation is based on the work of Patrizia
Battilani, Emanuele Felice, and Vera Zamagni as part of this project.12 In par-
ticular, their estimate for general government value-added at current prices is
much lower than, for instance, that of Ercolani (1978): the new data imply a 200
percent growth between 1913 and 1918, compared with 800 percent in the ear-
lier estimates. An even greater difference emerges if we consider constant price
estimates: according to the calculations of Baffigi and Brunetti,13 the growth
in general government value-added at 1938 prices over the period 1913–1918 is a
mere 13 percent, whereas the growth rate in Ercolani’s data is 580 percent.
The oval on the right in Figure 6.12 refers to Italy’s performance during
the Great Depression. The revision with respect to earlier estimates is entirely
attributable to another member of our team, Ferdinando Giugliano, who
revised recent estimates of industrial value-added by Carreras and Felice (2010).
He makes an interesting critical use of such sources as employment data and
an industrial production index produced by the Ministero delle Corporazioni.14
Overall, if we look at GDP movements, we notice a sharp fall in activity in the
years immediately after 1929, not unlike earlier estimates. However, our data
show a very different timing for the ensuing recovery: now it takes some years
for the recovery to begin. Only in 1937, after an illusory blip in 1935, did GDP
reach the same level as in 1929.
Private consumption per capita seems to reflect this movement in economic
activity: after 1929 it declines steadily until 1936 (the only partial exceptions
being 1932 and 1935) when a recovery begins, which is suddenly broken off by
the outbreak of World War II (Figure 6.13). Investment in plant and equipment
236000.000
216000.000
Rossi, Sorgato, and Toniolo (1993)
196000.000
176000.000
156000.000
136000.000 Ercolani and Fuà (1978)
116000.000
NEW
96000.000
11
13
15
17
19
21
23
25
27
29
31
33
35
37
39
41
43
45
47
49
51
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
Figure 6.12 Market prices GDP levels (millions of 1938 lire).
followed a similar path, reaching a peak in 1929 and then falling sharply; it was
only in 1938 that a higher level was reached (Figure 6.14).
Final Considerations
A GDP series covering Italy’s entire history has been estimated, together with
sectoral value-added and, for the demand side, disaggregated consumption and
3.3
2.8
2.3
1.8
1.3
0.8
11
13
15
17
19
21
23
25
27
29
31
33
35
37
39
41
43
45
47
49
51
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
Figure 6.13 Household consumption per capita (1911–1951; millions of 1938 lire).
40000
35000
30000
25000
Rossi, Sorgato, and Toniolo (1993)

20000
Ercolani and Fuà (1978)
15000
10000
New
5000
0
11
13
15
17
19
21
23
25
27
29
31
33
35
37
39
41
43
45
47
49
51
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
Figure 6.14 Fixed investment in plant, machinery, and transport equipment
(millions of 1938 lire).
investment. All the time series are available at current prices and in volume.
This is the output of the project presented in this chapter. The importance of
this update of sources for Italy’s economic history cannot be overstated. The
period 1861–1951 has been dissected and heavily revised by our work; it was
then connected to the ensuing years (1951–1970, less heavily revised) and, finally,
to the official 1970–2010 Istat data to obtain a quantitative documentation of
united Italy’s entire macroeconomic history. As emphasized in the introduction,
we did not work in a vacuum. The obsolescence of the old historical national
accounts was caused by the results obtained by scholars working over the last
thirty years. New results have been added by ad hoc studies forming part of our
project, namely the new estimates of value-added time series, at current and
constant prices, for services (1861–1951), for industry for the period 1928–1938,
and a new benchmark for 1871 of supply and uses. Old and new results were the
input of our reconstruction work, the first layer of the project.
Elaboration, homogenization, and reconciliation of this corpus of quan-
titative research was the task of the second layer of the project. We brought
all available data into a common conceptual space provided by the national
accounts framework. We have constructed deflators, either revising old ones or
estimating new ones ex novo, and we have estimated supply- and demand-side
series covering 150 years of Italy’s history. Important elements have been added
to the economic historian’s toolbox.
After this task has been accomplished, it is natural to think about pos-
sible refinements, or about new lines of research to build on the results just
obtained. A disaggregation of the manufacturing sector could bring some
important new information, in particular about the first industrialization period
between unification and World War I. Detailed sector value-added data do exist
(see Fenoaltea 2006 and bibliography therein), but they are all at 1911 constant
prices. No deflators are available for this period. An effort to construct more
disaggregated deflators for the manufacturing sector would be extremely useful
for a better understanding of the patterns of industrialization in Italy.
Another interesting research topic is related to demand-side estimates, which
are not based on statistical material as robust as that available for value-added
estimates. Many archival sources are awaiting discovery and could be incorpo-
rated advantageously in our overall framework, similarly to the ones we have
already used to estimate investment in means of transport for 1911–1951.
Notwithstanding potential refinements and improvements, which are
encouraged by the transparency of our methodologies and assumptions, Italy
too can now boast a complete and consistent historical national accounts
framework that beckons new and more accurate interpretations of the country’s
150-year-long history.
Appendix 6.1. Original Work by the

“150 Anni” Team
Besides already existing time series our project includes some new reconstruc-
tion work:
1. Patrizia Battilani (University of Bologna), Emanuele Felice (Autonomous
University of Barcelona), and Vera Zamagni (University of Bologna) produced
a new current prices series for service sector value-added from 1861 to 1951.
New series have been produced sector by sector (i.e., for commerce, hotels and
restaurants, inland transportation, maritime transportation, air transportation,
communications, insurance, miscellaneous services, public administration, and
buildings).
2. Notwithstanding the small weight of banks’ value-added in the entire
tertiary sector, the importance of bank data for today’s economies led us to
pay particular attention to this sector. Riccardo De Bonis, Fabio Farabullini,
Miria Rocchelli, and Alessandra Salvio (all colleagues at the Bank of Italy)
undertook this task and, besides estimating the financial sector value-added,
provided long time series (1861–2010) of the main items in the banks’ balance
sheets. Finally, based on the same set of quantity data used by Battilani et al.,
Baffigi and Brunetti constructed new series of services sector value-added at
constant prices.
3. Battilani et al. paid particular attention to 1871 value-added, which is their
contribution to the construction of the new benchmark for that year developed
by Alberto Baffigi and Ivan Triglia: it is made up of a 25 x 25 input-output
matrix and 25 “uses and sources” accounts at current prices.
4. Ferdinando Giugliano (University of Oxford), improving on a recent

paper by Carreras and Felice (2010), conducted research on value-added in
Italian industry during the Great Depression. His main result shows that, con-
trary to the indications of previous data, the recession was severe in Italy, as in
other industrial countries. Earlier and new time series are presented in Figure
6.1, where the red items are new estimates, part of our project.
5. The forthcoming Picozzi-Rey 1970 benchmark (Figure 6.1) is not part of
our project but the authors kindly shared with us their data.
Appendix 6.2. The Supply Side

(1861–1970): Methods and Sources
Given the benchmark value-added at current prices, the interpolating method,
explained in Appendix 6.3, is applied for each sector to one of the three mutu-
ally interdependent time series (deflator, value-added at constant prices, and
value-added at current prices), depending on the reliability and the availability
of the existing series. In the remaining part of this appendix the various cases
are listed by period and by sector with reference to the four cases presented in
Table 6.1.
1861–1911
Agriculture (Case 4)
(a) Value-added at current prices is estimated by imposing Federico’s (2003c)
data through the benchmark levels, when actually minor differences occur.15 (b)
The price deflator is Federico’s (1911 = 100). (c) Value-added at 1911 prices is
obtained by applying (b) to (a).
Industry (Case 2)
(a) Value-added at 1911 prices is given by Stefano Fenoaltea’s (see Fenoaltea 2006,
2011b, and the articles cited therein) various sectoral estimates, which have been
made consistent with present and historical boundaries, from those of 1911. (b)
Price deflators of value-added of the different industrial sectors have been cal-
culated for the benchmark years (1871, 1891, and 1911) as the ratio of the (current
price) benchmark estimates and the corresponding constant prices estimates
provided by Stefano Fenoaltea.16 The time series of the price deflators was then
completed by interpolating the benchmark values of the deflators on the basis
of the Ercolani (1978) (henceforth EF) implicit price deflators. For the years to
1871, the set of new deflators was calculated by retropolating the benchmark
price deflators on the basis of the dynamics of the EF deflators. (c) Current
price value-added time series are obtained by applying the price deflators to
Fenoaltea’s estimates of value-added at constant prices.
Services (Case 1)
(a) Current prices value-added series for seven tertiary sectors are given by the
new work by Battilani et al. included in this project. (b) 1911 prices value-added
series have been estimated by Baffigi and Brunetti by retropolating 1911 value-
added, based on quantity data consistent with the work of Battilani et al. (c)
Price deflators have been obtained as a ratio of (a) to (b).
1911–1938
Agriculture (Case 4): Estimates of Value-Added at Current and
Constant Prices
For the years 1913–1938, the value-added of agriculture at current prices has been
estimated by interpolating the benchmark levels (the interpolation has been car-
ried out on the basis of the EF series). As for the constant price series, it has
been calculated on the basis of the EF deflator.
Industry: Estimates of Value-Added at Current and Constant Prices

First Step (Case 2): Estimates of the Current Price Value-Added for
1928–1938
The value-added of industry at current prices for the years 1928–1938 has been
estimated on the basis of Giugliano’s 1938 price estimates and Carreras-Felice’s
1938 price deflator.17
Second Step (Case 4): Estimate of the Current

Price Value-Added for 1911–1928
The value-added at current prices for the period 1911–1928 has been estimated
by interpolating the benchmark year 1911 with the 1928 values as calculated in
the previous step, using the Carreras-Felice’s industry current price value-added
time series as proxy series.
Third Step (Case 4): Estimates of Constant

Prices (1938) Value-Added for 1911–1928
The value-added of industry at constant prices for the years 1911–1928 has been
estimated on the basis of the current price value-added of industry (see second
step) and the Carreras-Felice 1938 price deflator.
Services (Case 1)
As in 1861–1911 estimates.
1938–1951
Agriculture (Case 4): Estimates of Value-Added at Current and
Constant Prices
The procedure used is the same as for the years from 1911 to 1938.
Industry (Case 4): Estimates of Value-Added at Current and Constant

Prices
The procedure used is the same as for agriculture.
Services
As in the 1861–1911 estimates (Case 1); because of lack of data, the constant price
value-added of transport and communications has been estimated based on
Ercolani’s data (Case 4).
1951–1970
All estimates for this period are interpolations between the 1951 benchmark (Rey
2000, 2002) and the new 1970 benchmark by Luisa Picozzi (2012). Interpolations
have been performed based on Istat (1973) sectoral dynamics (Case 4). Deflators
have also been taken from Istat (1973).
Appendix 6.3. The Interpolating

Algorithm
The set of benchmark values has been interpolated based on the information on
the evolution of the annual rates of change of available proxy time series.18
More precisely, let Z0, Z1, . . . , ZT denote the time series of a variable of inter-
est in years [0,T], and f1, f2, . . . , f T, the corresponding rates of change:
Zt
ft = ( − ) = πt − 1
Zt −1
^ ^
If Z 0 and Z T are assumed to be the updated estimates of the variable Z in
the first and last year of the time interval concerned (updated benchmark val-
ues), the problem arises as to how the in-between levels of Z can be recalculated
to be coherent with the new information. The problem concerns the interpola-
^ ^
tion of the benchmark values Z 0 and Z T , based on the information already
available on Z. Notably, the reconstruction of the variable of interest, no matter
how it is obtained, implies the revision of the series of its rates of change, f t.
From this point of view, a possible solution to the problem at issue is to evalu-
ate a constant correction coefficient to the growth factors πt . Given,
^
ZT ZT
α = ^ /
T
Z0 Z0
Our correction coefficient is:

^
ZT ZT 1
α = ( ^ / )T
Z0 Z0
Appendix 6.4. From Supply to Demand:

Reconstructing National Account
Demand Side. Italy, 1861–1970
The Procedure at Current Prices

Our procedure follows four steps. The first step consists of calculating aggre-
gate internal uses (i.e., consumption plus investment: Ct + It) at current prices
and at current borders as GDPt + Mt – Xt (t = 1861, . . . 1970), where GDPt is our
estimates at market prices; Mt = import ( from 1861 to 1951: see endnote 7; from
1951 to 1970: Istat 1973); X = export (ibidem).
In the second step, we estimated the following seven demand components
(details on sources and methods are given in Section 3 of this appendix)19:
Cg t = public consumption
Cpt = household consumption
Imt = investment in machinery and transport equipments
Ict = investment in construction
Iat = investment in agricultural goods
Iot = other investment (investment goods produced by other sectors)
Iit = investment in intangible goods
In the third step, the estimates obtained in Step 2 are modified so that their
sum complies with the following constraint:
(1) C + I = Cgt + Cpt + Imt + Ict + I at + I ot + I it.
Compliance with constraint (1) is imposed by multiplying the demand com-
ponents by the following coefficients:
(a) for t = 1861, . . . ,1911
−1911 m −1911 a −1911 o

Ct I t = Ctg β1861 Ctp + β1861
1911
I t + Itc + β1861 I t + β1861 It
t t t t
(2a)
−1911 i
+ β1861
t It
where
−1911
β1861
t = [(Ct I t ) − Ctg I tc ] /[Ctp I tm + Ita + Ito + Iti ] (2b)
(b) for t = 1912, . . . . ,1951
−1951 a −19511 o
Ct I t = Ctg β1912
t
1951
Ctp + I tm + I tc + β1912
t I t + β1912
t It (3a)
−1951 i
+ β11912
t It
where
−1951
β1912
t = [(Ct I t ) − Ctg I tc − I tm ] /[Ctp + Ita I to ] (3b)
(c) for t = 1952,. . . . , 1970
−1970 g −1970 m −1911

Ct I t = β1952
t Ct β1952
t
1970
Ctp + β1952
t It + β1861
t
1
Itc β11861
t
1911 a
I t (4a)
1 −1911 o
+β 1861
t t I
where
−1970
β1952
t = [Ct I t ] /[Ctg Ctp + Itm + Itc + I ta I to ] (4b)
In the fourth step, historical boundaries estimates are converted into present
boundaries data by multiplying each series by appropriate coefficients, of which
detailed information is provided in the NA150 Excel file cited in the references.
The Procedure at Constant Prices

The constant prices time series reflect those calculated in the supply-side
estimates20:
1911 prices for 1861–1911

1938 prices for 1911–1951
1963 prices for 1951–1970
2010 prices for 1970–2010
The procedure is symmetric with the one at current prices:
1. Calculate Ct + It at constant prices as GDPt + Mt – Xt, deflated with
appropriate deflators;
2. Apply a deflator to each single demand side series;
3. In this case, too, estimates must comply with a constraint formally
identical to (1) we came across in treating the problem at current
prices. In this case, coefficients, calculated as in (2b), (3b), and (4b)
were applied to each series throughout the 150-years time span.
The Current Price Estimates of

the Demand Components and their
Deflators
The six benchmark years (1871: Baffigi et al. 2011; 1891; 1911; 1938; 1951: Rey 2002;
1970: Picozzi 2012) data are our starting point. We take time series or proxy time
series for each of the six demand components and we constrain them through
the benchmark year estimates. The time series we use to implement the proce-
dure are listed in this section along with the associated deflators. For consistency
with the supply-side calculations, the base year of Ercolani’s (1978) deflators,
always 1938, has been changed to 1911 when used for the 1861–1911 period.
Public Consumption
Time Series
1861–1951: To obtain a current price time series, apply Ercolani (1978) public con-
sumption deflators (1938 = 100: Tav.XII.4.1.B, 434–435) to the 1938 constant price
public consumption series (Ercolani, 1978, Tav.XII.4.1.A, 432–433). 1951–1970:
Istat (1973), Tav.37, 96.
Deflators
1861–1951: Ercolani (1978), Tav.XII.4.1.B, 434–435 (1938 = 100; the base year for
the period 1861–1911 has been changed to 1911). 1951–1970: Istat (1973), Tav.37, 96
(1963 = 100).
Private Consumption
Time Series
1861–1951: use consumption goods import data from Federico et al. database
to interpolate benchmark data. Missing data for 1861, 1947, and 1951 have been
recovered by extrapolation and interpolation. 1951–1970: Istat (1973), 60–63.
Deflators
1861–1951: Istat (2009a).
Investment in Plant, Machinery, and Transport Equipment
Time Series
1861–1911: net import data (1862–1880) of “Machinery and transport equipment”
(Standard International Trade Code = 7), from the database of Federico et al.
(2011) concatenated with Warglien (1985) quantity index. 1911–1951: new time
series.21 1952–1970: Istat (1973).
Deflators
Ercolani (1978), Tav. XII.4.14.B, 452–453 and Istat (1973).
Investment in Construction
Time Series
1861–1913: Fenoaltea (1987), Table 5, column 1, 23–24; data are at 1911 prices. To
obtain current prices time series Ercolani’s (1978) deflator (Table 12.IV.22, 460–
461) is applied. 1914–1970: Lupi and Mantegazza (1994) growth rates from 1914 to
1970 are used to extend Fenoaltea (1987) time series at current prices.
Deflators
Ercolani (1978), Table 12.IV.22, 460–461.
Investment in Agriculture Goods
Time Series
These are animals (mainly horses) for urban services. Until 1951 the bench-
mark fixed investment was interpolated using the time series of transport
and communications as a proxy. The 1951–1970 time series was obtained by

interpolating the 1951 and 1970 benchmarks using a quantity index (inflated
with the agriculture value-added deflator) based on livestock data reported in
Rey (1991, Table. 1.05, 116).
Deflators
Agriculture value-added deflator.
Other Investments (Investment Goods Produced

by Other Sectors)
Time Series
This is a broad and heterogeneous category including all goods produced by
branches not explicitly considered: mining, tobacco, textiles, clothing, leather,
wood, metal-making, minerals, chemical, coal and petroleum products, rub-
ber, printing, other manufacturing, and utilities. The time series of this aggre-
gate has been estimated as a percentage of the plant, machinery, and transport
equipments investments. In particular, such ratios have been first calculated for
the benchmark years, then they have been linearly interpolated; the 1861–1870
was set equal to the 1871 benchmark value.
Deflators
Istat (2009a).
Investment in Intangible Goods
Time Series
We retropolated the 1970 official Istat estimate by using the growth rates of
total services value-added.
Deflators
Deflator for total services value-added.
Appendix 6.5. Nonadditivity of Series

in Volume
Close attention must be paid in using our constant prices series because of
the possible bias arising when deflators with different base years are linked.
Linking deflators with different base years normally implies nonadditivity of

the deflated series.
In our estimates, reference years vary across subperiods and, in particular,
1861–1911 is based on 1911 prices, 1911–1951 on 1938 prices, 1951–1970 on 1963 prices,
and 1970–2010 on 2010 prices (to follow the example below, please keep in mind
these subperiods and the related base years). This means that, for each item (i.e.,
sectoral value-added on the supply side and consumption and investment items
on the demand side) deflator time series are segmented by subperiods.
Within each subperiod, deflated total value-added is always equal to the
sum of deflated sectoral value-added. This is not necessarily true if we calcu-
late constant price series with the base year outside the subperiod considered in
the analysis.
Suppose that we want to construct a total value-added series at 2010 prices
over the entire period 1861–2010. We need to link all subperiod deflators to
obtain a deflator series valid over all 150 years, with 2010 as reference year.
Now, as a first step, linking the deflator series for 1970–2010 with the deflator
series for 1951–1970 requires the latter to be shifted up or down, depending on
the relative level of the deflators in the common year (i.e., 1970). Similar opera-
tions are required going backward in relation to the earlier subperiods.
Suppose that we need to calculate also sectoral value-added at 2010 prices.
Obviously, a similar backward linking procedure should be applied for each
sector. Logically, the nonadditivity problem comes out here: there is no guar-
antee that, given the modified levels of the sectoral deflators within the period
1951–1970, the total value-added at 2010 prices will be equal to the sum of its
components. A moment’s reflection reveals that additivity would be preserved
only if the ratios between the sectoral deflators in 1970 were the same at 1963
and 2010 base years, which could happen only by chance.
One important implication of the nonadditivity problem is that sectoral
comparisons in levels at constant prices are not meaningful if the deflator’s
base year is outside the subperiod considered in the analysis. Strictly speaking,
the informational content of our series at constant 2010 prices, over the entire
1861–2010 period, is limited to their variations over time.
Notes
1. Baffigi and Brunetti worked at the second layer. Massimiliano Iommi (Istat)
joined the project to contribute to the demand-side estimation.
2. The book by Fuà (1978) contains a statistical section prepared by Paolo Ercolani to
which I refer in the following pages (Ercolani 1978).
3. We thank Guido Rey, Sandro Clementi, Paolo Piselli and Luisa Picozzi for
providing us with their work before it was published, in particular with the data
concerning the new benchmark for 1970. The article is now published as Rey (2012).
4. In this chapter I could not take into account Istat’s revision of the 1990–2011
national accounts data. However, data published on the Bank of Italy’s Web site
will be regularly updated to the most recent Istat releases and to the most relevant
quantitative results in the literature (see link in the references).
5. However, all results obtained and procedures used for the 1861–1970 period
estimates are available for researchers in the already mentioned NA150 Excel file
(see link in the references).
6. This is a tedious but important technical note. The differences between the
two blocks of estimates (i.e., 1861–1970 and 1861–2010) are not limited to the
disaggregation levels. Other differences arise for two reasons. The first and most
important is related to the 1951–1970 period and is caused by the difference between
the pre-ESA and ESA 1995 values for 1970. The second reason is caused by different
treatment of the “financial intermediaries services indirectly measured” (FISIM)
in the two estimates. Consistent with the benchmarks, in the 1861–1970 estimates
FISIM are assumed to be consumed by a conventional unit, to avoid double
counting; in the 1861–2010 estimates, consistent with the ESA 1995 standard, they
are allocated to each sector in proportion of the importance of financial services
for its activity. In the 1861–1970 case, to obtain GDP we have to deduct FISIM
from the sum of sectoral values added; in the 1861–2010 case, GDP at factor costs
is exactly equal to the sum of sectoral values added. Whereas the GDP level is the
same in the two cases, sectoral values added are lower in the 1861–2010 estimates.
7. We estimated imports and exports of goods and services by interpolating the
values of the benchmarks. Interpolations were achieved by using the data of
imports and exports of goods reconstructed by Federico et al. (2011).
8. We assumed procyclicality of inventories, which were thus estimated with a
common Baxter-King detrending procedure.
9. Fenoaltea (2011a) obtained reasonable estimates of the sectoral shares over the first
five decades after unification by modifying his sectoral value-added shares at 1911
prices, taking into account the 1891 and 1911 benchmarks of Rey–Bank of Italy.
Estimates of the shares for the period 1861–1880 are obtained by assuming similar
productivity growth in the three sectors. His ingenious estimates of the sectoral
shares do not require estimates of price deflators.
10. All Fenoaltea’s reconstructions are at constant 1911 prices. In 1911 the first census
for Italy’s industry and commerce took place (see Fenoaltea 2011a).
11. Gerschenkron (1947). See also Ames and Carlson (1968), Jonas and Sardy (1970),
and Scott (1952). Nicholas Crafts dedicates some important pages to this problem
in his book about the British industrial revolution (Crafts 1985, 17 ff.).
12. De Bonis et al. (2011) contributed to the estimates of value-added of services with
a study on the financial sector.
13. Baffigi’s and Brunetti’s calculations of value-added of services at constant prices
are largely based on precious indications of Vera Zamagni.
14. These sources were not new in the literature (Mattesini and Quintieri 1997), but
they had not been exploited for a new estimate of industrial value-added.
15. The work by Federico (2003c) explicitly focuses only on long-run variations
in value-added. The implication is that movements at cyclical frequencies
are not captured by the series. Federico’s series, however, is the best available
reconstruction in line with the historiographic approach we have adopted in our
project, not to mention the critical work on the sources behind that work. Also
see Cerrito (2003) for a completely opposite view.
16. Fenoaltea’s estimates of value-added at constant prices (1911) are basically quantity
indices, weighted with 1911 value-added per physical production unit. They are not
obtained by deflating current price values.
17. Here point (2) of CASE 2 has been skipped because we could use Carreras and
Felice’s deflators with no further elaboration.
18. This Appendix is part of a more general methodologic note on interpolation
written by Alessandro Brunetti.
19. An estimate of investments in intangible goods was needed to link 1861–1970 with
the 1970–2010 time series.
20. For 1970–2010, strictly speaking, we do not have constant prices times series. The
2010 base year is obtained by elaborating on the official Istat series at previous
year prices.
21. The new series for investment has been built using the following sources. Road
vehicles: 1928–1951, administrative register of road vehicles (Pubblico Registro
Automobilistico, data available from the Web site of UNRAE, table “Il mercato
degli autoveicoli dal 1920 al 2010, elaborazioni UNRAE su dati ACI e Ministero
delle Infrastrutture e Trasporti”); 1911–1927, production of road vehicles (Rey
1991). Rolling stock: 1911–1951, production of rolling stock (Rey 1991) integrated
with data from Amministrazione delle Ferrovie dello Stato, “relazioni per l’anno
finanziario – various years.” Ships and boats: 1911–1951, launch of new boats and
ships (“Navi varate”; Rey 1991). Airplanes: 1926–1951, business air traffic of Italian
airlines companies (“Traffico aereo commerciale delle società di navigazione aerea
italiane,” Istat 1986, tav. 14.13). Machinery and equipment: 1938–1951, investimenti
fissi in Impianti attrezzature ecc. (Istat 1986, tav. 8.28). 1911–1938, imports
of investment goods (imports of goods classified in the code 7 in the SITC
classification, excluding codes 78 and 79).
Chapter 7
PRODUCTIVITY
stephen n. broadberry, claire

giordano, and francesco zollino
Introduction
At the time of its unification in 1861, Italy was one of the poorest countries in
Western Europe, after a long period of decline that lasted from the late Middle
Ages to the nineteenth century (Malanima 2007). Whereas the center of eco-
nomic gravity within Europe in 1300 had clearly been in the Mediterranean
region and particularly in the city states of northern Italy, during the centuries
after 1500, it had shifted northward, first to the Netherlands and by the nine-
teenth century to Great Britain, where the Industrial Revolution ushered in the
transition to modern economic growth (Kindleberger 1996). As the Industrial
Revolution spread to other parts of Europe and the New World, there was a
danger that Italy would fall further behind.
This Chapter examines Italy’s growth and productivity performance over the
150-year period since 1861, first in isolation, and then in an international com-
parative perspective. Italy is compared with the old and new technologic leaders,
the United Kingdom and the United States, with a similar “late-unifier,” such as
Germany, and with two Asian countries, India and Japan. The study makes use
of the new estimates of Italian value-added, provided in Chapter 6 by Baffigi,
broken down into ten sectors, so as to capture the dynamics of structural change.
New estimates of labor and capital inputs are constructed by the authors, so as
to identify the proximate sources of growth. The growth accounting exercise is
carried out within an international comparative framework.
After the country’s political unification, Italy achieved modest rates of per
capita income and productivity growth. Structural change remained limited
before World War II, and Italy made little headway in catching up to the
technologic leaders of the time. After the first twenty postunification years of
stagnant growth, caused largely by a weak productivity performance in agricul-
ture, Italy’s first growth spurt (1881–1911) was driven by manufacturing industry
and by services (mainly trade, transport and communications, and credit and
insurance).
During and between the two World Wars, Italian labor productivity growth
rates remained subdued. In particular, the Great Depression years were char-
acterized by low industrial labor productivity growth across the board. Italy’s
Golden Age began after 1945 and was propelled by manufacturing. Strong pro-
ductivity growth was also registered in all other sectors, thanks to spill-over
effects and to new technology generated in the industrial sector. A crucial fac-
tor here was the significant release of labor from agriculture, which moved into
industry and services. Only Japan registered higher growth rates than Italy dur-
ing this Golden Age.
After a long period of catching-up, Italy overtook the United Kingdom in
aggregate labor productivity terms during the 1970s, although there is some
uncertainty about the precise year of il sorpasso.1 Since 1993, however, Italy has
registered a striking productivity slowdown, compared with other countries and
Italy’s past. Industrial growth has lost its previous impetus, but perhaps of more
significance is the decline in service sector productivity growth at a time when
services have come to dominate economic activity.
In a sense, then, Italy seems to have come full circle: whereas in the first
twenty years of its unified history low growth rates in the large agricultural
sector held back aggregate growth rates, now the services sector is playing a
similar role. It is tempting, looking at the aggregate data, to draw the conclu-
sion that the slowdown was inevitable after Italy had exhausted its potential
for catching up. However, the sectoral analysis gives more cause for concern.
Structural factors seem to be at work here, with Italy failing to follow other
countries in making effective use of information technology in services, which
shows up in weak labor productivity growth in this sector and weak total factor
productivity (TFP) growth in the economy as a whole.
The Chapter proceeds as follows. The second section analyzes the time
series evidence on Italy’s sectoral labor shares and labor productivity growth
rates. An exercise in shift-share analysis helps disentangle the contributions of
sectoral labor productivity growth and structural change to overall productivity
growth. The third section illustrates the differences in the sectoral distribution
of the labor force and in labor productivity growth rates in Italy, the United
Kingdom, the United States, Germany, Japan, and India. It also focuses on
comparative levels of labor productivity calculated at purchasing power parity
(PPP), with the United Kingdom as the numeraire country. The fourth section
performs a growth accounting exercise to gauge TFP’s contribution to aggregate
growth. TFP growth rates are then compared with those registered in the other
countries of the sample. The fifth section provides a brief discussion concerning
productivity 189
Italy’s most recent performance, in labor and TFP terms, when using the latest
official data release of October 2011 (ISTAT 2011b), not included in the previ-
ous sections. The sixth section draws some conclusions. Finally, the Appendix
explains how the comparative levels of productivity were constructed and con-
siders ways of cross-checking the results.
The Contours of Italian

Economic Growth
Italy’s Labor Data

The starting point for this comparative study is an analysis of Italy’s annual
sectoral accounts on employment. We have compiled an entirely new dataset on
labor, published in full in the Data Appendix at the end of this book.2 We pro-
vide two alternative measures: the headcount of total workers and the number
of full-time equivalent workers. The territory covered by our data refers to Italy
at current boundaries. Both measures are built at a ten-sector level of disaggre-
gation3 and span the overall period 1861–2010.4
At the time of Italy’s political unification in 1861, half of the country’s total
population was engaged in working activities.5 By 2010 this participation rate
had dropped to around 41 percent (43 percent in 2007, before the recent crisis).
However, as pointed out also by Daniele and Malanima (2011b), the decline was
not monotonic. A minimum of 36.7 percent was attained in 1972 after which a
weak recovery ensued, until current rates.
The sectoral labor force shares changed even more dramatically. Figure 7.1
shows the percentage distribution of employment in agriculture, industry, and
services over the 150 years considered. For ease of exposition, in this section
we only discuss results based on our full-time equivalent measure, the theoreti-
cally preferable measure.6 At the onset of its unified history, nearly two-thirds
of the total labor force worked in agriculture, and the remaining workers were
similarly distributed between industry and services. Whereas until World War
I the exodus from agriculture was limited, the 1930s, but mostly World War II,
witnessed a significant shift of the labor force toward the nonfarm sectors. By
the early 1950s the sectoral labor force shares had converged to the most bal-
anced structure over the entire period, its “three thirds” point, as defined by the
literature. Agriculture was still in the lead, however, with about 40 percent of the
labor force devoted to it. By the end of the 1960s, the services sector was instead
clearly dominant and continued to increase in importance until current times,
in which it engages over two-thirds of workers against less than a third working
in industry and with a tiny fraction engaged in agriculture—a complete reversal
100%
90%
80%
70%
Sectoral FTE shares
60% Services
Industry
50%
Agriculture
40%
30%
20%
10%
0%
1861
1871
1881
1891
1901
1911
1921
1931
1941
1951
1961
1971
1981
1991
2001
Years
Figure 7.1 Full-time equivalent labor shares in Italy, 1861–2010 (percentage shares).
Source: see our FTE labor estimates in the Data Appendix at the end of this book.
of the picture relative to 1861. The most significant trend is the contraction in
employment devoted to agriculture, coupled by a steady increase in importance
of the services sector. Industry instead showed an inverted U-shape pattern, first
steadily rising in importance and then declining after the 1970s oil shocks.
By breaking down our data further, we find that industrial labor was nearly
all employed in manufacturing. The construction industry was the second larg-
est industrial sector, moving progressively, although not continuously, from 10
to 30 percent circa over the 150 years considered. The extractive and utilities
industry were and remain tiny, only accounting for three percentage points at
their peak. Employment within the services sector was instead more diffused.
Trade and personal services were the largest sectors from the onset, roughly
accounting for a total 60–80 percent of the aggregate services sector over the
whole period. Transport and communications were also quite stable within a
range of 10–20 percent. Labor engaged in the credit and insurance sector grew
from approximately zero to the current 4 percent. Finally, government services
peaked at 33 percent in 1971 and are currently around 22 percent.
Sectoral Labor Productivity Growth in Italy

Our labor input figures, together with value-added data, may be used to calcu-
late indices of labor productivity by major sector and for the aggregate economy.
All labor productivity figures are based on an output per employee measure,
because reliable data on hours worked are not available on a consistent basis at
a sectoral level for much of the period under consideration.7
The sectoral value-added and gross domestic product (GDP) data, covering
the period 1861–2010, on which we built, are the new estimates described in
productivity 191
Table 7.1 Italy’s output per full-time equivalent worker and GDP per head growth
rates, 1861–2010 (percentage changes; yearly average in periods)
Years Agriculture Industry Services Total GDP per
Economy Head
1861–1881 0.3 0.4 −0.1 0.2 0.6
1881–1911 1 2 1.9 1.5 1
1911–1938 0.8 0.5 0.1 0.6 0.9
1938–1951 1.9 2 −0.1 1.7 2.2
1951–1973 4.7 5.3 4.9 5.9 5.1
1973–1993 5.2 3.4 0.4 2.3 2.3
1993–2010 2.9 0.6 0.9 0.9 0.6
Source: Elaborations on VA estimates are from Chapter 6, FTE labor estimates are ours (see the Data
Appendix.)
Notes: The benchmark years chosen until 1951 coincide with selected census years, for which estimates
are more robust. VA is computed net of housing and net of government services.
Chapter 6. However, in this section, value-added of the services sector and of the
total economy has been calculated by us net of housing (for consistency reasons
with our input data) and of government services (because of the methodology
underlying the construction of value-added in this sector, which hinges on the
cost of labor and hence makes the output per worker measure rather meaning-
less). We again use our full-time equivalent labor series. Average annual growth
rates of sectoral labor productivity for selected subperiods of Italy’s history are
thus presented in Table 7.1, alongside GDP per capita growth rates.
Malanima (2007) claims that, from the Middle Ages (approximately 1300)
until Italy’s unification, labor productivity steadily declined, until its lowest
level was reached between 1810 and 1820. Our data show that after 1861 aggre-
gate labor productivity had indeed begun growing again, confirming the trend
reversal. However, in the first two decades after Italy’s unification, labor pro-
ductivity growth was very modest, in fact the lowest ever achieved over the 150
years considered, because of weak growth rates in agriculture and industry, and
of a negative productivity performance in the services sector, where employ-
ment growth outstripped that of value-added. Furthermore, in this period,
overall working population grew faster than total population, hence explaining
the higher GDP per capita growth rate. In 1881, nearly 52 percent of total popu-
lation was active; this peak was never again attained in Italy’s unified history.
Table 7.2 adopts a similar periodization to Table 7.1 to present annual
average growth rates of labor productivity within the industrial and services
sectors. The latter sectors immediately stand out as being highly diverse in
terms of their labor productivity performance, thus underlining the impor-
tance of a more finely disaggregated analysis. In the immediate postunifi-
cation years, manufacturing, utilities, and transport and communications,
Table 7.2 Italy’s industrial and services’ output per full-time equivalent worker growth rates, 1861–2010
(percentage changes; yearly average in periods)
Years Mining Manufacturing Construction Utilities Trade Transport and Credit and Personal
Communications Insurance Services
1861–1881 −1.3 0.7 −4.6 1.9 −0.1 1.2 −0.5 −0.6
1881–1911 0.8 1.9 1.8 −0.1 2.5 1 1 0.3
1911–1938 −0.2 0.6 −4.2 7.7 −0.8 1.3 1.3 0
1938–1951 4 1.5 3.2 −0.8 2.6 2 −1.7 0.2
1951–1970 9.7 6.2 0.5 4.6 4 5 3.3 4
1970–1993 0 4.4 1 −0.3 1.2 2.2 −1.6 −0.7
1993–2010 −2.1 1 −1 2 0.2 1.8 1.5 −0.1
Source: VA estimates are from Baffigi (2011) for 1861–1970 and ISTAT (2011a) for 1970–2010; FTE labor estimates are ours (see the Data Appendix.)
Notes: The periodization differs slightly to the one presented in Table 1, given the two different datasets here used for disaggregated VA.
productivity 193
recorded positive labor productivity growth rates. Yet all other sectors had
no, or negative, productivity growth, thus explaining the overall performance
of Italy’s economy.
In the following period 1881–1911, Italy achieved its first productivity spurt
with an overall labor productivity growth rate of 1.5 percent. Whereas the growth
rates in agriculture increased to 1 percent per year, industry and services were
even better achievers relative to the previous period, registering impressive rates
of 2 and 1.9 percent per year, respectively. If one breaks the period down further
(1881–1901 and 1901–1911), to account for different political regimes and to iso-
late the so-called Giolittian Era (i.e., the decade in which the Italian statesman
Giovanni Giolitti was Prime Minister; see Chapter 2), one finds that the overall
productivity growth rate was higher in the second subperiod, reflecting a faster
growth rate especially in the industrial sector (2.5 percent), but also in services
(2.2 percent). The acceleration, relative to 1861–1881, can anyhow already be seen
across the board in the first subperiod.
The three decades under study included a period of trade tariffs (1887–1894)
and trade wars with France (1887–1898), yet Federico and O’Rourke (2000b),
and James and O’Rourke in Chapter 2, found that Italian protectionism only
affected total agricultural output marginally, by less than 5 percent. With a
growing agricultural output and a declining engagement of labor in this sector,
labor productivity growth rates in agriculture rose as a result. Transports in the
services sectors, which were greatly enhanced by a boom in railway construction
until 1895, by their backward linkages stimulated the extraction and construc-
tion industries and, after 1895, the manufacturing industry for the mainte-
nance, repairs, and improvements of the railroads (Fenoaltea 2006, 196–199).
When focusing only on the Giolitti period, public utilities played an impor-
tant role, displaying annual average growth rates of 6.9 percent. These were the
years in which the electrification of the country received a significant impulse.8
The shift in energy use from steam to electricity was particularly relevant in a
country, such as Italy, in which coal was painfully lacking but in which water
was abundant. The use of “white coal” loosened up Italy’s binding energy con-
straint and favored the country’s industrialization. However, the transformation
of industrial processes as a result of the introduction of the new technology was
neither immediate nor costless, and required the construction and extension
of power transmission networks over the whole country.9 It also called for an
adequate legislative framework that regulated the new technology and its trans-
mission nationwide (Mori 1992). Productivity gains showed up with a lag only
in the early twentieth century, and set the stage for Italy’s second productivity
spurt after World War II. Finally, in the services sectors, from 1881 through 1911,
annual average labor productivity growth rates were positive across the board,
a result that has never since been repeated in Italy’s 150 year history. The three
leading sectors were trade, transport and communications, and credit and insur-
ance, sectors that traditionally accompany the production and consumption of
industrial goods, the process of industrialization and urbanization, undertaken
by Italy in those years. Although the literature has mainly focused on indus-
trialization as the main way out of economic backwardness (e.g., Williamson
2011a), the figures here presented show how the growth of the services sector
also played a part in this period, especially if compared with its relative perfor-
mance in previous years.
Between 1911 and 1938, Italy’s economy slowed down once again and reg-
istered little labor productivity growth. Agriculture suffered the least, whereas
industrial and services labor productivity growth fell, respectively, to 0.5 and 0.1
percent per year. If one breaks the period down further (1911–1929 and 1929–
1938) so as to set apart the Great Depression years from World War I and the
1920s, industry turns out to have performed well in the first subperiod, but very
poorly in the 1930s. Conversely, labor productivity growth rates in agriculture
and services were low (negative) during the war and the 1920s, but picked up
(became positive) in the 1930s.
Manufacturing and the already mentioned public utilities contributed to
the positive, albeit low, overall industrial productivity growth rate in the three
decades 1911–1938. However, zooming in on the Great Depression years, all
industrial sectors suffered in productivity terms, relative to the previous subpe-
riod (1911–1929), with only public utilities holding the fort. Within the services
sectors, transport and communications and credit and insurance confirmed
their leadership in productivity terms, even during the troubled 1930s. These
were the years in which horse-drawn carts were gradually being replaced by
trucks and lorries (Battilani, Bertagnoni, and Vignini 2008). Because of swift
and “secret” bailouts of Italy’s main mixed banks during the 1930s, the coun-
try’s financial system was saved from collapse (Toniolo 1980); this is confirmed
by no significant changes in credit and insurance productivity outcomes in
those years. Productivity growth in trade was instead negative, especially dur-
ing the Great Depression years, thus contributing to the aggregate negative
growth rate.
Conversely, the period 1938–1951 saw an increase in the overall labor pro-
ductivity growth rate, which reached a yearly rate of 1.7 percent to which agri-
culture and industry positively contributed. The war years were actually years
of negative growth in all three sectors, which makes the post-1945 growth even
more remarkable. The substantial post–World War II increase in agricultural
labor productivity growth rates confirms Federico and Malanima’s (2004) view
of productivity soaring because of mechanization, but also because of substan-
tial migrations from the countryside, reviewed in the next section. In industry,
value-added increased vis-à-vis an unchanged aggregate workforce. In the ser-
vices sector, productivity in the credit and insurance sector instead fell, mainly
caused by a downturn in banks’ value-added during the war as a result of a
high number of bank failures (De Bonis et al. 2012).
The 1951–1973 period was Italy’s Golden Age, as the data clearly show.
Labor productivity growth rates reached a hitherto unprecedented overall
average yearly rate of 5.9 percent. This period markedly summarizes a success
productivity 195
story, relative to Italy’s economic record over the entire 150-year period, but
also, as we shall see, in an international context; a success story that was
propelled by industry. Agriculture and services too registered strong yearly
growth rates in these two decades. The productivity boom provided a strong
foundation for rapid improvement in living standards: GDP per head reached
its highest ever yearly growth rate (5.1 percent). Breaking up the period fur-
ther, so as to gauge the changed macroeconomic setting—full employment,
rise in trade union strength, wage increases, inflation, balance of payments
deficit—and to evaluate the policy shift—restrictive monetary and fiscal pol-
icies—in 1963, one finds that the acceleration in all sectors was even greater
in the first subperiod (1951–1963) relative to the second subperiod (1963–1973).
When examining the disaggregated data, all subsectors’ productivity grew
at exceptional rates (e.g., manufacturing at 6.2 percent per year and trans-
ports and communications at 5 percent), with the only exception of the con-
struction industry (0.5 percent). Mining, manufacturing, and transport and
communications were the leaders. This result confirms the traditional view
of manufacturing activities being the key to post–World War II growth, and
stressing the rising importance of personal services with a collective nature,
tied to health and education among others. Finally, not only transport and
communications, but also distribution (wholesale and retail trade), strongly
benefited from organizational and technologic transformation, made possible
by significant road construction.
During the twenty years after the energy crisis and the breakdown of the
Bretton Woods system of fixed exchange rates (1973–1993), growth in agricul-
tural labor productivity continued to increase, reaching 5.2 percent growth
per year, mainly because of the shift of the labor-force away from this sector.
Productivity growth, however, slowed down in industry and collapsed in the
services sector, by then the largest sector even in headcount terms. The aggre-
gate labor productivity growth rate (2.3 percent) was thus negatively affected
by this composition effect. Manufacturing remained by far the most important
driver of industrial productivity growth until 1993. Within the services sec-
tor, credit and insurance and personal services registered negative productivity
growth rates. Transport and communications and, to a lesser extent, trade off-
set the negative performance of the former sectors.10
Finally, in the most recent period (1993–2010), whereas labor productivity
in agriculture continued to grow at a strong rate (2.9 percent), although slower
than in the previous periods, probably because of the exhaustion of the gains
from the rationalization of this sector, growth in industry and services was
far from impressive (0.6 and 0.9 percent, respectively). Industrial productivity
growth was underpinned by the fastest-growing but small public utilities sec-
tor, and by the slower-growing but large manufacturing sector. In the services
sector, we again find considerable heterogeneity in labor productivity growth
rates, which further confirms the statement by Timmer et al. (2010, 13) that:
“the treatment of the services sector as a homogenous and stagnant sector, in
contrast to dynamic manufacturing, is no longer warranted.” Productivity in

transport and communications and credit and insurance grew annually at 1.8
and 1.5 percent, respectively, compared with a 1 percent rate in manufacturing.
Lackluster growth in trade and negative growth in personal services were two
striking features of the period. The overall yearly output per worker growth
rate dropped to 0.9 percent, whereas GDP per head growth fell to 0.6 percent
per year, the same rate as that registered in the postunification years, the lowest
ever. If one truncates the period considered at 2007, to net out the effects of
the recent negative downturn, agriculture continues to be the leading sector
(3.3 percent average yearly growth). Industry and services perk up a bit (1 and 1.2
percent, respectively). In particular, in the services sector, trade triples its labor
productivity growth rate (0.6 percent), but the growth rate of personal services’
productivity actually becomes more negative (−0.2 percent). The overall economy
1993–2007 average yearly labor productivity growth rate only increases to 1.3 per-
cent, a full percentage point lower per year compared with the previous period.
A finer analysis points, however, to the turn of the millennium as leading to a
true break in productivity trends. Annual average labor productivity growth rates in
agriculture between 1993 and 2000 were in line with those registered in the previous
two decades, but then dropped to 1.3 percent in the period 2000–2007. Industrial
labor productivity growth had already slowed down in the 1990s (1.8 percent), but
then fell to −0.1 percent in the 2000s. The overall economy labor productivity and
GDP per head growth rates largely mirrored those recorded in the nonhousing pri-
vate services (approximately 2 percent in 1993–2000 and 0.2 percent in 2000–2007).
Finally, in the three years 2007–2010, labor productivity growth was positive only
in agriculture. Industry suffered the most (−1.4 percent per year); the services sec-
tor was only marginally more virtuous (−0.6 percent). Overall labor productivity
growth annually declined by 0.9 percentage points and GDP per head by 0.8.
7.0%
Average annual growth rates
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
1950–1973 1973–1995 1995–2007
Years
Value added per hour worked Value added per FTE worker
Figure 7.2 Post–World War II labor productivity growth rates: Value added per full-time
equivalent worker and per hour worked (percentage changes; yearly average in periods).
Sources: See Table 7.1 for the VA and FTE labor estimates’ sources; The Conference
Board (2011) for hours worked.
Note: Benchmark years are those reported in Chapter 3.
productivity 197
Our labor productivity estimates have been thus far computed on an

output per worker basis. However, this definition may be misleading in a
context in which yearly work-time varied significantly over the decades.11 Yet,
because of data availability we can only account for these changes for the
most recent years, and at an aggregate level. Therefore, for the post–World
War II period, we can compare our total economy labor productivity growth
rates with output per hour worked growth rates, as presented in Chapter 3
and in turn based on Conference Board (2011), to verify the presence of any
major discrepancies. As Figure 7.2 shows, the two growth rates are reassur-
ingly quite similar.
Structural Change in the Italian Economy

What has emerged from the previous section is that until the end of World War
II, Italy grew very little in terms of per capita GDP and labor productivity; an
outstanding acceleration in growth rates was instead attained thereafter, when
Italy evolved from an agricultural to an industrial and, after the 1970s, into a
services economy.
In explaining the slow growth rates before the 1950s, a sectoral analysis
once again comes to our aid. Positive correlations between increasing levels of
productivity in agriculture and the rise of an urban industrial economy are well
understood. Before 1951, in Italy, the low agricultural labor productivity we have
seen documented in Table 7.1 was coupled with high land productivity and low
land endowment per worker. Figures in O’ Brien and Prados de la Escosura
(1992, 529) point to a more or less stable land/labor ratio of 3.3 in Italy until
1950, significantly lower than that registered in other countries, such as the
United Kingdom. The same source points to output per hectare in Italy being
instead relatively high. Italy’s long-term growth was constrained by a combina-
tion of high population density and an unfavorable land/labor ratio: low labor
productivity in agriculture can thus be attributed to overcrowding and conges-
tion, and not to the scarcity of fertile land. This conclusion implies that Italy
could only grow if its primary sector were to shed labor.
We have already seen the evolution of sectoral employment shares in Italy
in Figure 7.1. In contrast to more developed countries, the higher share of agri-
cultural labor force in Italy in the late nineteenth century meant that the latter
country had larger scope for net gains linked to the reallocation of resources.
Given the lower level of value-added per employee in agriculture and the higher
level in industry and services, structural change was the key to kick-start Italy’s
development process.
In the present section, we time and quantify the structural change of Italy’s
economy over 150 years by performing an exercise in shift-share analysis. The
aggregate growth rate of labor productivity is not merely the average of sec-
toral productivity growth rates with constant weights; it is the result of changes
of the labor-productivity ratio within individual sectors, but also of systematic

shifts of employment shares between sectors. The basic approach is derived from
Nordhaus (1972), in which the aggregate productivity growth is broken down
to disentangle its two structural components, in turn modified by Broadberry
(1998).12 The resulting decomposition is the following:
∑ ∑
^ ^ ^ ^
0 / 0 i (VA
VAi / VA
V o) VA
V Ai / VA
V o (Li / Li Lo / Lo ) (1)
i {A , I ,T } i {A,II ,T }
Where:
^ ^ ^
α i = X i / Xi − (L o Li )
^
α i = X i / Xi
And:
X0 = level of aggregate labor productivity;
L0 = aggregate employment;
i = sector of origin (A = agriculture; I = industry; T = tertiary sector);
Si = share of employment in sector I;
X i = productivity level in sector I;
VAi = value- added in sector I;
Li = employment in sector I;
and hats above variables denote time derivatives.
The first term on the right-hand side of equation (1) is the “pure productivity”
(Nordhaus 2001), “direct productivity” (Stiroh 2002), or “within effect” (Antonelli
and Barbiellini Amidei 2007). It is a weighted average of the productivity growth
rates in component sectors, where the weights are period-average nominal val-
ue-added shares of each sector. As the productivity in one sector grows, aggregate
productivity rises in proportion to the sector’s size. The second term is the “reallo-
cation effect” (Stiroh 2002) or the “Denison effect” (Nordhaus 2001), after Edward
Denison, who was the first to point out how the shift from a low-productivity-level
sector to a high-productivity-level sector raises productivity even if the growth
rates in the two sectors are the same (Denison 1967). Broadberry (1998)’s correc-
tion, summarized by the variable α, implies that, in a declining sector, the actual
productivity growth rate is reduced by the difference between the growth rate of
the aggregate labor force and the growth rate of the labor force in the particular
sector, whereas in expanding sectors the actual productivity growth rate is used.13
The results of the modified shift-share calculations for Italy over key subpe-
riods are given in Figure 7.3. The corrections related to the modified shift-share
analysis are large mainly in the 1973–1993 and 1993–2010 periods, when shares in
not only agriculture but also in industry were declining. The shift from indus-
try to services characterized the process of structural change since the 1970s.
productivity 199
4.50%
Annual average growth rates
4.00%
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
19
19
19
19
19
18
18
93
11
38
51
73
61
81
–1
–2
–1
–1
–1
–1
–1
0
9
9
8
93
10
38
51
73
81
11
Years
Internal productivity growth Structural change
Figure 7.3 Shift-share analysis of Italy’s labor productivity growth rates, 1861–2010
(percentage change; yearly average in periods).
Sources: See Table 7.1.
Note: This analysis is the result of a standard shift-share exercise, modified
as in equation (1). VA here includes government services.
What we can tease out from Figure 7.3 is that in periods of low productivity
growth (i.e., the first twenty years after Italy’s political unification, the World
War I and Great Depression period) structural change accounted for the bulk
of aggregate labor productivity growth. Therefore shifts of employment away
from agriculture to higher labor productivity level sectors managed to boost
the overall productivity rate in these critical subperiods. The years of Italy’s
first spurt (1881–1911) and of its “economic miracle” (1951–1973), which actually
began in 1945, were instead characterized by large direct productivity growth in
industry and services sectors. The 1973–1993 period growth was instead char-
acterized by an equally balanced internal growth and structural change. In the
most recent period, structural change accounted for only 17 percent of over-
all productivity growth, given the exhaustion of gains obtained from a shift of
labor force out of agriculture. In the long run (1861–2010), structural change
explained approximately one-fourth of Italy’s labor productivity growth.
Italy’s Productivity Performance in

International Perspective
So far, we have focused on Italy’s growth performance during different peri-
ods since 1861. In this section, we place that performance in an international
perspective by making comparisons with a sample of other countries. Because
it is widely recognized that economic backwardness provides scope for rel-

atively fast catch-up growth, it is important to consider levels of productiv-
ity and growth rates (Gerschenkron 1962a; Abramovitz 1986; Baumol 1986).
Because levels and growth rates of productivity may vary among agriculture,
industry, and services, we need to consider performance in all three major
sectors, and the total economy-wide performance (Broadberry 1998, 2006).14
The sample of countries chosen includes the United Kingdom, the United
States, Germany, Japan, and India. The United Kingdom was the first indus-
trialized country, the per capita income leader during the nineteenth century,
and the richest European country for much of the twentieth century, and has
thus been widely used as the numeraire country in international comparisons
of productivity, particularly those involving European countries. As the pro-
ductivity leader during the twentieth century, the United States is included to
represent the technologic frontier. Germany attained its political unification in
the second half of the nineteenth century (in 1871), similarly to Italy. However,
in contrast to Italy, Germany quickly emerged as a major industrial power to
challenge Britain’s industrial dominance and remains today Europe’s largest
industrial producer and exporter. In addition, we have included two Asian
countries to provide a more global perspective. Japan was the first nonwest-
ern country to industrialize, after the Meiji Restoration in 1868, which can be
seen as a major institutional shock similar to Italian unification in 1861. India
provides an example of a much less developed country, notwithstanding its
recent impressive growth performance and its large size in the world economy
as a consequence of its massive population (Bosworth and Collins 2008).
For data, we rely mainly on the historical national accounts of the previously
mentioned countries, which we explain in detail in the Data Appendix of Broadberry,
Giordano and Zollino (2011), to which we refer. In our international comparisons
we use the gross services and total economy value-added figures, as reported in
Chapter 6, together with our headcount labor data, for reasons of international
comparability. As we shall see, the resulting labor productivity growth trends are
not significantly different from the ones presented in the previous section.
The Structure of Employment

Before we analyze productivity performance in the different parts of the Italian
economy in international comparative perspective, it is instructive to note the
changing structural balance of our six sample economies since the late nine-
teenth century. The data showing the breakdown of the labor force among agri-
culture, industry, and services are given in Table 7.3. The Italian data show the
classic pattern of development noted by Clark (1951) and Kuznets (1974), with
the economy dominated by agriculture at low levels of development, followed
by a phase of industrial-led development and leading ultimately to a domi-
nance of services. Note that agriculture still accounted for more than half of
Table 7.3 Sectoral shares of employment (headcount), 1870–2007 (percentage shares)
A. Italy Agriculture Industry Services B. United Kingdom Agriculture Industry Services

1871 68.1 15.8 16.2 1871 22.2 42.4 35.4
1911 59.1 23.5 17.4 1911 11.8 44.1 44.1
1921 59.1 22.5 18.4 1924 8.6 46.5 44.9
1931 53.8 25.4 20.8 1930 7.6 43.7 48.7
1936 52 25.6 22.5 1937 6.2 44.5 49.3
1951 44.3 31 24.8 1950 5.1 46.5 48.4
1973 17.7 38.4 43.9 1973 2.9 41.8 55.3
1993 6.6 31.3 62.2 1990 2 28.5 69.5
2007 3.9 27.9 68.2 2005 1.4 18.4 80.2
C. United States Agriculture Industry Services D. Germany Agriculture Industry Services

1870 50 24.8 25.2 1871 49.5 29.1 21.4
1910 32 31.8 36.2 1913 34.5 37.9 27.6
1920 26.2 33.2 40.6 1925 31.5 40.1 28.4
1930 20.9 30.2 48.9 1930 30.5 37.4 32.1
1940 17.9 31.6 50.5 1935 29.9 38.2 31.9
1950 11 32.9 56.1 1950 24.3 42.1 33.6
1973 3.7 28.9 67.4 1973 7.2 47.3 45.5
1990 2.5 21.8 75.7 1990 3.4 39.7 56.9
2005 1.5 16.7 81.8 2005 2.1 25.5 72.4
Table 7.3 (cont.)
E. India Agriculture Industry Services F. Japan Agriculture Mining/ Construction
Manufacturing
1875 73.4 14.5 12.1 1891 75.8 9 1.4
1910/1911 75.5 10.3 14.2 1920 55.4 16.2 2.8
1929/1930 76.1 9.1 14.8 1950 48.3 17.6 4.3
1950/1951 73.6 10.2 16.2 1973 16 27.3 9.3
1970/1971 73.8 11.1 15.1 1990 9.2 23.5 9.2
1999/2000 64.2 13.9 21.9 2007 5.1 17.4 8.4
F. Japan Facilitating Services

Industry
1891 1 12.8
1920 3.6 22
1950 5.1 24.7
1973 6.3 41.1
1990 6.2 51.9
2007 6.4 62.7
Source: For Italy, headcount labor estimates are ours (see the Data Appendix at the end of this book); for other countries see the Data Appendix in Broadberry, Giordano and
Zollino (2011).
productivity 203
all employment in 1936, whereas industry continued to increase its share until
1973. This general pattern of development can also be seen in the data for the
United Kingdom, the United States, Germany, and Japan, but only to a much
lesser extent in the later-developing India.
Despite the general pattern, there have been some substantial differences
between countries in the timing of the release of labor from agriculture. Italy’s
structural transformation away from agriculture occurred much later than in
the United Kingdom, where the share of employment in agriculture in 1871 was
just 22.2 percent. Italy took almost another century to reach this level of devel-
opment. Italy’s pattern of structural change was more similar to that of the
United States and Germany, where agriculture continued to account for around
half of all employment in 1870–1871. The similarity becomes even closer when
Italy’s development trajectory is compared with that of Japan, where agriculture
continued to account for around half of employment until after World War II.
Finally, Italy’s pattern of structural change clearly looks much more developed
than that of India, where agriculture continued to account for nearly two-thirds
of employment at the end of the second millennium.
It is also worth noting in Table 7.3 some differences in the relative importance
of industry and services as labor shifted out of agriculture. As the first indus-
trial nation, the United Kingdom accounted for a large share of world industrial
exports and production in the nineteenth century and the first half of the twen-
tieth century, and hence redeployed a large share of its labor force into indus-
try. As Germany industrialized from the late nineteenth century, it also built
up a large export business and hence transferred a large share of its labor force
from agriculture to industry. Although the United States also enjoyed industrial
export success, exports accounted for a smaller share of economic activity than
in the more open European economies. Combined with the high levels of labor
productivity achieved in US industry already by the late nineteenth century, this
meant that industry did not account for as large a share of employment as in
Germany or the United Kingdom. The sectoral breakdown is slightly different
in the case of Japan, where it is not possible to provide a clean break between
industry and services before World War II because of the inclusion of gas, elec-
tricity, and water together with transport and communications in facilitating
industry. Nevertheless, the growing success of Japanese industry in export mar-
kets is reflected in the rising share of mining and manufacturing in employment.
All these countries seem to have followed an industry-led development process
until at least World War II. After 1950, the share of industry began to decline
in the United States and the United Kingdom, with services becoming the most
dynamic sector. However, in Germany and Japan, industry continued to expand
its share of employment until 1973, and Italy also followed this pattern.
Increasingly, services have come to dominate the employment structure.
Services were already the largest sector in the United Kingdom by 1930 and in
the United States, where industrial labor productivity was exceptionally high,
as early as in 1870. In Germany, services came to employ more people than
industry only after 1973, and Italy was closer to the German than the UK case,
with services becoming larger than industry just before 1973. The cases of India
and Japan provide an interesting contrast with the European economies consid-
ered here, with both economies showing relatively large service sectors at early
stages of development.15
A number of conclusions follow immediately from this evidence on the
sectoral distribution of labor. First, because agriculture dominated economic
activity in most economies during the late nineteenth century, low productivity
growth in agriculture at this time must mean low productivity growth in the
economy as a whole. Second, although industry never came to play as dominant
a role in total employment as agriculture, its importance did clearly increase
in the first half of the twentieth century, so that achieving high productivity
growth in industry became an important determinant of overall productivity
growth performance. Third, during the second half of the twentieth century
and into the twenty-first century, high productivity growth in services has
become essential for high productivity growth overall, as services have come to
exercise the kind of dominance over economic activity exerted by agriculture
during the nineteenth century.
Labor Productivity Growth by Sector

The overall pattern of Italian labor productivity growth has already been noted.
During the pre–World War II period, growth of total value-added per employee
was generally quite modest, but with some periods slightly faster than others.
The fastest annual labor productivity growth in Italy before World War II was
recorded between 1881 and 1911. There then followed a period of very rapid pro-
ductivity growth between 1951 and 1973. Since then, the Italian labor productiv-
ity growth rate has declined, particularly since 1993. In assessing which sectors
account for these variations in Italy’s overall productivity growth in panel A
of Table 7.4, it is important to bear in mind our previous observations on the
relative size of the major sectors. Before 1881, agriculture experienced the fast-
est labor productivity growth in Italy and was also the largest sector, so there
can be little doubt that industry and services played a subsidiary role during
this period. Between 1881 and 1973, Italian industry recorded the highest rate
of labor productivity growth in three of the four subperiods. Because industry
was increasing its share of employment substantially in Italy during these years,
this is suggestive of a period of industry-led development. Since 1973, the slow-
down in Italian productivity growth can be accounted for by a sluggish labor
productivity growth rate in services, which has seen a dramatic increase in its
share of employment.
However, before we rush to conclude that Italian agriculture performed
well before 1881, or praise Italian industry between 1881 and 1973, or indeed
condemn the performance of Italian services since 1973, we need to place this
productivity 205
Table 7.4 Output per worker (headcount) growth rates, 1870–2007

(percentage changes; yearly average in periods)
A. Italy Agriculture Industry Services Total Economy
1861–1881 0.5 −0.1 0 0.4
1881–1911 0.8 1.9 1.6 1.3
1911–1938 1.3 1.1 −0.1 1.2
1938–1951 1.9 2.1 1.6 2.1
1951–1973 5.7 6.9 3.8 6.2
1973–1993 6.4 3 0.5 2.1
1993–2007 3.2 1 0.2 0.6
B. United Kingdom Agriculture Industry Services Total Economy

1861–1881 1 1.8 0.5 1.3
1881–1911 0.2 0.5 0.3 0.4
1911–1938 1.7 1.9 0.1 1
1938–1951 2.7 0.9 0.5 0.8
1951–1973 5 2 1.3 2.5
1973–1993 3 3 0.8 1.8
1993–2007 2.6 2 1.8 1.8
C. United States Agriculture Industry Services Total Economy

1869–1879 1.7 1 0.9 1.9
1879–1909 0.8 1.6 1.1 1.4
1909–1937 1.4 1.8 0.2 1.2
1937–1950 4 2.4 1.8 2.4
1950–1973 5.6 3.1 1.4 1.9
1973–1990 4.4 0.8 0.5 0.4
1990–2007 2.2 2.5 2.1 1.9
D. Germany Agriculture Industry Services Total Economy

1871–1881 0.3 1.5 0.5 0.8
1881–1911 1.3 1.7 1 1.6
1911–1937 1.0 0.9 0.6 1
1937–1950 −0.4 0.1 0 0.1
Table 7.4 (cont.)

D. Germany Agriculture Industry Services Total Economy
1950–1973 6.3 4.9 3.1 4.2
1973–1990 6 2 1.5 1.8
1990–2007 4.1 3.9 1.2 2
E. India Agriculture Industry Services Total Economy

1872/1873–1900/1901 0.4 1.1 0 0.4
1900/1901–1946/1947 0 1.4 1 0.5
1950/1951–1970/1971 0.9 3.4 2.8 1.9
1970/1971–1999/2000 0.9 2.7 2.3 2.5
F. Japan Agriculture Mining/ Construction Facilitating Services Total

Manufacturing Industry Economy
1891–1920 2.3 3.2 0.3 4.6 0.3 2.6
1920–1950 0.4 1.4 1.3 −0.2 1 1
1950–1973 4.9 8.9 4.3 7.7 3.1 6.6
1973–1990 2.3 4 1.5 2.6 1.9 2.8
1990–2007 2.5 3.4 −1.9 1.4 0.9 1.5
Sources: For Italy, see the Data Appendix at the end of this book for VA estimates (described in Chapter6)
and for our headcount labor estimates; for the other countries, see the Data Appendix in Broadberry,
Giordano and Zollino (2011).
Italian experience in international perspective. It is easier to achieve rapid

growth while the rest of the world is booming rather than while it is stagnat-
ing or contracting. The first point to note is that labor productivity growth in
Italian agriculture between 1861 and 1881 was not exceptional by international
standards. Indeed, it was substantially exceeded by the United Kingdom and
the United States. Second, labor productivity growth in Italian industry stands
out as being noticeably higher than in other countries only during two sub-
periods. Italy recorded the highest rate of labor productivity growth in indus-
try between 1881 and 1911, although German industrial labor productivity grew
almost as quickly at this time. Furthermore, although industrial labor produc-
tivity growth during the period 1951–1973 was substantially higher in Italy than
in the United Kingdom, the United States, India, and Germany, it was never-
theless surpassed by the even more impressive performance of Japanese min-
ing and manufacturing. A third point worthy of comment is that Italy’s labor
productivity growth in services since 1973 has been strikingly slower than in all
other countries, particularly since 1993. Given the growing dominance of ser-
vices in economic activity, it is difficult to avoid the conclusion that this must
productivity 207
have been a major factor in Italy’s overall slower labor productivity growth at
this time. However, before seeing this as a failure of Italian services, we need to
consider comparative labor productivity levels, because it is also widely accepted
that economic backwardness opens up opportunities for rapid catch-up growth.
The flip side of the coin is that starting from high levels of productivity makes
it harder to achieve rapid rates of productivity growth.
Comparative Labor Productivity Levels

Table 7.5 provides an overview of Italy’s comparative labor productivity level
between 1871 and 2007, broken down by sector. The United Kingdom is the
numeraire country, with the UK labor productivity level taking a value of 100
in all years and in all sectors. The Appendix to this Chapter explains how we
constructed these comparative productivity levels. An important part of the
methodology involves the use of more than one benchmark to ensure the con-
sistency between information on comparative levels and growth rates of labor
productivity.
The GDP column in panel A of Table 7.5 informs us that at the level of
the economy as a whole, Italy failed to catch-up to the United Kingdom at all
between 1871 and 1936, had embarked on a catching-up trajectory by 1951, and
had overtaken it by 1973. Since 1993, however, the United Kingdom has been
catching-up to Italy. Note that this levels analysis, even at the aggregate level,
already takes some of the sting out of the more critical commentaries on recent
Italian productivity performance. Slower productivity growth since 1993 can
be seen as a result of the end of catching-up, with Italy reaching the techno-
logic frontier. Furthermore, the breakdown by sector reinforces this conclusion,
because services, where the labor productivity growth rate has most obviously
lagged behind rates achieved in other countries, had achieved the largest pro-
ductivity lead during the 1970s.
This optimistic reading of recent Italian productivity performance needs to
be qualified in light of the US/UK comparison, which is presented in panel B of
Table 7.5. Here we see that at the aggregate level, the US labor productivity lead
over the United Kingdom remains substantial. Furthermore, the US productivity
lead in services has remained substantial, whereas the Italian productivity lead
over the UK has evaporated since 1993. One factor often used to explain the
high level of labor productivity in US services is the widespread use of informa-
tion and communications technology, which has sometimes been seen as rela-
tively slow to diffuse in Italy (Timmer et al. 2010).16 The US/UK comparison also
helps to put the achievements of Italian industry during the twentieth century
into perspective. During most of the first half of the twentieth century, the aver-
age Italian industrial worker produced less than half the output of his or her
British counterpart, who in turn produced around half the output of the aver-
age American industrial worker. This large transatlantic labor productivity gap
has widely been attributed to differences in technology, with high-throughput
Table 7.5 Comparative labor productivity levels by sector, 1870–2007 (UK = 100)
A. Italy Agriculture Industry Services Total Economy
1871 39.5 44.6 49.3 37.6
1881 40.8 33.8 46 35
1901 38.6 38.5 56.8 36
1911 42.4 47.7 64 41.3
1921 37.6 41.2 55.8 36.7
1931 36.5 39.2 61.1 39.5
1936 29.4 35.4 53.9 35.4
1951 30.1 42.2 68.5 46.5
1963 36.6 82.7 92.2 77.5
1973 34.5 117.4 119.4 101.6
1993 66.7 117.2 112.6 106.4
2007 73.1 102.2 90 89.6
B. United States Agriculture Industry Services Total Economy

1869/1871 86.9 153.6 85.9 89.8
1879/1881 98.1 149.8 87.9 95.9
1889/1891 102.1 164.1 84.2 94.1
1899/1901 106.3 174.7 104 108
1909/1911 103.2 193.2 107.4 117.7
1919/1920 128 198 118.9 133.3
1929 109.7 222.7 121.2 139.4
1937 103.3 190.6 120 132.6
1950 126 243.5 140.8 166.9
1960 153.1 250.4 137.7 167.9
1968 156.7 248.1 139.6 164.2
1973 131.2 214.8 137.4 152.3
1979 156.1 186 137.2 145.5
1985 146.9 161.1 134.1 134.8
1990 151.1 163 129.6 133
2007 196.4 166.2 125.1 127.7
productivity 209
C. Germany Agriculture Industry Services Total Economy

1871 55.7 91.7 62.8 59.5
1881 54.7 93.7 61.3 57.3
1891 53.7 99.3 64.4 60.5
1901 67.2 105 71.9 68.4
1911 67.3 127.7 73.4 75.5
1925 53.8 92.3 76.5 69
1929 56.9 97.1 82.3 74.1
1935 57.2 99.1 85.7 75.7
1937 59 96.9 89.4 79.2
1950 41.2 91.8 83.2 74.4
1960 47.8 117.9 102.6 94.5
1968 48.6 121.9 115.9 107.1
1973 50.8 121.1 120.1 114
1979 65.5 132.8 131.8 126.5
1985 62.1 114.8 131.6 120.9
1990 75.4 111 134.9 125.4
2007 92.4 105.2 117.5 114.6
D. India Agriculture Industry Services Total Economy

1871/1873 11.2 18.2 18.1 15
1881/1883 11.3 16.8 15.9 14.1
1890/1891 10.4 17.3 15.6 13.8
1900/1901 10.5 18.6 15.6 13.2
1910/1911 11.1 24.2 17.7 14.4
1920/1921 9.8 21.1 21.1 13.4
1929/1930 8.3 25.3 25.2 14.2
1935/1936 7.1 21.8 23.2 12.8
1946/1948 7 18.1 23.5 11.7
1950/1951 5.4 14.6 17.5 9.3
1960/1961 4.3 16.4 20 9.7
1970/1971 2.3 17.3 22.6 8.9
1980/1981 1.6 16.1 29.3 10.2
1990/1991 0.9 18.3 33 11
1999/2000 1 15.8 32.8 11.4
Table 7.5 (cont.)

E. Japan Agriculture Mining/ Construction Facilitating Commerce- Total
Manuf Industry Services Economy
1891 20.5 14 75 32.4 33.5 16.5
1901 24.7 16.6 64.7 50.8 36.6 19.7
1911 27.8 20.5 94 65.5 33.5 22.5
1920 29.7 30.9 74.4 95.9 31.9 29.1
1929 28 35.5 59.3 121 33.1 31.6
1935 25.2 35.9 89.8 124.2 30.5 32
1950 15.5 25.4 75.1 49.2 46.1 28.8
1960 18.9 46.6 109.4 80.7 45.2 43.6
1973 15.1 86.8 147.3 109.2 76.4 75.5
1979 13.2 98.1 156.4 107.7 83.7 83.9
1990 12.7 94.6 162.8 108.5 97.9 92.4
1997 14.2 89 92.9 79.6 95 86.2
2007 13.4 96.2 94.5 65.9 88.1 84.9
Sources: See Table 7.4.
or mass production techniques developed in the United States, but difficult to

apply in European conditions because of differences in factor endowments and
demand conditions (Hounsell 1984; Broadberry 1997a; Chandler 1990).
The comparison of Germany with the United Kingdom suggests that the scale
of the Anglo-Italian productivity gap in agriculture may be explained more by a
strong UK performance than by a weak Italian performance, because the Anglo-
German productivity gap in agriculture also remained quite large until very
recently. Furthermore, Italian productivity in agriculture has been substantially
higher than in Asia throughout the period under consideration. It is perhaps not
surprising that agricultural labor productivity has been very low in India, but the
scale of the agricultural productivity gap in Japan has also been very large.
Accounting for Italian

Economic Growth
In this section we perform a standard growth accounting exercise, with a
two-fold aim. First, further insight into labor productivity dynamics can be
productivity 211
provided by examining the evolution of Italy’s capital intensity and TFP over
the period 1861–2010. Second, the computed residual, in broad terms, reflects
the development of Italy’s ability to innovate, and its organizational and insti-
tutional changes. Together with evidence of changing contributions coming
from primary inputs to GDP growth, the analysis provides additional insights
into the restructuring process of the Italian economy in a historical perspec-
tive. This could provide a benchmark against which the dismal performance in
more recent times can be compared and better appraised in its intensity and
duration.
The Theoretical Framework

We have followed the standard theoretical reference, namely the basic neoclas-
sical growth model described in Solow (1957), to disentangle the contributions
of labor, capital, and technologic change to the development of the Italian
economy. In particular, we have assumed that output is described ^by a stan-
dard neoclassical Hicks-neutral production function. TFP growth, A/ At (where
hats denote time derivatives), is thus computed as a residual, as the difference
^
between output growth ( Y / Yt ) and the weighted average of the growth rates of
factor inputs, labor (Lt), and capital (Kt), as presented in equation (2):
^ ^ ^ ^
A / At Y / Yt − [ Lt / Lt + ( ) K / Kt ] (2)
t t
where αt = w tLt/Yt is the labor share of output, w t is the unit wage, and (1-αt)
is capital’s share of output under the assumptions of perfect competition and
constant returns to scale.
Although it is agreed that, for example, distortions from imperfect compe-
tition, externalities, omitted inputs, and nonconstant returns to scale confound
the interpretation of this residual as a pure technology measure, “it remains a
useful indicator of the underlying technological factors” (Stiroh 2001). Basu and
Fernald (2002), for instance, find a high correlation between a traditional Solow
residual and a more sophisticated index of technology that controls for market
imperfections. However, a further caveat must be stated in our exercise, because
of the very large time-span we consider: since 1861, the market structure and
the institutional setting have undergone radical changes in Italy, as everywhere
in the world, hence potentially adding noise in the residual approach to TFP
measurement.
To implement the growth accounting exercise, first we have constructed a
historical series of physical capital stock in Italy over the period since 1861. We
refer to the Data Appendix in Broadberry, Giordano, and Zollino (2011) for a
discussion of the sources and methodology used. We computed net and gross
capital stock, at current prices and at chained values, for four different assets
(machinery, infrastructure, and equipment; means of transport; nonresidential
construction; and housing), published in full in the Data Appendix at the end of
this book. Because sectoral investment data do not exist for the overall period,
we could only compute the stock of capital for the overall economy, government
services included.
Based on our estimates, we find that Italy experienced important changes
in capital composition as economic development deepened. In the early stage,
asset substitution took place mostly from construction, in particular nonresiden-
tial structures, to machinery and equipment, and to a lesser extent, to means of
transport. In the first decade of the twentieth century a housing upsurge began,
against a continuing drop of the share of nonresidential construction in total
capital and a roughly stable profile of the other assets. This pattern changed in
the late 1960s, because machinery, equipment, and means of transport resumed a
positive trend, which was offset by a declining share of housing as the downward
correction of nonresidential structures came to a halt. However, for the purpose
of the growth accounting exercise, we focus solely on productive assets, thus rul-
ing out the housing sector from the output (once again) and the input sides.
Secondly, following Jorgenson (2001) we estimated the rental price of single
productive assets to control for the possible trend in the quality of productive
services they provide over time. For this purpose, for each asset i we have first
computed the rental price uit 17 and then calculated the changes in capital input
as a Divisia index:
n
kt / kt ∑
i =1
/ si ,t
i ,t i , t
(3)
Where:
1⎛ ⎞
vi ,tt
2⎝
ui ,t −1St ∑u i ,t St − ui ,t St ∑u S⎟
⎠
i ,t t
and si is the log of the chained values of the net stock of asset type i (Si), vit is the
respective share on total returns to capital, and hats once again denote time deriv-
atives. Rather than simply summing up net stocks of different assets, the Divisia
index of capital input controls for the possible upgrading in the quality of capital
as it implicitly assigns relatively larger weights to changes in the more productive
(or short-lasting) assets than to the less productive (or long-lasting) ones.18
Thirdly, we computed the factor shares, filling the gap between 1861 and
1951, the latter being the first year for which data are available in the received
literature. For this purpose we have constructed a series of unit wages by aggre-
gating all information available for single activities over different periods (again
refer to the Data Appendix of Broadberry, Giordano, and Zollino [2011] for the
primary sources used). Based on unit wages and total employment, we retrieved
the wage and profit shares in total value-added as the two sum to one under
the standard assumptions of constant returns to scale and perfect competition.
productivity 213
Our data show that the profit share in Italy started off high in the immediate
postunification years, at a time when the capital-output and capital-labor ratios were
low. Although with some fluctuations, particularly pronounced in war times, the
profit share tended to stabilize after the late 1890s at around half its original value. A
further downward correction started in the early 1970s, which was temporarily, and
only partially, reversed during the 1990s. In the meantime, the capital intensity of
production and the ratio of capital to income have shown a clear, positive trend.
Aggregate TFP Development in Italy

Focusing on the total economy, and netting out housing rental services on the
output side and residential stock on the input side because of their negligible
contribution to growth potential, our results in Table 7.6 show that in the first
twenty years of unified Italy capital accumulation provided the greatest contri-
bution to GDP growth, partly thanks to a sizeable upgrading in the quality of
productive assets. Employment creation also contributed positively to output
growth, against the drag caused by a decline in TFP. Because the latter usu-
ally proxies disembodied technical progress and efficiency gains in the pro-
duction process, its negative development could signal the transitory distress
caused by the revision of organization and management practices in the face
of the increasing migration of workers out of agriculture and the expanding
labor force. Indeed, TFP growth gained momentum thereafter and explained
Table 7.6 The sources of growth of the Italian economy, 1861–2010 (percentage
changes; yearly average in periods)
Years Changes in Contribution Contribution of which asset Changes in

GDP of labor of capital substitution TFP
services
1861–1881 1.3 0.7 1.1 0.4 −0.5

1881–1911 1.8 0.3 0.9 0.1 0.6
1911–1938 1.7 0.6 −0.3 −0.1 1.3
1938–1951 3.1 0 1 0.2 2.1
1951–1973 6 1 1.7 0 3.3
1973–1993 2.5 0.5 0.9 0.1 1.2
1993–2010 1.1 0.2 0.6 0.1 0.3
1861–2010 2.5 0.5 0.8 0.1 1.2

Sources: See Table 7.1 for GDP and labor estimates; see the Data Appendix for our capital stock estimates.
Note: GDP and capital are both net of the housing sector, but include government services.
Capital deepening Changes in TFP
5.00
GDP per FTE worker average annual
4.00
growth rates (% changes)
3.00
2.00
1.00
0.00
18
19
19
19
19
19
18
18
81
11
38
51
73
93
61
61
–1.00
–1
–1
–1
–1
–1
–2
–2
–1
91
93
95
97
99
01
01
88
0
1
Years
Figure 7.4 The contribution of TFP and capital deepening to labor productivity
dynamics (percentage changes; yearly average in periods).
Sources: See Table 7.6. Note: GDP and capital are net of residential structures, but include
government services.
one-third of total GDP growth in the years from 1881 to 1911; at the same time,
the contributions of labor and capital levelled off, although capital accumula-
tion continued to provide the largest contribution to growth (0.9 percentage
points per year). Seen from another perspective (Figure 7.4), the greater labor
productivity growth of these three decades (1.4 percent per year) was spurred
on by capital deepening (0.8 percent) and by TFP growth (0.6 percent).
Italy’s Golden Age, heralded in the years just after the end of World War
II, mirrored a brisk recovery in capital accumulation and, even more so, in
TFP growth. This was evident already in the subperiod 1938–1951 because of the
strong recovery after 1945, but was even more pronounced in the years 1951–1973,
when capital accumulation and TFP growth provided positive contributions to
growth as large as 1.7 and 3.3 percentage points, respectively. As employment
creation also became robust (with a contribution to growth of 1 percent), the
Italian economy entered a rapid growth phase that was extraordinary in terms
of its intensity and duration: even abstracting from the flourishing housing
activities, GDP grew by 6 percent per year. Labor productivity grew by almost
5 percent per year, benefiting from higher capital deepening but even more so
from an acceleration in TFP growth.
As the catching-up of the Italian economy was rapidly progressing and
structural bottlenecks began to show up, between the first oil shock and the
crisis of the early 1990s GDP growth decelerated to 2.5 percent. More worry-
ingly, the deceleration in TFP was particularly pronounced, and its growth
rate dropped to 1.2 percent. Capital accumulation also lost momentum (falling
roughly by a half), but still explained almost one third of the total growth of the
Italian economy. Moreover, capital deepening, despite its moderation, continued
productivity 215
to contribute significantly to labor productivity growth, which decelerated to

around 2 percent per year mostly caused by the TFP dynamics.
Finally signs of structural weaknesses in the Italian economy have become
more severe since the middle of the 1990s, with particular reference to the dis-
mal performance of TFP growth, which hit a low across the several periods we
considered (0.3 percent; 0.6 if the years since the start of the contraction in 2008
are excluded). Compared with long-term developments, proxied by the average
changes over the full period since 1861, in recent years the gap in GDP growth
(1.1 percent against 2.5) is almost completely explained by the virtual stagnation
of TFP, in addition to the slightly lower contribution coming from labor and
capital inputs.19 The gap in labor productivity is less severe (0.6 percent against
1.7), because capital deepening proceeded in the latest years broadly at the same
intensity on average as in the full history of unified Italy (0.5 percent compared
with 0.6 percent).
Once again, however, if we break down the period 1993–2010 into three
subperiods, the worsening of Italy’s productivity performance stands out in the
2000s, exacerbated by the end-of-the-decade recession. Whereas TFP growth
rates were 1.3 percent in the 1990s, they later turned negative in the period
2000–2007 (−0.1 percent) and declined even further in the last three years of
the decade (−0.5 percent).
Evidence in Table 7.6 and in Figure 7.4 lead us to conclude that after Italy’s
political unification in 1861 factor accumulation predominated in the country’s
early stages of development, whereas a switch to TFP growth became the driv-
ing development factor after World War II, potentially pointing to a more sus-
tainable path. This result is similar to the one found by Collins and Bosworth
(1996) for East Asia and by Prados de la Escosura and Rosés (2009) for Spain.
In the most recent period, however, TFP growth has gone back to being the
weakest proximate cause of Italy’s growth, which is causing great concern.
Once again, however, one must turn to the international context to see if these
features of Italy’s growth process, especially since 1993, are common to other
countries and if our concern is fully justified.
TFP Growth in an International Perspective

Because of the lack of wage data throughout the period under study for all the coun-
tries in our selected sample, in this section we assume factor shares to be fixed at
0.65 for labor and 0.35 for capital. Similar assumptions have already been made in
cross-country studies (Broadberry and Gupta 2010, Carreras and Josephson 2010,
and Crafts and Toniolo 2010, just to mention some of the most recent). Although
criticism may be expected for this assumption, we are reassured by the fact that
studies such as Aiyar and Dalgaard (2005) find that a Cobb-Douglas production
function with a constant capital share of one-third is a very good approximation of
more general production functions that relax the restrictive neoclassical assump-
tions. Furthermore, comparing our two estimates for Italy (variable versus fixed
Table 7.7 GDP and TFP growth in a sample of countries (percentage changes;
yearly average in periods)
A. Italy GDP TFP B. United Kingdom GDP TFP
1861–1881 1.3 0 1871–1891 1.8 0.6
1881–1911 1.7 0.4 1891–1911 1.7 0.3
1911–1938 1.7 0.7 1911–1950 1.3 0.6
1929–1938 1.1 −0.8 1929–1937 2.3 1.1
1938–1951 3.2 2.6 1950–1973 2.7 1.2
1951–1973 5.8 3.3 1973–1990 1.1 0.3
1973–1993 2.6 1 1990–2007 2.6 0.7
1993–2007 1.7 0.3
C. United States GDP TFP D. Germany GDP TFP

1869–1889 4.3 0 1871–1891 2.4 0.7
1889–1909 4.2 0.8 1891–1911 2.1 0.8
1909–1950 3 1.3 1911–1950 −0.3 0.6
1929–1937 0.6 0.3 1929–1935 0.1 0.7
1950–1973 3.6 1.4 1950–1973 5.4 7
1973–1990 1.5 0 1973–1990 4.6 2.3
1990–2007 3.1 0.9 1990–2007 0.6 1.5
E. India GDP TFP F. Japan GDP TFP

1890/1891 to 1900/1901 0.4 −0.7 1891–1911 2.9 1.1
1900/1901 to 1946/1947 0.9 0 1911–1950 2.4 0.4
1950/1951 to 1970/1971 3.8 1.2 1929–1935 2.3 −0.3
1970/1971 to 1999/2000 4.8 1.5 1950–1973 8.7 4.2
1973–1990 3.8 0.8
1990–2007 1.4 1.1
Sources: For Italy see Table 7.4 for VA and labor and Table 7.6 for capital stock estimates; see the Data
Appendix of Broadberry, Giordano and Zollino (2011) for the other countries.
Note: For international comparability reasons, in this Table we assume factor shares to be fixed at 0.65
for labor and 0.35 for capital. GDP here includes residential structures.
shares) we do not see striking differences in the main trends. We therefore pro-
ceed in this section with constant shares and gauge the TFP growth rates for the
total economy for Italy, the United Kingdom, the United States, Germany, Japan,
and India, presented in Table 7.7, alongside GDP growth rates.20
productivity 217
The stagnation of TFP in the first twenty years after Italy’s unification
looks less worrying when compared with the similar performance of the United
States in the same years. Later developments in TFP growth were also not too
dissimilar to those registered in all the other countries of our sample, India
excluded. Interestingly, Italy and Japan were the only two countries to register
negative TFP growth in the Great Depression years.21
Although Italy, Germany, and Japan were defeated countries in World War
II, their GDP recovery was remarkedly fast, as the reported GDP growth rates
already in 1938–1951, but mainly in 1951–1973, show and as explained by Boltho
in Chapter 4. The latter period again stands out as being one of exceptional
TFP growth in Italy’s history, yet is overshadowed by Japan and Germany’s
TFP performance in the same years. By contrast, during the most recent years
Italy’s disembodied technologic and organizational advance has been very low
by international standards (with TFP growth at 0.3 percent per year), the lowest
in our sample, India once again excluded.
Whereas the United Kingdom and the United States never saw any partic-
ularly dramatic acceleration in their TFP growth rates throughout the 150 years
considered, Germany continued to display strong growth rates (of 2.3 percent)
even in the two decades after its “economic miracle,” growth rates that stabi-
lized at 1.5 percent per year in 1990–2007. The less-developed India again shows
a different development pattern with negative (or approximately zero) TFP
growth rates, which only became positive after 1950, and thereafter contributed
to one-third of overall growth until the year 2000.
Italy’s TFP performance can thus be roughly summarized as being in line
with the average of our sample until 1951, above the average during its golden
years, and strikingly below the average in recent years. Whereas the low TFP
growth in Italy’s first twenty years of unified history does not stand out in the
international comparison as particularly alarming, the most recent downturn is
an outlier relative to the other countries and turns out to be the main cause of
Italy’s modest GDP growth.
A Brief Update on Italy’s Most

Recent Period (1992–2010)
In October 2011 the Italian National Institute of Statistics (Istat) released new
national accounts data for Italy that revised the existing figures for the period
1992–2010. This new vintage of data (Istat 2011b) was not taken into account by
Baffigi in Chapter 6. Yet, given the relevance of the correction, in this section
we provide some preliminary evidence of the impact of the new data on our
productivity estimates.
0.13
0.12 Changes in labor productivity
0.11 Contribution by capital deepening
0.10 TFP
0.09
0.08
0.07
0.06
0.05
0.04
0.03
0.02
0.01
0.00
1992–2010 1992–1999 2000–2010
Figure 7.5 Italy’s total economy performance in the most recent years
(differences in percentage points between estimates based on the new and old vintage of
national accounts; yearly average in periods).
Source: See Figure 7.4 and our elaborations on ISTAT (2011b).
Note: Total economy VA and capital stock are net of residential structures. FTE labor is used.
Figure 7.5 plots the difference in percentage points between estimates built on
Istat (2011b) and the estimates described until now in this Chapter. Upward cor-
rections in the overall period 1992–2010 have increased labor productivity growth
by 0.08 percent per year, mainly because of a greater contribution of TFP growth
(+0.075 percent). The contribution of capital deepening has altered only margin-
ally. Yet, when breaking down the period into two separate decades, as done in the
right-hand side of Figure 7.5, it is clearly the years 2000–2010 that have undergone
the major revision. Labor productivity growth increases by nearly 0.13 percent per
year relative to the estimates presented in our previous sections, once again driven
by faster TFP growth (+0.12 percent). This implies that in the most recent decade
(2000–2010) Italy’s total economy TFP growth has stagnated rather than declined
(which is what the previous vintage of national accounts pointed to).
A sectoral breakdown of labor productivity growth, at this stage, is too
demanding. Yet, preliminary calculations suggest that the main improvement has
been achieved in industry, in particular in manufacturing. The annual average
growth rates of value-added (including housing and government services) per
full-time-equivalent worker are 2.8 percent for agriculture, 0.7 for industry, 0.6 for
services, and 0.8 for the total economy.22 In particular, the manufacturing produc-
tivity growth rate rises to 1.4 percent per year, and transport and communications
and credit and insurance rates increase to 2.1 percent. All other subsectors’ labor
productivity growth rates improve slightly (except for agriculture, utilities, and
personal services), because of this recent revision, but to a very minor extent.
Once again, when dividing the overall period 1993–2010 into three relevant
subperiods, sectoral labor productivity growth rates in 1993–2010 do not change
productivity 219
significantly relative to the ones presented previously. Instead, in the later seven
years, industrial labor productivity growth was found to be positive, although
sluggish (0.3 percent per year). Finally, in the recession years (2007–2010), labor
productivity declined in industry and services, but at a lower rate (−1.0 and
−0.1 percent, respectively) than what the previous data revealed, leading to a
fall in total economy labor productivity growth of “only” −0.3 percentage points
per year.
Italy’s new national accounts therefore lead to a less gloomy portrait of
Italy’s last twenty years, and last ten in particular. However, a slowdown relative
to Italy’s past, and to other countries in the same years, continues to stand out,
deserving great attention.
Conclusions: A Sectoral Analysis of

Italy’s Development (1861–2010)
This Chapter contains a growth accounting exercise, which helps to shed light
on Italy’s aggregate growth performance in terms of variations over time and
comparisons with other countries. Italian labor productivity growth was mod-
est before World War II, despite Italy’s economic backwardness in 1861, so
that although a long period of decline was decisively reversed, there was little
catching-up on the leading economies of the time. The 1881–1911 period fared
relatively better than the average (1901–1911 even more so), but the country’s
growth was soon halted, and reversed, by thirty years of war and recession.
Modest growth was largely the result of slow TFP growth before World War
I and inadequate capital formation during the interwar period. The war and
interwar years are difficult to interpret in a comparative perspective because
of problems with the data, but it is noteworthy that Italy’s TFP growth rates
turned negative during the 1930s, similarly only to Japan. Because the United
States was forging ahead of the United Kingdom at this time, Italy was fall-
ing further behind the technologic frontier. In common with other European
countries, Italy was hampered in adopting US high-throughput technology in
industry, because of the abundance of cheap labor and the fragmentation of
markets.
Rapid growth of labor productivity was achieved during the Golden Age
of the 1950s and 1960s, driven primarily by TFP growth, although there was
also a strong contribution from capital. Together with Germany and Japan, Italy
represented a success story in those years. By 1973 Italy had caught up with the
United Kingdom in the economy as a whole, and was beginning to forge ahead,
particularly in industry. At this point, growth rates slowed down, as would be
expected within a catching-up framework. However, although Germany in par-
ticular continued to grow at a sizeable rate, Italy’s success was rapidly reversed
after the 1970s oil shocks. After 1973, Italy’s labor productivity growth slowed
down, primarily as a result of slowing TFP growth, although the contribution of
capital also declined. The deterioration in TFP growth rates in the most recent
period, especially in the last decade, is even more striking, although slightly less
worrying when considering Istat’s most recent data release. Factor accumulation
has once again become the main engine of Italy’s growth, as was the case in the
early stages of Italy’s development.
A full understanding of Italy’s productivity performance, however, requires
a consideration of sectoral developments. At this stage, without sectoral data on
capital inputs, the sectoral analysis has to be conducted in terms of a partial
productivity indicator (labor productivity) rather than TFP. Before World War
II, although labor productivity growth was positive, Italy made little headway
in catching up to the United Kingdom because of low productivity growth rates
in agriculture, the largest sector of the time. Industry was no doubt the main
engine in Italy’s first bout of acceleration (1881–1911), but the services sector too
saw an interesting increase in its productivity growth rates in those years.
Italian labor productivity growth increased dramatically during the Golden
Age of 1951–1973, with industry once again in the lead, as Italy caught up with
the European productivity leaders. A major factor in the convergence process
during this period was a structural shift of labor away from a low-level labor
productivity sector, such as agriculture, to high-level labor productivity sec-
tors, such as industry and services. After 1973, Italian labor productivity growth
slowed down. To some extent this was to be expected as Italy approached the
technologic frontier. However, a sectoral analysis raises some concerns, par-
ticularly for the post-2000 period. A substantial productivity gap remains
between Italy and the United States, particularly in services, where Italy seems
to have shared in the productivity bonus from the application of information
and communications technologies to a much lesser extent than other advanced
countries.
Drilling deeper into Italy’s labor productivity dynamics, manufacturing
was a relevant driver of Italy’s industrialization, and growth process in general,
throughout the country’s 150-year history. In contrast, the nonmanufacturing
sectors presented fluctuating performances, but contributed less to overall eco-
nomic performance given their size.
Transport and communications was the only services sector that registered
positive labor productivity growth rates over the whole period, with intense
accelerations in particular after 1938. Interestingly, this is a services sector that,
after a certain degree of development, bears greater resemblance to industry
than the others in respect of the scale of production and of the capital intensity
of technology. Trade and tourism also performed well after this date (and in
1881–1911), with the exception of the most recent period. Labor productivity in
credit and insurance alternated between bursts of positive growth and bouts
of negative growth. In particular, the latter coincided with the first twenty
years after the country’s unification, when the banking and financial system
productivity 221
was highly fragmented and underdeveloped; the World War II years; and the
1970–1993 subperiod. Credit and insurance is, however, the smallest of the sec-
tors considered, hence contributing little to the aggregate services productivity
dynamics. Finally, personal services’ productivity registered high growth only
in one subperiod (1951–1970), but has been declining since 1970, contributing
heavily to the productivity slowdown of the most recent period (1993–2010),
given its large size. Trade too is also to blame for current labor productivity
dynamics in the services sector.
Finally, it is appropriate to sound a note of caution about the data. The
analysis presented here can only be as good as the available statistics, and
imperfections remain despite the best efforts of official statisticians and his-
torical researchers. Nevertheless, we think it unlikely that future revisions will
overturn the basic findings presented here, particularly the slowness of Italian
catching-up before World War II, the dramatically improved productivity per-
formance of Italy during the Golden Age of the 1950s and 1960s, and the slow-
down of Italy’s growth since the early 1990s. Even Istat’s latest revision of the
Italian national accounts (Istat 2011b) has only marginally brightened up the
country’s productivity performance over the past ten years.
Appendix
As well as growth rates in different countries, in the third section we also pre-
sented comparative levels of labor productivity. In this Appendix we explain the
methodology used to construct these levels in index number form.
To pin down the comparative labor productivity level, we used a cross-sectional
benchmark for 1997, derived from the EU KLEMS database (Timmer, Ypma, van
Ark 2007). The benchmark is estimated from data on nominal value-added (i.e.,
in national currency), deflated by relative sector-specific price ratios adjusted for
PPP, per person engaged in each country.23 This deflation procedure is necessary
because the exchange rate cannot be assumed to accurately reflect differences in
prices between different countries, especially at the level of individual goods and
services, or particular sectors. In principle, price discrepancies converge to zero
in sectors open to international trade, yet different degrees of monopoly power,
lags in response to exchange rate movements, barriers to trade, and so forth may
fuel persistent differences. Furthermore, exchange rates have been known to be
subject to substantial short-term fluctuations and international capital move-
ments, thus becoming misleading converters to a common currency, even for
tradeable goods and services.24 In the case of cross-country comparisons, value
measures must be corrected for differences in relative prices between countries.
Furthermore, sector-specific PPPs are to be used, because large cross-sector dif-
ferences in PPPs can be shown to exist (Inklaar and Timmer 2008, 16–17).25 The
PPP for services in Italy is, however, believed to be underestimated because it

leads to a very high labor productivity level for that sector in the international
context, especially in the nonmarket services’ sector, which is difficult to justify
given the existing literature on the subject.26 The EU-KLEMS PPP for services
has thus been replaced by the geometric mean of the PPP for industry and of
the PPP for agriculture. In turn, the PPP for the total economy has been com-
puted as a weighted average of the three sector-specific PPPs.
The time series of labor productivity are then projected, backward and for-
ward, from the 1997 benchmark thus built. A number of studies (Prados de la
Escosura 2000; Ward and Devereux 2003) have questioned the use of time series
projections from a single benchmark over long periods of time, the methodology
used here, which potentially raises index number problems. The issue was the
subject of debate between Broadberry (2003) and Ward and Devereux (2004).
The problem may be mitigated by using additional benchmark estimates—for
earlier and later years—to check for consistency with the comparative labor
productivity levels suggested by the time series projections. Broadberry (1993)
had already suggested the use of additional benchmarks to provide cross-checks
in a study of comparative productivity in manufacturing, whereas Broadberry
(1997a; 1997b; 1998; 2006) applied the method to full sectoral productivity com-
parisons over the period 1870–1990 for the United Kingdom with the United
States and Germany, and found broad agreement between the benchmarks and
time series evidence for those countries. Broadberry and Irwin (2006, 2007)
find similar agreement between time series projections and benchmarks for the
United Kingdom compared with the United States in the nineteenth century
and the United Kingdom compared with Australia over the period 1861–1948.
More recently, Broadberry and Gupta (2010) have applied the same methodol-
ogy to an Anglo-Indian comparison between 1870 and 2000 and Broadberry
et al. (2012) to an Anglo-Japanese comparison between 1870 and 2007. We thus
proceed in the same way here to provide some additional corroboration and
conclude that, although index number problems do exist, with careful treat-
ment of the data time series projections from a fixed benchmark can tell a con-
sistent story.
In particular, we compare our time-series projections with existing direct
benchmarks built in previous studies, presented in Table 7.8. The first bench-
mark in order of time refers to 1905 and is taken from Broadberry and Klein
(2012). The PPPs are in turn taken from a study by Williamson (1995) and are
based on the prices of a basket of consumption goods. This is not ideal because
national income includes other items of expenditure besides consumption; yet,
consumption is the most relevant item. Furthermore, the benchmark refers to
per capita income and not precisely to aggregate labor productivity. However,
the two measures are known to be strictly related. The difference between the
benchmark and our projection is relatively small, which is reassuring given the
claims of inevitable large disagreements between time series projections and
direct estimates made by Ward and Devereux (2003). O’Brien and Toniolo (1991)
produce a direct estimate for agriculture in 1910. It is based on comparative full-
productivity 223
Table 7.8 Benchmark Cross-Checks on Time-Series Projections

Years Direct benchmarks Time series projections
1905 43.7 38.5
1910 43 42.4
2007 83.8 89.6
Sources: For the direct benchmarks, Broadberry and Klein (2012) for 1905; O’Brien
and Toniolo (1991) for 1910; OECD (2011c) for 2007; our estimates for the time-series
projections.
Note: The first and third are direct estimates of GDP per head; the second is a direct
estimate of male FTE labor productivity in agriculture.
time equivalent labor input in United Kingdom/Italy. It is, however, assumed

to be similar to the headcount labor input comparative ratio in the same sec-
tor. As Table 7.8 shows, in 1910, too, the time projection differs only 1.5 percent
from the direct estimate. In conclusion, our time series projections from a 1997
benchmark substantially agree with existing direct estimates in 1905 and 1910,
which further corroborates our projection from a fixed benchmark technique.
Finally, for recent years, OECD (2011c) provides data on internationally com-
parable real GDP per capita. We can thus compare our comparative Italy-UK
labor productivity estimate for 2007, the only overlapping year, with these data.
The comparison is again presented in Table 7.8, from which it is clear that our
forward time-series projection is also relatively close to the OECD results. In
conclusion, although time-series projections from a fixed benchmark are not
devoid of problems, especially given the long time-span of our study, we are
reassured by the fact that our resulting estimates are similar to existing direct
benchmarks or to other internationally sourced estimates.
Acknowledgment
The authors thank their discussant Leandro Prados de la Escosura, and Federico
Barbiellini Amidei, Nicholas Crafts, Herman de Jong, Stefano Fenoaltea,
Matteo Gomellini, Paolo Malanima, Guido Maria Rey, and Gianni Toniolo for
their valuable comments and suggestions. They are also grateful to Giovanni
Federico, Ferdinando Giugliano, and Roberto Golinelli for sharing their data
on request. Finally, they thank all participants of the Conference “Italy and the
World Economy, 1861–2011” held at Banca d’Italia, Rome, in October 2011, and
the Workshop “Italy and its International Economic Position, 1861–2011” held at
Banca d’Italia, Perugia, in December 2010, for their useful questions and com-
ments. The views expressed herein are those of the authors and do not neces-
sarily reflect the views of the institutions represented.
Notes
1. Our figures, which make use of substantially revised Italian output data, point to
1973, but with the GDP figures available at the time, the more conventional dating
of il sorpasso is 1979.
2. Similarly to Baffigi’s estimates of Italy’s value-added presented in Chapter 6, for
the period 1970–2010 our figures are based on Istat (2011a) and hence do not take
into account the revisions published in Istat (2011b).
3. The ten sectors considered are (1) agriculture, forestry, and fishing; (2) mineral
extraction; (3) manufacturing; (4) construction; (5) utilities; (6) trade and tourism;
(7) transport and communications; (8) finance, insurance, and real estate;
(9) social and personal services; and (10) government services.
4. Complete details of data sources and the methodology behind the construction
of the series are reported in the Data Appendix of Broadberry, Giordano, and
Zollino (2011).
5. Participation rates are here computed as the headcount measure of labor divided
by resident population in Italy at present boundaries.
6. Note that the headcount labor shares are very similar to the ones here described;
general patterns and evolutions are the same.
7. For the more recent years for which data on hours worked are available, a rapid
comparison of output per worker and output per hour worked growth rates will,
however, be drawn.
8. The first electric power station was built in Milan in 1883.
9. David (1990) effectively claimed the existence of a “diffusion lag.”
10. In the literature, it is quite common to distinguish between the services subsectors
prone to domestic and international competition and those that instead are more
protected and hence presumably have fewer incentives to increase their efficiency
or employ marginal workers, therefore registering lower labor productivity growth
rates. The communications sector, being characterized by the presence of a State
monopoly, seems to go against this theory prediction, yet our data point to this
sector as being one of the most productive over the 150 years considered. In
particular, Pellegrini (1991, 16) explained the high labor productivity growth in
this sector in the 1980s by the technologic progress it underwent in these same
years and by the buoyant demand for these services.
11. See Daniele and Malanima (2011b) for a discussion of this issue.
12. Broadberry (1998) argues that a major problem with Nordhaus’s (1972) orthodox
shift-share approach is that it assumes that productivity growth rates in each
sector would be unaffected by the absence of structural change. If Kindleberger’s
(1967b) assumption that surplus labor was being drawn from agriculture and
reallocated to nonfarm activities with little or no loss of agricultural output is
accepted, as is reasonable, then restoring labor to agriculture would not have
positively affected output, but simply lowered labor productivity growth rates.
However, the shift of labor away from nonfarm activities would not only have
lowered labor, but also output, leaving labor productivity growth rates unaltered.
Therefore, had agriculture continued to employ an unchanged share of workers,
because of an absence of structural change, labor productivity growth rates
in agriculture would have been lower. This effect is taken into account in
Broadberry’s modified equation.
productivity 225
13. These calculations are to be regarded as upper-bound estimates of the effects of

structural change (Broadberry 1998). This modified shift-share calculation has also
been adopted by Crafts and Toniolo (2010).
14. To achieve international comparability we are obliged to revert back to a
three-sector disaggregation.
15. Especially in those subsectors where entry barriers are low, such as petty trade
and personal services, because of the strong pressure of the active population that
cannot find employment in agriculture or industry, the services sector can act as a
sponge, absorbing the excess work-force.
16. The exploitation of opportunities offered by information and communications
technology in the United Kingdom has been put into relation with the
de-regulation of services, which are intensive in the use of information and
communications technology (e.g., finance and retail trade). See, for example,
Crafts (2011a).
17. Under the usual assumption that rental price does not vary across vintages of a
capital asset i it is measured as, ui ,t = qi ,t − rt + qi ,t δi ,t − (q
(qi ,t qi ,t ), where qit is the
market price of the productive asset i, rt is a measure of the opportunity cost
that we proxy by the nominal long-term interest rate on public bonds, δit is the
same depreciation rate adopted in estimating the capital stock, and the terms in
brackets stand for the expected revaluation of the asset, that we compute as a
three-term moving average of the market price.
18. Because of data limitations on wage and employment composition by skill or
education level, we could not perform the same calculations for labor input, which
we continue to measure using our estimates of full-time equivalent workers.
19. However, Bassanetti, Torrini, and Zollino (2010) show that, by taking into account
the prolonged wage moderation and intense process of privatization since the
start of the 1990s, which resulted in a fall in the share of wages over value-added,
TFP in Italy would have marked a more moderate increase between the mid-1980s
and the end of the 1990s, followed by a less negative dynamics from 2000 to
2005, the last year covered in the analysis, compared with what emerges from the
official Istat national accounts. Interestingly, the finding was not matched in the
other leading countries in the Euro area, confirming that part of the recent delay
in productivity growth in Italy was caused by the competition structure of the
markets and their development over time.
20. Again, for comparability reasons, we use the headcount measure for labor and
GDP inclusive of residential structures.
21. By looking at our Table, the reader can gauge that TFP growth rates in the
United States in the period 1929–1937 were low (0.3 percent per year). However,
a recent interpretation of the US Great Depression, offered by Alexander Field,
who focused on the longer period 1929–1941, led the scholar to conclude that
those years were actually “the most technologically progressive of any comparable
period in the US economic history” (Field 2011, 19), with TFP growth rates of 2.3
percent (43). Simply “Kendrick [i.e. Kendrick (1961) whose data we too use for the
US] led us astray by choosing 1937 as a reference peak in calculating productivity
growth in the 1930s” (Field 2011, 41). The cause of this exceptional surge in TFP
growth was a still rapid progress in manufacturing coupled with the spillover
effects in transportation and distribution resulting from the construction of the
surface road network. This novel light shed on the US performance in the 1930s
does not alter our conclusions on Italy’s relative performance in the same years.
Similar innovations were adopted in Italy mainly after World War II, when Italy’s
TFP growth rates soared.
Another noteworthy point is that in the period 1911–1938 the differences
between TFP growth rates in Italy as computed in Tables 7.6 and 7.7 are the
largest. This is caused in particular by the Great Depression years which,
weighting labor and capital by constant shares, creates some distortion. The
estimate presented in Table 7.6 is thus the more reliable of the two.
22. Unfortunately the figures for services and total economy are only partially
comparable with those presented in the last row of Table 7.1 because valued-added
here has not been netted of the housing sector and of government services.
23. PPP can be defined as “the number of currency units required to buy the goods
equivalent to what can be bought with one unit of currency of a base country”
(Kravis, Heston, and Summers 1982).
24. See for example Taylor and Taylor (2004) for a review of the debate on PPP.
25. In particular, the PPPs provided by EU KLEMS include production PPPs for
agriculture, mining, manufacturing (except high-tech), transport, communication
and trade industries and expenditure PPPs for all remaining sectors. See Timmer,
Ypma, and van Ark (2007) for a discussion on the advantages and drawbacks of
the different types of PPP.
26. See for example Bripi, Carmignani and Giordano (2011) for a survey of studies on
the (poor) quality and efficiency of public services in Italy in recent years in an
international context.
Chapter 8
STANDARDS OF
LIVING
andrea brandolini and

giovanni vecchi
Introduction
In 1861, a newborn Italian could expect to live for another twenty-nine years.
One and a half century later, life expectancy at birth has increased to eighty-two
years, 84.5 for females and 79.4 for males. With a gain of fifty and more years
over 150 years, Italians have climbed to the top of the country ranking by life
expectancy, and Italy stands among the best performers worldwide. There is
hardly any other indicator that is as effective as life expectancy to gauge in a
single number the progress of a population. On this account, Italy since unifi-
cation in 1861 is undeniably a success story.
Yet, this is hardly the end of the story. Human well-being is a multifaceted
concept. Living longer is an achievement by itself, but it also matters how people
live. Access to consumer goods and leisure time, for instance, is important. The
capability of choosing one’s own life is even more important. However signif-
icant, life expectancy cannot account for these different aspects of well-being,
nor can per capita income, another popular indicator of progress. Moreover,
any assessment based on average well-being is bound to ignore its distribution
across the population, whereas our evaluation of the advancements in, say, the
prevention of avoidable morbidity is likely to depend on whether it is spread
across the entire population or is instead concentrated among a few wealthy
individuals.
Multidimensionality and distribution are the two keywords in tracing the

path of the well-being of Italians since the country’s unification. We begin with
an overview of the historical changes in income per capita and integrate this
description with information on its distribution. Income is a good measure of
the command that people have over resources, but it cannot capture all the
diverse dimensions of human well-being. Here, we go “beyond GDP” (European
Commission 2009; Stiglitz, Sen, and Fitoussi 2009) by considering also the sec-
ular evolution of working time, health outcomes, and educational achievements.
This broad set of variables allows us not only to depict a nuanced view of the
human progress in unified Italy, but also to delve into its dynamics. Was it a
smooth unfolding of long-run, mechanical, and inescapable tendencies, or was
it the outcome of a sequence of episodes (Atkinson 1997), alternating advance-
ments to stasis and, possibly, regression? Did Italy sail with the international
tide or did it succeed to surf the long wave of economic well-being because of
the ability of expert skippers (Toniolo 2007)?
Income and People

It is far-fetched to identify well-being with income, but there is little doubt that
command over resources is a fundamental determinant of living standards. As
observed by Anand and Sen (2000), “in an indirect way—both as a proxy and
as a causal antecedent—the income of a person can tell us a good deal about her
ability to do things that she has reason to value. As a crucial means to a number
of important ends, income has, thus, much significance even in the accounting
of human development” (100). Likewise, at the aggregate level, the total amount
of incomes produced or enjoyed in a country, expressed in per capita terms, is
an important measure of the prosperity of its population. National accounts offer
several aggregate income concepts but, because of data availability, we focus here
on gross domestic product (GDP). Our reference series is drawn from the recon-
struction of the Italian historical national accounts documented in Chapter 6
(see also Vecchi 2011), but for international comparisons we rely on the series
elaborated by Maddison (2001, 2010) and updated by Conference Board (2012).1
The growth of average income was fairly slow after unification, and it took
about eighty years for GDP per capita to double. After the destructions of World
War II, the speed rose considerably, and income doubled once during the 1950s
and a second time in the following fifteen years. Qualitatively this historical
pattern is not different from that of other advanced countries, but Italy lags
behind the top performers. Considering Maddison’s estimates (Figure 8.1), in
2011 the Italian GDP per capita equaled 59 percent of the US level, just above
the ratio for Spain (55 percent), but well below those of other Organization for
Economic Co-operation and Development (OECD) countries, such as Germany
standards of living 229
140
120
100
80
60
40
20
0
1861 1871 1881 1891 1901 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001 2011
Italy France Germany Spain Sweden UK
Figure 8.1 GDP per capita in selected countries (index: US = 100). Source: authors’
elaboration on data from Maddison (2010) and Conference
Board (2012); underlying values are in 1990 international Geary-Khamis dollars.
Data for Italy in 1915–1920 are adjusted on the basis of the new reconstruction of
national accounts exposed in Chapter 6.
(70 percent), France (71 percent), the United Kingdom (72 percent), or Sweden
(84 percent). Although some changes have occurred in the rank order of coun-
tries, most notably the relative decline of the United Kingdom, Italy has overall
shared the ups and downs of other countries (Crafts and Toniolo 2010). There is
little indication of Italian-specific growth miracles in comparative terms.
Dividing aggregate income by the number of persons provides only a rough
indication of average living standards. Two people living together do not need
an income twice as large as the income they would need were they living alone.
Living in a household generates economies of scale in consumption, because
certain goods, such as housing space and heating, can be shared. Moreover,
needs differ by age, with children and the elderly typically requiring less than
adults, at least in terms of calorie intake. Thus, for a society as for a household,
the demographic structure affects the standard of living achievable with a given
income. Over the last 150 years changes in age structure and average household
size have been dramatic. The share of persons younger than fifteen years fell
from 34 to 14 percent of the total population between the end of 1861 and the
end of 2009, whereas the share of people older than sixty-four quintupled from
4 to 20 percent. The “ageing index,” calculated as the number of persons sixty-
five years old or over per hundred persons aged fourteen or less, has increased
by a factor of twelve between 1861 and 2011 (from 12 to 145 percent), “making
[Italy] the world’s ‘oldest’ major country” at the onset of the third millennium
(Kinsella and Phillips 2005, 7). Household size decreased from 4.5 persons per
unit in 1881 to 2.4 in 2010 (Figure 8.2).
50 6.0
45 5.5
40 5.0
No. of persons per household

Thousands of 2010 euros
35 4.5
30 4.0
25 3.5
20 3.0
15 2.5
10 2.0
5 1.5
0 1.0
1861 1871 1881 1891 1901 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001 2011
GDP per capita GDP per equivalent adult
GDP per equivalent person living alone Household size (right scale)
Figure 8.2 GDP per capita and per equivalent person in Italy. Source: authors’ elaboration
on Istat data. The number of equivalent adults is computed by weighting individuals
by their age-dependent relative nutritional needs (drawn from Istat 2009b). The number
of equivalent persons living alone is computed by weighting individuals
by a factor capturing the economies of scale from cohabitation (set equal to the
square root of the household size).
To account for these demographic trends, we compute the number of

“equivalent persons,” which is the number of individuals made comparable
in terms of needs (Coulter, Cowell, and Jenkins 1992), and calculate GDP per
equivalent person rather than per capita (Figure 8.2). For the lack of suitable
household-level information, we carry out separate adjustments for age and
household size, but in either version GDP per equivalent person exceed GDP
per capita. When we adjust for the age structure, this happens because children
and the elderly are weighted less than adults. Despite the remarkable changes
in the age composition, the difference between GDP per capita and GDP per
equivalent adult is very small; it only widens slightly in the last decades, but not
in a way sufficient to alter the overall income profile. The secular changes in
household arrangements seem to be far more important. The gains from pool-
ing and sharing goods and services within the household, which explain the
difference between equivalized and nonequivalized GDP, diminish over time,
since the 1920s. Thus, the eleven-fold increase of GDP per capita between 1881
and 2010 would turn into an eight-fold rise of GDP per equivalent person. This
result, however, should not be overplayed. First, at earlier stages of development,
expenditure is higher on goods characterized by low economies of scale, such
as food, than on goods characterized by greater economies of scale, such as
housing (Deaton 1997). Should we assume that economies of scale in consump-
tion rise over time, rather than being constant as in the calculation underlying
Figure 8.2, the discrepancy between equivalized and per capita GDP would
be proportionally lower at the beginning than at the end of the period, and
the conclusion would be different. Second, and more importantly, the secular
movement toward a smaller household size reflects a people’s choice. Thus, the
lower economies of scale in consumption must have been more than offset, in
welfare terms, by the greater independence allowed by living in smaller family
units. Exit from the family of origin and household formation reflect economic
feasibility and cultural factors (Reher 1998; Giuliano 2007). In sum, although
the fall in household size is an important feature of the evolution of quality of
life in Italy, as in other advanced countries, its welfare implications are not eas-
ily captured by any mechanical application of equivalence scales.
Worked Time and Child Labor

As early as 1952, Kuznets denounced that the long-run reduction in hours
worked, that is the secular increase in the consumption of leisure, was one
of those aspects that economists had “ . . . overlooked, or, if recognized, dis-
missed lightly because they lie outside the boundaries of economic discipline,
as narrowly defined. The neglect or dismissal of these problems is likely to
be more detrimental to the understanding of the process of economic growth
than even crude attempts to deal with them” (1952, 63–64). In the same vein,
Nordhaus and Tobin later remarked that “the omission of leisure and of non-
market productive activity from measures of production conveys the impres-
sion that economists are blindly materialistic. Economic theory teaches that
welfare could rise, even while NNP [net national product] falls, as the result of
voluntary choices to work for pay fewer hours per week, weeks per year, years
per lifetime” (1972, 9).
The reduction in worked hours may take many forms: later entry in the
labor market, as years spent in full-time education rise; shorter working days or
weeks; longer holiday leaves; and early retirement, relative to residual life expec-
tancy. Together with the rise in the length of life, all these changes have gone
in the direction of reducing the share of lifetime devoted to work, diminishing
effort and increasing leisure. Data are currently insufficient to carry out a sys-
tematic adjustment of GDP for the reduction in worked hours along the lines
suggested by Kuznets and Nordhaus and Tobin, but two aspects can be exam-
ined: child labor and working hours.
Available evidence suggests that child work was widespread in most European
countries during the nineteenth century (Cunningham and Viazzo 1996). Italy
was no exception, with about 80 percent of children aged ten to fourteen years
being classified as economically active at the time of the country’s unifica-
tion (Vecchi 2011). Industrialization was, however, accompanied by a decline
in child work, unlike in other countries (Goldin and Sokoloff 1982; Horrell
and Humphries 1995; Tuttle 1998). This decline proceeded rapidly throughout
the entire period, except for a stasis between the two world wars, and even an
increase in the aftermath of the Great Depression from 1931 to 1936. These esti-
mates, which are based on census results, contradict the pessimist conclusion of
the Parliamentary Commission of Inquiry into Unemployment that “ . . . in the
course of Italy’s economic development, the employment of children in work-
places has steadily increased during its early phases” (Spesso 1953, 171). They are
also considerably lower than the figures reported in some international com-
parisons of child work (International Labor Organization 1996; Basu 1999).
As to working time, it is not easy to reconstruct its historical movements,
not least for the large variability across sectors and occupations. The selection
of data reported in Figure 8.3 mostly refers to manual workers in industry,
including construction. Time spent at work did not vary much during liberal
Italy, so that the gains in well-being as measured by the GDP per capita were
not offset by a concomitant increase in the effort required to produce it. The
calculations by Zamagni (1975, 1994) show a temporary rise of work-time dur-
ing World War I, followed by a sharp fall around 1919, when the eight-hour
workday was introduced. Working time slightly rose in the aftermath of World
War II, stabilized during the 1950s, and then declined until the early 1980s.
Thereafter, the Italian National Institute of Statistics’ (Istat) national accounts
3,500
3,250
3,000
2,750
2,500
2,250
2,000
Huberman
Zamagni
1,750 Ministero del lavoro
Istat, SCI
1,500 Istat, NA
Conference Board
1,250
1861 1871 1881 1891 1901 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001 2011
Figure 8.3 Annual hours of work in Italy. Source: authors’ elaboration on data
from Huberman (2004, Tab. 6, 982), industrial manual workers; 1911–1918, Zamagni
(1975, Tab. 1, 532), industrial manual workers, hours of work per day multiplied by
6×30/7×12; 1919–1939, Zamagni (1994), industrial manual workers, hours of work per
month multiplied by 12; Ministero del Lavoro’s survey of industrial establishments with
at least ten employees (fifty since 1978), industrial manual workers; Istat’s survey of firms
with at least fifty employees, industrial manual workers (SCI); Istat’s national accounts
(from EU-KLEMS for 1970–1979), all industrial employees (NA); Conference Board (2012),
total economy, all employed.
figures for all employees, rather than blue-collar workers only, indicate a flat
trend, except for the abrupt drop during the Great Recession of 2008–2009. The
Conference Board’s (2012) series for the total economy exhibits a substantially
similar pattern, but at a higher level because it also covers the self-employed,
who typically work longer hours. Italy’s historical record follows, by and large,
the pattern of most European countries (Ausubel and Grübler 1995), although
nowadays the average employed person works more in Italy than in the United
States, the United Kingdom, France, or Germany.
When we consider the work effort relative to the entire population rather
than the employed only, we may expect to observe similar long-run tenden-
cies, but reinforced by a decline in labor market participation (Zamagni 1987;
Daniele and Malanima 2011a). The reduction in child labor and the ageing of
population, when not accompanied by a corresponding elevation of retirement
age, imply an additional fall in hours of work per person, besides that caused by
shorter work-time. Kuznets (1966, 75) calculates a significant long-run decrease,
until the early 1950s, in the number of man-hours per capita (as opposed to per
worker) in thirteen advanced economies, ranging from 1.1 percent per decade
in Great Britain (1870–1952) to 4.5 percent in the Netherlands (1900–1952), and
to an “exceptional” 7.5 percent in Italy (1901–1953). According to the Conference
Board’s (2012) data, the fall continued until the 1970s; it was then reversed in
the mid-1990s, as labor market participation began rising again. The postwar
trend in hours of work is in Italy similar to those of the other main European
countries, although somewhat less pronounced.
Beyond Average Incomes

GDP per person ignores the distribution of income across people. However, the
welfare of a community depends not only on total income, but also on the way
in which it is distributed among its members. As put by Dalton (1920, 349), “the
objection to great inequality of incomes is the resulting loss of potential eco-
nomic welfare.” In Dalton’s utilitarian approach, social welfare equals the sum
(or mean) across individuals of identical concave utility functions, where income
is the argument. Social welfare is maximized when a given income is equally
distributed, and inequality can be identified with the shortfall from this maxi-
mum value. Atkinson (1970) suggests that this welfare loss can be measured in
the income space by means of the “equally-distributed equivalent income,” that
is the level of income that would give the same level of social welfare as the
given distribution when equally assigned to all individuals. By construction, the
equally-distributed equivalent income is lower than mean income and repre-
sents a measure of the economic welfare allowed by a certain income level that
scales down the mean for the inequality of its distribution among people. Sen
(1976) derives from different nonutilitarian assumptions a measure of economic

welfare that is analytically identical, except for using the Gini index rather
than the Atkinson index to measure inequality. In this section we document
the secular changes in the distribution of income, and assess their implications
for economic welfare by constructing distributionally adjusted GDP per capita
series as suggested by Atkinson and Sen.
Data Problems and the Italian Household Budget Dataset

Modern household surveys began after World War II, once the statistical the-
ory and method to construct representative samples had been developed and
legislators had created national statistical offices (Stapleford 2009). Before World
War II, the individual- or household-level data required to estimate the evolu-
tion of the personal distribution of income were scarce and inadequate, because
of their limited coverage of population and income. This is the case of the
income data drawn from tax files, originally used by Pareto (1895) to study the
revenue curve. The adjustment to income and population totals derived from
external sources, developed by Kuznets (1953) and recently revived by Atkinson
and Piketty (2007, 2010), improves the representativeness of income tax data,
but does not eliminate all problems, including that inequality can only be mea-
sured by the income shares of top income earners. Other sources and proxies
have been imaginatively used (Williamson and Lindert 1980; Williamson 1985;
Milanovic, Lindert, and Williamson 2010), but despite the eclecticism and inge-
nuity, the paucity of suitable data has curbed the analysis of long-run changes
in income inequality.
For Italy tax-based information has limited time coverage. However, we can
rely on a novel and innovative database, the Italian Household Budget Database,
constructed from the thousands of household budgets collected, in various
forms, since the country’s unification (Niceforo 1933; Somogyi 1959; Vecchi
1994). The first version of this database comprised about 4,700 household bud-
gets over the years 1881–1961 and focused more on expenditure (Rossi, Toniolo,
and Vecchi 2001); the new version, used here, covers also income and includes
as many as 20,000 household budgets (Vecchi 2011). The individual budget data
are used to construct “samples” centered on census years. Census data provide
the information needed to compute the weights (“expansion factors”) used to
poststratify the income information and correct for the potential biases arising
from the lack of a probabilistic survey design (Holt and Smith 1979; Little 1993).2
We use the information from the Italian Household Budget Database for the
period 1861–1931, together with the data collected by Istituto Doxa for 1948 and
from the Bank of Italy’s Survey of Household Income and Wealth from 1967 to
2008 (tabulated data until 1976 and microdata thereafter; on these sources, see
Brandolini 1999). The Gini index and the Atkinson index for the distribution
of per capita incomes are estimated by fitting, for each available year, a four-
parameter functional form, the Generalized Beta of the Second Kind, discussed
by Jenkins (2009).
Long-Run Dynamics of Inequality and Distributionally

Adjusted GDP Per Capita
Figure 8.4 shows the secular trend of income inequality in Italy, as measured
by the Gini and the Atkinson indices. The calculation of the latter requires
specifying the parameter ε that measures the aversion to inequality: the higher
ε, the more weight we attach to transfers at the bottom of the distribution rel-
ative to transfers at the top; in the extreme case where ε tends to infinity, only
the income of the poorest individual matters. We consider three values of ε
(0.125, 1, and 2), which cover a wide range of social preferences. There are local
divergences in the movements of the four indices, in particular between the
Atkinson index most sensitive to changes at the bottom of the distribution
(ε = 2) and the others. However, except for a notable divergence in the period
1921–1931, the overall story seems to be fairly consistent across the four indices.
During the first seventy years since unification the Gini index fluctuated
within a relatively narrow band, between 45 and 50 percent; these variations
were statistically not significant. Eighty years later, it has decreased by almost
a third to around 33 percent, although the historical minimum was reached,
at 30 percent, in the 1980s. Even allowing for statistical errors, the long-run
trend is unambiguously downward: Italy’s modern economic growth has been
0.60
0.50
0.40
0.30
0.20
0.10
0.00
1861 1871 1881 1891 1901 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001 2011
Atkinson index ε=0.125 Atkinson index ε=1 Atkinson index ε=2 Gini index
Figure 8.4 Gini and Atkinson indices of per capita income in Italy (percent). Source:
authors’ elaboration. Dashed lines help to identify the three main sources: (1) the Italian
Household Budget Database until 1931, (2) the survey of Istituto Doxa for 1948, and (3) the
Bank of Italy’s Survey of Household Income and Wealth from 1967 onward.
accompanied by a narrowing of the distribution of income. This process has

not been linear, however, and it is better described as a sequence of periods
alternating declines to stasis, or sharp drops to sudden rises, consistently
with Atkinson’s observation that “ . . . it is misleading to talk of ‘trends’ when
describing the postwar evolution of the income distribution,” whilst “ . . . it may
be better . . . to think in terms of ‘episodes’ when inequality fell or increased”
(1997, 303).
During the early stages of industrialization the Gini index stalled. The
increase between 1871 and 1901 is not negligible, but not statistically significant
and by and large offset by the reduction between 1901 and 1921. There is no
evidence of the inverted U-shaped curve that Kuznets (1955) suggested should
emerge along the process of industrialization. Rather, the evidence seems consis-
tent with the hypothesis of a “benign industrialization” conjectured by Toniolo
(2003) and Vecchi (2003). In this respect, Italy’s experience may have differed
from those of the United States and the United Kingdom as summarized by
Lindert (2000, 169), “income and wealth inequality definitely rose over the first
150 years of US history. Britain may also have had an early period of rising
inequality, but the most likely period of rising inequality (1740–1810) was earlier
than most writers have imagined” (but see Feinstein 1988 for a different view
about the UK experience).
Although income distribution tended to narrow during the two episodes
of more intense economic growth (the Giolitti’s years before World War I and
the post–World War II years of the so-called economic miracle), it was between
the end of the 1960s and the early 1980s that the fall in inequality was more
pronounced, with a sharp drop of the Gini index by more than 10 percentage
points. This fall was driven by a strong compression in the distribution of labor
incomes, which was reinforced by the expansion of the welfare state (see also
Chapter 3). This “egalitarian phase” was not specific to Italy: changes in the
same direction, if not of the same size, took place in France, Germany, Sweden,
and Finland (Brandolini and Smeeding 2008).
The downward trend reversed during the 1980s. Inequality rose especially
during the severe economic and currency crises of the early 1990s, when the
Gini index abruptly went back to the levels of the late 1970s; it did not change
much in the subsequent period, including the period of the Great Recession
of 2008–2009. The tendency of inequality to rise since the 1980s is, however,
less pronounced than in other countries, particularly the United States and the
United Kingdom, but also Sweden and Finland.
The fall in inequality amplifies the extent of the economic progress of
Italians since unification. As shown in Figure 8.5, the overall increase of eco-
nomic welfare is always larger for the distributionally adjusted measures of real
income. The improvement is modest when one takes Atkinson’s equally distrib-
uted equivalent income with ε equal to 0.125, which is not surprising in light
of the modest weight assigned to inequality in the social welfare function. For
higher values of ε or for the Gini index, the increase of the distributionally
20
18
16
14
12
10
8
6
4
2
0
1861 1871 1881 1891 1901 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001 2011
μ μ(1–A(0.125)) μ(1–A(1)) μ(1–A(2)) μ(1–G)
Figure 8.5 Distributionally adjusted measures of real income in Italy (index: 1861 = 1).
Source: authors’ elaborations as described in the text. μ is GDP per capita, A is the
Atkinson index calculated for the value of ε indicated in parentheses, and G is the Gini
index. The lines connect the years for which inequality statistics are available.
adjusted GDP per capita is far more conspicuous. Sen’s measure, embodying the
Gini index, suggests an eighteen-fold increase of economic welfare between 1861
and 2008 instead of the thirteen-fold rise indicated by GDP per capita.
Life Expectancy and GDP-Augmented

Measures
We have already mentioned how the advancement in the Italians’ life expec-
tancy since unification is enormous, and remarkable even in the international
comparison (Figure 8.6). In the liberal period, from 1861 to 1913, the progress was
rapid and sizeable, and Italy almost caught up with France. Improvements are
in line with those in other countries during the Fascist period, but after World
War II they were more substantial than elsewhere, and Italy overtook most
countries. According to the last estimates by the World Health Organization
(2012), Italians can expect to live longer than any other world citizen except for
the Japanese.
Until the 1960s the improvement in life expectancy was driven by that in
infant mortality. In Figure 8.7 we compare for selected countries the long-run
series of the infant mortality rate, defined as the number of deaths within the
first year of life per one thousand live births. In 1863, this rate equaled 290 in
Italy, slightly less than in Germany, but considerably more than in France and
90
80
70
60
50
40
30
20
1861 1871 1881 1891 1901 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001 2011
Italy France Germany Spain Sweden UK US
Figure 8.6 Life expectancy at birth in selected countries. Source: authors’ elaborations
on data from Vecchi (2011) for Italy and from University of California Berkeley and Max
Planck Institute for Demographic Research (2012) for other countries. The UK figures
refer to England and Wales only from 1861 to 1921.
350
300
250
200
150
100
50
0
1861 1871 1881 1891 1901 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001 2011
Italy France Germany Spain Sweden UK US
Figure 8.7 Infant mortality rate in selected countries (deaths within first year of
life per 1,000 live births, three-year centered moving average). Source: authors’
elaboration on data from Istat (2012), University of California Berkeley and Max Planck
Institute for Demographic Research (2012), and Mitchell (2007). The series are from the
Human Mortality Database for France, Sweden, and the United Kingdom (England and
Wales for 1861–1921); the series from the Human Mortality Database are retropolated
backward with the series from Istat (2012) for Italy (1963–1971) and from Mitchell (2007)
for Germany (1863–1955), Spain (1861–1907) and the United States (1915–1932).
England and Wales. Infant mortality fell quickly after the unification, mainly
thanks to the reduction in mortality caused by infectious diseases, but in 1910 it
was still above the levels observed today in the poorest countries of the world,
such as Sierra Leone, Liberia, or Angola. The infrastructure of public health was
still underdeveloped at the end of the nineteenth century, and this likely pre-
vented Italy from absorbing more rapidly the excess mortality, especially among
the youngest cohorts: deaths caused by diarrhea and enteritis (negatively corre-
lated with the presence of public health facilities) were considerably higher in
Italy than in other countries (Caselli 1991). The convergence toward the French
and British values slowed down during world wars, and in the mid-1970s the
infant mortality rate still exceeded those of other richer countries. In 2008, this
rate was equal to 3.3, a value higher than in Japan, Sweden, or Finland (around
2.5), but lower than in Germany (3.5), France (3.6), the United Kingdom (4.7),
and the United States (6.7) (University of California Berkeley and Max Planck
Institute for Demographic Research 2012). Until recently, infant mortality has
been persistently higher for out-of-wedlock births, which may be seen as evi-
dence of less adequate health conditions in poorest classes, where these births
are more common (Manfredini and Pozzi 2004; Tizzano 1965).
Data on people’s height can offer further insight into the well-being of a
population, particularly in periods for which there is a lack of more informative
sources (Fogel, Engerman, and Trussel 1982). Although the variation of individ-
ual heights is dominated by randomly distributed genetic potential, variations
over time or across socioeconomic groups are driven by systematic differences in
diet, disease environment, workload, and health care. The evolution of heights
provides an indirect confirmation of the improvement in living conditions in
Italy (Vecchi 2011; Federico 2003a; A’Hearn 2006): the average height of male
conscripts steadily grew by almost a centimeter per decade between the cohort
born in 1861 and the cohort born in 1980, a gain in line with the experience
of other European countries (Hatton and Bray 2010). Interestingly, Italy does
not seem to have experienced any period of declining heights, such as those
that have been associated with industrialization in the United Kingdom and the
United States (Williamson 1981; Komlos 1998; Steckel 2008).
How can we combine the improvements in life expectancy with those on
material living standards to arrive at a more comprehensive evaluation of the
progress in well-being? Usher (1973) suggested that the value for individuals to
live longer derives from the greater lifetime consumption that they can expect
to enjoy. Thus, the value of longevity can be seen as the difference between the
(higher) lifetime consumption that would have been necessary to generate the
same level of utility if mortality rates had remained constant, and the actual
lifetime consumption. By taking an isoelastic utility function, the increase in
economic welfare can then be proxied by the growth in GDP per capita aug-
mented by a term capturing the rise in longevity relative to a base year.3 Using
the Istat life tables as assembled in the Human Mortality Database (University
of California Berkeley and Max Planck Institute for Demographic Research
2012), it is possible to compute Usher’s GDP measure adjusted for longevity for
Italy. For standard values of parameters, the measured progress in economic
welfare would rise considerably relative to considering solely GDP per capita.
The impact is strongest during liberal Italy, because of the fast improvement
in life expectancy: between 1873 and 1913, adjusted GDP per capita grew twice
as much as GDP per capita. The increase in life expectancy contributed less
to welfare growth during Fascism and after World War II. These conclusions
hold even looking at estimates net of the endogenous improvements in mortal-
ity attributable to rising incomes (Crafts 1997a).
Educational Achievements and the

Human Development Index
Education is a further important dimension of human well-being. School qual-
ification is a major determinant of earnings capacity and social status, but it
also captures, in a broader sense, the capacity of a person to function, to com-
prehend, and to act in the outside environment to do the things that he or she
values.
Italy’s current record in educational achievement is comparatively mediocre,
be it measured by school attainment levels or by proficiency scores in surveys,
such as the Programme for International Student Assessment or the Trends
in International Mathematics and Science Study (see Chapter 9). According to
Morrisson and Murtin (2009), the situation was even worse in 1870, when Italy
stood out as a laggard among most other comparable countries: with an average
of less than one year of schooling in the population aged fifteen to sixty-four,
Italy was far away from the leaders (United States, 5.6 years; Germany, 5.5 years;
and France and the United Kingdom, 4 years) but also from backward countries
(Spain, 2.4 years; Japan, 1.7 years; and Greece, 1.5 years). This picture is consistent
not only with many studies in the literature (Checchi 1997; Zamagni 2002a), but
also with the testimony of contemporary commentators. The British historians
Bolton King and Thomas Okey remarked in 1901: “Education is the gloomiest
chapter in Italian social history, a chapter of painful advance, of national indif-
ference to a primary need, of a present backwardness, that gives Italy (next to
Portugal) the sad primacy of illiteracy in Western Europe” (1901, 233).
Italy’s disappointing performance can be appreciated by comparing the new
estimates of the gross enrolment rate for primary education made available by
Vecchi (2011) with those collected for a number of countries by Lindert (2004).
Over the years 1860–1930, Italy’s position is pretty stable at the bottom of the
ranking, far below France, Germany, the United Kingdom, and the United
States, but also behind Spain, despite the higher level of GDP per capita. During
this period, Italy was outperformed even by Greece, whose GDP per capita was
about half that of Italy in 1860, that succeeded in catching up and eventually
overcoming Italy. King and Okey had little hesitation in identifying the causes
of this poor record: “There have been thirty-three Education Ministers since
1860, each eager to distinguish himself by upsetting his predecessor’s work.
Money has been stinted, and State and communes, lavish in all else, have econ-
omized in the most fruitful of national investments” (1901, 233).
The Casati law, providing for compulsory and free primary education
since the first day of unification, remained a dead-letter. “Prosecutions for
non-attendance are probably unknown, and a head-inspector reports that he
has never heard of one” (King and Okey 1901, 235). We lack long-run time series
on attendance rates, but the evidence gathered by Vecchi (2011) suggests that
approximately 20 percent of enrolled pupils did not attend school at the end
of the nineteenth century, with small differences between boys and girls. The
insufficient resources of local administrations played a crucial role, but review
of the reports by ministerial inspectors reveals that inertia and lack of incentives
also mattered, particularly in the South; in the Center-North poor infrastruc-
ture and climatic conditions were a further important impediment to school
attendance.
The evidence on literacy confirms this picture. At the time of unification
illiteracy rates approached 80 percent, with a gender gap of about 14 percentage
points in favor of males, and it took a surprisingly long time for Italy to catch
up with other countries. According to the 2001 population census, illiteracy has
been eradicated from the country, although many observers draw attention to
other forms of “functional” illiteracy, which are more appropriate to assess the
present situation (De Mauro 2010).
A measure of human progress that accounts for educational achievement
together with income and life expectancy is the Human Development Index
(HDI). Since its introduction in 1990 (United Nations Development Programme
1990), the HDI has become a popular way of capturing essential dimensions
of well-being into a single index easily comprehensible to the general public,
despite controversies about its conceptual foundations (Klugman, Rodríguez,
and Choi 2011; Ravallion 2012). According to the United Nations Development
Programme (2011, Table 1), in 2011 Italy ranked twenty-fourth out of 187 coun-
tries, behind the United States, Canada, Japan, South Korea, and most Western
European countries, including Ireland and Spain, but ahead of Luxembourg,
the United Kingdom, Greece, and Portugal. Italy’s position in the international
ranking has barely changed during the previous thirty years.
The HDI takes a simple unweighted mean of three indicators: (1) income per
capita (in logarithms); (2) life expectancy at birth; and (3) education. Its exact
formula has changed a few times since its first release, and alternative formulae
have been discussed in the literature. In this Chapter we have reconstructed the
annual series of the HDI for Italy since unification using the formula proposed
by Prados de la Escosura (2010), to be able to compare our series with his esti-
mates for the OECD countries (Western Europe plus Australia, Canada, Japan,
New Zealand, and the United States), Latin America, Asia (excluding Japan),
and Africa in selected years.4 All series are shown in Figure 8.8. (The sharp
drops in the Italian series broadly correspond to world wars, whose periods are
not covered by the other series.)
In 1870, Italy’s human development gap relative to the OECD countries as
a whole was remarkably large, about 50 percent, far more than the comparison
of GDP per capita would suggest. Going beyond GDP emphasizes Italy’s back-
wardness at the onset of modern economic growth. Italy’s secular convergence
to top performers is evident in Figure 8.8, but its pace is slow. It takes more
than forty years to halve the gap, and there are no further improvements for
the next twenty-five years, from 1913 to 1938. The post–World War II catching-
up narrows the gap further, but it only falls below 10 percent after 1980. Italy
reached in 1921 the level currently (2005) observed in Africa; in 1955 that of
Asia (excluding Japan); and in 1971 that of Latin America. Achievements in the
three constituents of human development, however, differ. In 2005, the non-
OECD countries taken as a whole had approximately the same value of the
HDI estimated for Italy in 1954, but that Italian value was achieved by virtue
of a far higher income level (38 percent) than the one currently observed in the
non-OECD world and by a correspondingly lower educational achievement (life
expectancy was virtually the same). More than half of the HDI overall increase
since Italy’s unification is caused by the improvement in life expectancy, almost
four-fifths by the rise in educational levels, and only a tenth by the growth of
income levels.
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
1861 1871 1881 1891 1901 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001 2011
Italy Africa Asia (exc. Japan) Latin America OECD countries
Figure 8.8 Improved Human Development Index in Italy and world regions.
Source: authors’ elaboration on data from Vecchi (2011) and Istat (2012); OECD countries
(Western Europe, Australia, Canada, Japan, New Zealand, and the United States), Africa,
Asia (exc. Japan), and Latin America Prados de la Escosura (2010, Table 3).
When did It Occur that Italians

became Well-Off?
The discussion of the HDI illustrates the extent to which nonincome dimensions
can modify an assessment of Italy’s secular progress based exclusively on GDP
per capita. The problem with HDI, and with the GDP-augmented measures dis-
cussed previously, is that they assume a specific degree of substitution among
the different dimensions: the same level of well-being can be achieved by
exchanging x units of GDP per capita with y units of life expectancy, and so
forth. These exchange rates reflect value judgments that can vary over time and
be legitimately different across people. Rather than pursuing further these lines
of investigation, in this section we use our dashboard of indicators to identify
the different stages in the evolution of the Italians’ well-being since unification.
We measure progress by the proportionate increase over the range zero to one,
where zero is the value of the well-being indicator in 1861 and one is its value
in the most recent available year. Thus, the value of the normalized indicator
in a given year represents the proportion of the overall absolute increase accom-
plished between 1861 and that year. In Figure 8.9 we plot these normalized well-
being indicators against normalized GDP per capita. The shape of the resulting
curves reveals the extent to which progress is “balanced.” A curve (or section
of curve) close to the forty-five-degree line, the line from the bottom-left to
the top-right corner, indicates that the movements of the welfare indicator on
the vertical axis parallel those of GDP per capita on the horizontal axis; an
approximately concave curve suggests that the welfare indicator improves more
rapidly than GDP per capita, whereas the opposite happens when the shape is
approximately convex.
The top-left panel compares the progress in life expectancy with that in
GDP per capita. Using jubilees as benchmark years (the vertical lines in the
graph), it stands out that the conquest of longevity was much faster than the
conquest of economic prosperity: by 1911 GDP per capita had only achieved
5 percent of the overall increase between 1861 and 2010, whereas life expec-
tancy had gained about 30 percent; by 1961 the progress had risen to 25 and 75
percent, respectively. The graph highlights how the improvements in GDP per
capita underestimate those in well-being in the first century after Italy’s unifica-
tion, because they fail to capture the swift gains in longevity of the population.
The graph also leads to revaluate the gains in well-being after the Golden Age:
exactly half of the total distance covered by GDP per capita during the past 150
years is covered between 1971 and today. (The curve for infant survival, which
is not shown here, would closely match that for life expectancy, confirming the
correlation between these two variables.)
As to education, we consider adult literacy and school enrolment. Eradication
of illiteracy among adults required an extraordinary long time to be completed.
1911 1961 2011 1911 1961 2011
1911 1961 2011

1911 1961 2011
Figure 8.9 The time patterns of selected welfare indicators versus

GDP per capita in Italy. Source: authors’ elaboration on data drawn from various sources,
as described in the text. Each panel compares the dynamics of a welfare indicator
(vertical axis) with that of GDP per capita (horizontal axis); all variables are normalized
according to the formula (x–x1861)/(x 2010–x1861), where x1861 is the value in 1861 and x2010 is the
value in the latest available year.
In 1951, still 14 percent of Italian adults could not read and write, and only
four-fifths of the total progress had been accomplished; it took another fifty
years to bring illiteracy close to zero. The pronounced concavity of the curve
shows that this process was largely independent of income growth. Gross
enrollment rates tell a different story, depending on the school level. Primary
school enrollment rates improved impressively faster than income from 1861 to
1931. After World War I the enrollment of the population in primary school
age (six to ten years) has become universal; the rates exceeding 100 percent
for many decades, from the 1920s until the early 1980s, indicate the presence
of pupils repeating grades and the school attendance by persons older than
school-age. The enrollment rates for secondary education exhibit a strict posi-
tive correlation with GDP per capita. Conversely, advances in tertiary education
enrollment rates seem to have lagged behind those in GDP. At 5 percent, the
enrollment rate for tertiary school had in 1961 only accomplished one-tenth of
the overall progress, compared with 25 percent for GDP per capita. A sharp
acceleration in university participation has, however, occurred in the last two
decades (see Chapter 9).
The last chart, in the bottom-right corner of Figure 8.9, compares the dynam-
ics of equality (the complement to one of the Gini index) with the dynamics of
GDP per capita. The jagged curve reflects the discrete nature of the equality
indicator. It shows that more than half of the secular advancement in equality
was achieved during the 1970s, and that about a fifth of that advancement was
eroded in the subsequent period. The timing of the progress varies if informa-
tion on the level of income is integrated with that on its distribution.
Concluding Remarks
“Backwardness” is probably the term that best summarizes Italy’s socioeco-
nomic conditions at the time of the country’s political and administrative uni-
fication (Gerschenkron 1962a; Toniolo 1988). The well-being of Italians was not
only far-off from the level reached today, but also from that enjoyed by the
citizens of the most developed countries. Progress has been considerable in all
dimensions ever since, but has not developed smoothly.
The findings reviewed here are rich in implications for liberal Italy (1861–
1913). First, the well-being of Italians is severely underestimated if measured by
GDP per capita. Many indicators, including health and education outcomes,
improved dramatically vis-à-vis a gentle increase in average national income.
Second, improvements were both in absolute terms (e.g., Italy in 1911 versus Italy
in 1861) and in relative terms (e.g., Italy versus other comparable countries). We
found no evidence of “dark satanic mills” during Italy’s initial stage of indus-
trialization (Williamson 1981), at least in the aggregate indicators. Third, tak-
ing GDP as the yardstick of the living standard, Italy seems to have poorly
exploited the unprecedented movements of capital and labor across national
frontiers of the late nineteenth century globalization (Williamson 1996) to con-
verge with the leading countries. However, looking at some nonmonetary wel-
fare measures the conclusion may be reversed: Italy did succeed in catching up
with the leaders in life expectancy and infant mortality. The question “conver-
gence of what?” is therefore a nontrivial one when investigating gainers and
losers in the process of globalization. Fourth, the average living conditions of
Italians improved without a widening of income distribution; the improvements
in living conditions spread across the country’s regions, including Mezzogiorno
(Vecchi 2011). All this addresses some key issues raised by Federico (1996) and
sheds new light on Italy’s economic development: we can no longer say, with
Federico, that Italy’s success story is a little-known one.
World War I stopped Italy’s catching up. During the interwar years, Fascist
Italy opted for autarchy, thereby partaking in the world-wise process of deglo-
balization. The well-being of Italians did not benefit from this choice; although
GDP per capita continued to grow roughly in parallel with other countries, the
march toward better living standards slowed down. In fact, now and then it
even came to a halt: child work, for example, increased during the recovery
from the Great Depression (1931–1936). Inequality seems to have risen too, but
only slightly according to the estimates based on households’ incomes, more
sizeably in terms of consumption (Rossi, Toniolo, and Vecchi 2001). The modest
growth of household incomes recorded between 1921 and 1931 benefitted only
people from the fiftieth to the ninetieth percentiles, with all others persons (in
the bottom half of the distribution and at the very top) suffering an income
fall; the gap between the North and the South widened in life expectancy at
birth, infant mortality, and conscripts’ heights (Vecchi 2011). The combination
of two world wars, the most severe economic crisis ever experienced in modern
times, and the autarchic strategy had negative consequences, but all in all the
well-being of Italians kept rising, if more slowly. Of course, this was not the
case for civil liberties and political rights, dimensions that should be part of a
fuller notion of well-being (Dasgupta and Weale 1992; Crafts 1997b).
In the immediate aftermath of World War II, standards of living in Italy
deteriorated dramatically. Hunger became widespread: according to Vecchi
(2011), half of the population was undernourished during the years 1946–1947.
The results of a Parliamentary Commission set up in 1951 depicted a picture of
the diffusion and nature of poverty in the country as gloomy as in late nine-
teenth century investigations, irrespective of the indicator used to measure the
incidence and depth of destitution. Italy had undoubtedly tumbled in the past.
The recovery was impressively fast, however, and was paralleled by a profound
transformation of society and the lifestyles of Italians. In the 1950s and 1960s,
economic performance was extraordinary by historical standards, less so by
international standards. The North-South income gap narrowed significantly,
this being the only episode of convergence during the 140 years for which
regional GDP estimates are available (Vecchi 2011).
The findings of this chapter also lead to an interesting reappraisal of the
1970s. Despite harsh social conflicts, terrorism, political turbulence, two major
oil crises, and high international instability, economic growth remained well
above 3 percent per year and was characterized by a distinctly “pro-poor” bias;
income inequality and absolute poverty fell, although inflation and unemploy-
ment rose. However, the 1970s left many problems unresolved, most impor-
tantly the structural weaknesses that would have impaired economic growth
in subsequent decades (Rossi and Toniolo 1996; see Chapters 3 and 4). The rise
of welfare expenditures (Ferrera 1984) sustained further improvements of living
standards in the 1980s, but at the price of a public debt soaring from 51 percent
of GDP in 1982 to 102 percent in 1990. Current well-being was being traded
against the well-being of future generations.
The currency crisis of 1992 marked a turning point. After 130 years of
economic growth accompanied by an overall narrowing income distribution,
Italy entered a phase of low growth, persistently high inequality, and increas-
ing sense of vulnerability (Boeri and Brandolini 2004; Rossi and Vecchi 2011).
The level of well-being achieved after 150 years since unification may not be
necessarily enjoyed by future generations. The sense of accomplishment for the
success in heading the country “from the periphery to the centre” (Zamagni
1998b) mixes with the concern that today’s achievements need not be forever
(Ciocca 2007).
Acknowledgments
The authors thank for useful comments Nicola Amendola, Tony Atkinson,
Luisa Minghetti, Gianni Toniolo, and participants in the conference “Italy and
the World Economy, 1861–1911,” Banca d’Italia, Rome, October 12–15, 2011. The
views expressed here are solely the authors’; in particular, they do not necessar-
ily reflect those of the Bank of Italy.
Notes
1. The newly reconstructed series for GDP per capita and the Maddison series show
some local differences, but a similar dynamics in the long run. The main difference
is around World War I, when the former does not show the sharp up-and-down
exhibited by the latter. Hence, in the period 1914–1922 we have adjusted the
dynamics of the Maddison series to mimic that of the new series.
2. The weights are the population shares resulting from the breakdown by area
of residence (Northwest, Northeast, Center, South, and Islands) and sector of
occupation of the breadwinner (agriculture, industry, and services).
3. The latter term is discounted by the inverse of the constant elasticity of utility to
consumption. The reason for the discounting is that the more elastic is utility, the
smaller is the reduction in the consumption flow necessary to keep the utility level
unchanged, and hence the measured value of longevity.
4. Like the HDI since 2010 (United Nations Development Programme 2010), this
formula takes the geometric mean of the three elementary indicators instead
of the arithmetic mean originally used, to remove the assumption of perfect
substitutability and penalize unbalanced developments in the three dimensions. The
formula used here follows the old HDI practice to construct the education indicator
as the average of adult literacy, with a two-third weight, and gross enrolment in
primary, secondary, and tertiary schools, with a one-third weight. In the new
HDI introduced in 2010 the education indicator combines, with equal weights, the
mean years of schooling and the “expected” years of schooling (number of years of
schooling that a child of school entrance age could expect to receive if prevailing
patterns of age-specific enrollment rates remained constant). All elementary
indicators are normalized by taking the proportional country’s achievement over
a prefixed scale; for nonmonetary indicators this distance is also subjected to a
logarithmic transformation. After methodologic differences are taken into account,
our calculations suggest a progress slower than that estimated by Crafts (1997a), but
roughly in line with that found by Felice (2007b).
Chapter 9
HUMAN CAPITAL
giuseppe bertola and

paolo sestito
Introduction
Like many other aspects of Italy’s historical experience, its human capital accu-
mulation and economic development were shaped by the new country’s loca-
tion at the boundaries of Western Europe’s industrialization process, and by the
interplay of national rules and reforms with the heterogeneous characteristics of
its constituent regional states.
Aiming to characterize the educational system’s role in different historical
phases of Italy’s development, this chapter compares its structure and perfor-
mance over time with those of a group of countries with common European
historical roots, and influenced by broadly similar external shocks. We also
examine regional differences within Italy, which are informative because the
country’s unification was itself an important economic integration experiment.
Variation across regions and over time of education’s structure and effectiveness
casts useful light on the mechanisms linking human capital accumulation and
economic performance.
Education can foster economic and cultural growth and convergence (or
divergence) through several well-understood theoretical mechanisms (Checchi
2006). Schooling contributes to economic productivity not only through pro-
vision of specific skills, but also of general skills that ease on-the-job training
and, at the primary level, of communication and relational skills that make it
possible for individuals to function in a large society with extensive division
of labor. The latter type of schooling plays an essential role in ensuring the
political sustainability of national entities, because mandatory, free, and largely
uniform elementary education can replace family- and village-level solidarity

with patriotic values.
Later in life, routing youths to different tracks may help develop special-
ized skills and allow the best performers to access elite education. Such dif-
ferentiated schooling may or may not improve the average effectiveness of
education, but is very likely to increase the persistence of inequality, because
the risk of failure in more demanding tracks is a stronger concern for chil-
dren, particularly for those from more disadvantaged households. When exam-
ining the consequences and, especially, the motivation of Italy’s educational
policies and institutions, one needs to keep in mind such distributional con-
cerns. These were shaped by variable social and distributional objectives at the
national level, and their implications for economic growth in Italy and across
its regions were significantly influenced by different initial conditions and dif-
ferent local circumstances.
The second section summarizes the evolution of Italy’s education system,
in terms of relevant legislation and as regards practical details of organizational
aspects (funding, regulation and implementation, access criteria and selectivity,
tracking) that bear on a schooling system’s ability efficiently to produce suit-
able human capital. The third section discusses broad trends over time, relative
to comparable countries and across Italy’s regions, of the educational system’s
inputs (enrollment and expenditure) and effectiveness (as measured by literacy
statistics and, over the most recent period, by standardized test scores), and
interprets this evidence in light of the frequent and often only partially imple-
mented reforms that shaped the Italian education systems, driven in turn by
politico-economic mechanisms. The fourth section discusses the role of the
resulting human capital stock’s dynamics and regional heterogeneity as a deter-
minant of Italy’s economic performance, outlining in particular how some
aspects of the Italian economy’s recent stagnation may reflect its education sys-
tem’s structure and performance.
Structure and Evolution of Italy’s

Education System
Over its 150 years, Italy’s educational system has featured an evolving mix of
features from preexisting regional states, on the one hand, and influences from
developments and reforms in neighbor nation states, on the other hand. This
section offers a necessarily brief and incomplete history of its structure and evo-
lution, sketching also some relevant features of other European nations’ experi-
ence, and emphasizing key discrepancies between the letter of the national law
and its actual implementation, which was often highly heterogeneous across the
country’s regions.
human capital 251
The Situation in 1860

Two features of educational institutions in Italy’s constituent states shaped
the new country’s evolution in the following periods. The first is that, overall,
they were much less developed than in most other Western countries (Lindert
2004). The second is the presence of wide regional gaps (D’Amico 2010). Only
in Austrian-ruled Lombardy and Veneto, in Tuscany, and in the Piedmont and
Liguria parts of the Savoy Kingdom had primary education started to near the
standards of Prussia, where eight years of primary education had been made
compulsory in 1763, the Netherlands (where primary education was already
under state control as early as 1806), and Scandinavian countries that soon fol-
lowed suit. Austria had brought elementary schools under state control in 1774,
even though it would wait until 1869 to effectively provide eight years of ele-
mentary education. The other regional states were much behind in terms of
elementary school provision.
Regional differences were less pronounced at the secondary school level. Licei
had been introduced throughout the peninsula at the beginning of the nine-
teenth century, during the Napoleonic domination; in the North, Austrian-type
ginnasi were also present, not only in Lombardy and Veneto but also in the
northwest regions ruled by the Savoy king. Some heterogeneity could, however,
be observed as regards the more or less academic orientation of these and other
secondary schools’ curricula (D’Amico 2010; Genovesi 2010). In the Kingdom
of Naples, secondary schools were mostly run for the elites by the Jesuit order,
whose prerogatives had been restored in 1814; in Tuscany and Piedmont, the
government had a stronger grip on the system and relied for outsourcing on less
ideologic and more practically oriented religious orders, such as the Scolopians
(see D’Amico 2010 on the different pedagogic orientation of the several religious
orders).
At the tertiary level, Italy was home to some of the Western World’s most
ancient and prestigious universities. Only one was located in the continental
South, in Naples (but three were in Sicily).
The Origins of Italy’s Education System (1860–1900)

The Casati law, issued in November 1859 (when Lombardy, Parma, and Modena
had already voted in favor of annexation to the Savoy Kingdom) was meant
as a blueprint for the new Nation’s educational institutions, rather than as a
regional state’s reform, and indeed became applicable in March 1861 to all terri-
tories of the newly established Kingdom of Italy. Its wide ranging scope shaped
Italy’s education system for a very long time, and it was explicitly inspired by
the German system of nationally directed education (Canestri and Recuperati
1976; Zamagni 2002a). As a matter of principle, and in contrast to the British
system of no government involvement in education or the Belgian system of
public-private competition, privately organized establishments would be allowed

to coexist with public ones, but all would be subject to a common regulatory
framework.
At the primary level, the law envisioned two years of entirely free and com-
pulsory education. This was fully consistent with Italy’s new national ambi-
tions and with the need to provide at least some knowledge of the new nation’s
official language: in 1861, less than three percent of the new country’s citizens
were Italian speakers (Scotto di Luzio 2007). In 1877, the Coppino law extended
compulsory schooling to three years (with provisions for enforcement and
fines for noncompliant parents) and introduced a five-year elementary school
curriculum.
In practice, however, Italy did not develop a truly common and mandatory
primary education system during this period. Funding of primary education
was almost entirely left to municipalities; even formally, rural municipalities
(those with less than four thousand inhabitants) were only mandated to orga-
nize the first two years. This resulted in huge differences in the quality and
even the existence of primary schools, which depended on local resources, and
on the local sociopolitical propensity to devote resources to general education
(A’Hearn, Auria, and Vecchi 2011). For the first half century of life of the new
state, this crystallized the huge regional differences inherited from the preuni-
tary period.
At the secondary level, education was envisioned to be fully regulated
and to a larger extent funded by the new nation’s central power. State con-
trol was meant to foster cohesion, and to diminish the role in education of the
Catholic Church, hostile to a new kingdom that had removed the Papal States
from its control. The new state focused attention mostly on the academic licei
track, whose antecedents (and remaining competitors) were the Jesuit schools’
Latin-based curricula. Licei were established and run by the State in all prov-
inces. With five years of gymnasium and three of liceo classico, they offered
an academic curriculum meant to shape the culture of the new nation’s elite.
In keeping with its German inspiration, the Casati law also provided for a less
academic middle and high school parallel track. Despite its scuole tecniche
denomination, it aimed at supplying students with general human capital rather
than practical techniques; in 1872, four-year istituti tecnici were introduced at
the high school level, and one of their four curricula was centered on mathe-
matics and physics. Unlike licei, scuole tecniche offered some financial help to
students, were largely funded by private or local sources, and were adminis-
tered by the Ministry of Agriculture, Industry, and Commerce rather than by
the Ministry of Education. A more clearly vocational track was organized in
the form of scuole professionali, which remained under Ministry of Agriculture,
Industry, and Commerce control even after the Ministry of Education was put
in charge of technical schools and institutes in 1878. Supply and demand of
practical secondary-level education was much more influenced by local cultural
and socioeconomic features and funding sources, and scuole professionali were
human capital 253
very differently relevant across regions and sectors (Zamagni 1996). In urban
areas, working-class youths could also enroll in new religious schools, such as
those run by the Salesiani, that offered some practical and cultural education.
As to tertiary education, the Casati law tasked the new nation’s ancient
and reputable academic institutions to transmission of specific, practical, pro-
fessional knowledge, and to the maintenance and advancement of culture; no
universities were closed, and Naples remained the only university in the South
of the peninsula. The law provided again for an applied educational track, par-
allel to traditional university-level education, instituting scuole tecniche superiori
engineering schools; scuole commerciali for business studies were also instituted
in 1868, a tertiary-level agriculture school opened in Portici in 1872, and others
followed.
The educational system built in the new nation’s institutional structure, and
its uneven implementation, arguably reflects the “elite democracy” social and
political texture of the new nation. Because lower classes had little or no polit-
ical voice and power, the State’s public funds were mostly devoted to second-
ary and tertiary academic education, whereas education was mostly funded and
organized locally at the elementary level and in applied fields.
Broadening and Tracking (1900–1970)

After some political turbulence over the 1890s, the political climate shifted in
more progressive directions. The 1904 Orlando law widened the scope of pri-
mary education (in terms of years of mandatory schooling and tasks assigned
to all municipalities) and further enlarged the financial support from the State
to the municipalities. After the results of the influential 1908 Corradini enquiry,
the 1911 Daneo-Credaro law finally fully shifted the cost of all personnel and
materials for primary education to the central State budget, leaving local gov-
ernments in charge only of providing adequate buildings (which remains their
obligation to this day).
The cultural shift that produced this important reform of the Italian educa-
tional system’s funding also spurred debates regarding its organization and syl-
labus. After the war, modernization tendencies eventually resulted in the Gentile
reform enacted in 1923 by the newly established Fascist regime. Many aspects
of the new design were similar to those originating from the Casati law; others
instead aimed (rather controversially, also because of Minister Gentile’s strong
personality) at strengthening the role of the central State, the early tracking
features of the Italian system, and the pivotal role in it of liceo Classico as an
elite track characterized by a difficult syllabus and tough assessment standards
(Scotto di Luzio 2007). The elementary school curriculum was shortened to
five years, and the State role was extended beyond funding with the institution
of administrative teacher control and adoption of a common syllabus. These
new features aimed at fostering political loyalty and national homogeneity.
Mandatory schooling was extended to age fourteen but, after elementary school,
the tracked structure of the system was strengthened by instituting a dead-end
scuola complementare track, which did not allow its students to proceed beyond
lower secondary school, alongside an academic scuola media that made it pos-
sible to enroll in upper-secondary institutions (including istituti tecnici, which
were again brought under control of the Ministry of the Economy). Possibly
also with the aim of strengthening the elite connotation of liceo classico, the
reform introduced new types of secondary schools, notably a four-year liceo sci-
entifico (a diluted version of liceo classico that would in time become the most
popular upper secondary track) and a liceo for female students (that would dis-
appear). The standards (not only of the elite academic track, but of all schools)
were enforced by central controls, because performance was monitored and cer-
tified by State-run examinations at the end of elementary, middle, and high
school cycles.
The resulting system was thus strongly segmented at very early ages. Strictly
ranked secondary school alternatives were meant to maintain the high qual-
ity and purity of liceo classico and university students who, in Gentile’s words,
were supposed to be “few but good.” The Gentile reforms also aimed at seg-
menting tertiary education, distinguishing the elite academic university degrees
from professionally oriented education. Licei degree holders could enroll in any
university degree program, whereas istituto tecnico degrees allowed enrolment
only to programs in specific subject areas, where qualifications were assessed by
national Esame di Stato examinations.
The timing and sharpness of tracking proved very controversial, even under
Fascism. Already in 1928 a new minister, Belluzzo, replaced scuola complemen-
tare with an avviamento al lavoro lower secondary school that made it possible
for students to access technical schools. Further reforms were envisioned by the
Bottai plan, which included tracked education in the Fascist corporatismo blue-
print for Italian society, but had not been implemented as the war brought an
end to the totalitarian regime.
After the war, accordingly, the Italian education system was essentially
still shaped by the Casati law’s blueprint of a centrally managed, early tracked
structure. That structure had been stiffened in the interwar period, however, by
stronger administrative tools, such as the definition and central enforcement
of primary school teacher qualifications (Ruolo unico nazionale dei maestr i law
1942/675), and especially by the institution of State examinations at the end of
each course of study.
The structure envisioned by legal provisions, however, was still far from
being fully and effectively implemented. Schooling was supposedly mandatory
until age fourteen, but was effectively provided up to that level only when, in
1962, the lower secondary level was unified in a scuola media unica – after the
five-year primary education cycle – providing for some postponement of the
early tracking system. In 1968 the State also introduced scuola materna at the
preprimary level, where education had until then been provided privately or,
human capital 255
in some cases, by municipalities (which still represent most of the pre-primary

services’ providers).
The relationship between the new scuola media and the unreformed ele-
mentary and upper secondary segments of the resulting educational system was
not made explicit by the 1962 reform: although different unions lobbied for or
against allowing teachers qualified for the elementary level to teach in the new
lower secondary program, legislators (and Italian society) remained ambivalent
as regards the preferred intensity and features of tracking. At the upper sec-
ondary level, academic licei and mildly less demanding istituti tecnici continued
to coexist with a variety of professional institutes, intertwined with local (and
national) industry, and with schools organized internally by such large firms as
Olivetti from the 1950s, patterned on American corporate training institutions.
Maturity and Deterioration

(1970s to Present)
The transition to a fourth period of institutional evolution is marked by the
period of student revolts and worker strikes that erupted in 1969. By 1973,
sweeping reforms had allowed free access by any secondary school graduate to
any tertiary degree program. University enrollment boomed; degrees earned
also began to grow a few years later, but the labor market inflow of univer-
sity graduates was reduced by high drop-out rates and long degree comple-
tion times because universities were poorly equipped to educate large masses
of unscreened students. Free access to universities was supposed to be followed
by suitable university reforms, but only in 1980 a reform began to be imple-
mented, replacing the previous German-style institutes, professors, and assis-
tants with three faculty ranks, organized in departments. Almost all of those
who in the 1970s had been employed on temporary teaching and research posi-
tions were tenured, without proper screening, and this made it difficult for
subsequent younger cohorts to start university careers. The administration of
university personnel and the structure of degree programs remained fully cen-
tralized until the 1990s, when many new universities were established all over
Italy. Around 2000, universities were finally granted broad and uncontrolled
freedom to hire and (more frequently, because of obvious evaluation biases and
smaller budgetary costs) promote their faculty, and to design new courses in the
three-plus-two harmonized European format.
At the upper secondary level, the system based on licei, istituti tecnici,
and istituti professionali until recently maintained its prewar configuration.
Comprehensive reform of the upper secondary tracks remained pending (and
hotly debated) for about fifty years. Most of the local connections between
technical- and vocational-oriented tracks and the entrepreneurial world have
been severed since the mid-1970s. Since the early 1990s school-level sperimen-
tazioni were allowed to introduce fairly substantial changes in the admittedly
obsolete upper secondary school curriculum. Despite their name, these inno-
vations were neither introduced in a properly experimental setting, nor evalu-
ated. They did not substantially change the academic orientation of the licei’s
stream, which was increasingly unsuitable to their wider and less selected pop-
ulation of students. Although until the 1980s the rise in high school enrollment
had been driven by technical and (initially) professional tracks, since the 1990s
enrollment has favored licei, perceived as more prestigious and a better gateway
to university. A new simplified, and less expensive, structure has only recently
been introduced, and has begun to be implemented in 2010.
The fact that all upper secondary schools would have to prepare students
for potential university access further complicated the inconclusive debates that
followed the 1962 scuola media unica reform of lower secondary schools. Lower
secondary schools’ mission was not fully clarified. They moved from being pre-
paratory schools arranged along already differentiated tracks to provision of
a universal and mandatory education, but it was unclear whether they should
serve as completion of the primary segment, or as an introduction to an upper
secondary level that was also gradually becoming almost universal. Today, lower
secondary teachers seem to fare worse than those in other schools’ segments in
job satisfaction surveys (Argentin and Cavalli 2010).
In the primary segment, where teachers up to very recently were not
required to have a tertiary degree, teacher numbers increased faster than enroll-
ment with the introduction (in 1971) of full-time sections and the assignment (in
1977) of additional teachers to help problematic students who were previously
confined in remedial sections; between 1985 and 1990, the elementary school
curriculum was reformed assigning multiple teachers to each class. As a baby
bust followed the baby-boom’s peak reached in 1964, the pupil-to-teacher ratio
declined along with enrollment rates: in public elementary schools, it was 27.3
in 1950, 22.2 in 1960, 21.4 in 1970, and 15.7 in 1980 (Brunello and Checchi 2005);
in 1992, it was at 10.8 the lowest of the Organization for Economic Cooperation
and Development International Indicators Project data.
Not only the mismatch between unreformed curricula of different school
levels and mass school attendance, but also administrative and legislative inno-
vations may have reduced the effectiveness of Italian schools’ organization and
operation. Hiring and retention of teachers gradually lost any remaining selec-
tive feature, and the lack of selectivity at the access gate may have been fur-
ther compounded by the self-selection implications of the erosion in the social
prestige and the economic appeal of the teacher profession. Increasingly rare
and over-crowded official competitions for permanent teaching positions (kept
below the numbers required by current enrollment to avoid longer run budget-
ary costs) implied that the many would-be teachers who had earned degrees
in the newly accessible universities could only obtain temporary employment.
Because access to tenured position could result from accumulation of seniority
human capital 257
in such positions, rather than official competitions, teaching became an occupa-

tion for individuals who either are very motivated and willing to wait for a long
period of time before getting a permanent position, or lack alternative employ-
ment opportunities. When teachers finally obtain a tenured position, they earn
the right to move to other schools on the basis of seniority, without any perfor-
mance evaluation. As a result, teacher/student ratios and teacher seniority are
higher in the South and, within each local district, in schools with better socio-
economic catchment areas. In the areas and schools with more pressing needs,
teachers are not only fewer and less experienced but also, because they hope
and expect to move soon, poorly motivated to supply effort (Barbieri, Rossetti
and Sestito 2011).
The implications of inefficient teacher allocation mechanisms are com-
pounded by changes in student assessment procedures in the direction of
weaker standards and reduced comparability of examination results. The pro-
cess began with the reform of the Esami di Maturità in the early 1970s and
possibly peaked between 1995 and 2006, when students who failed only a few
subjects were no longer required to make up their shortcomings during the
summer break. Already in June, teachers had to decide either to have them
repeat the grade, or to pass them to the next grade; the latter was the more
agreeable option for teachers in an environment where anxious parents, rather
than Ministry inspectors, would be questioning their choices. From 1997 until
2005, the Esame di Stato at the end of high school was administered by the stu-
dents’ own teachers, with only one Ministry-appointed external examiner.
Education Inputs and Outputs

Italy’s institutional evolution offers a very rich setting for evaluating the deter-
minants and effects of education quantity, quality, and funding modes. In this
section, we first examine the behavior over time and across regions of indicators
of the Italian education system’s input and output, aiming to detect the implica-
tions of the institutional features reviewed previously. Then, we compare them
to those observed in other countries, preparing the ground for the next sec-
tion’s analysis of education’s role in explaining Italy’s economic development.
Long-Run and Convergence Dynamics

The consequences of the institutional developments briefly reviewed previ-
ously are readily apparent in the expenditure and enrollment data shown in
Figure 9.1. Public expenditure remained low until primary schools shifted from
local to State funding; enrollment in primary schools took off only after the
.10
.08 1
.9
.8
.06 .7
.6
.04 .5
.4
.3
.02
.2
.1
0 0
1880 1900 1920 1940 1960 1980
Education expenditure/GDP, left axis:

Municipalities
+ other local government
+ State
Enrollment rates, right axis:
Primary students/6−10 population
Secondary students/11−18 population
Figure 9.1
Source: Checchi (1997).
provision of State funding, and approached 100 percent only in the 1930s. Even
though enrollment increased continuously, attendance was lower and actually
declined between 1881 and 1893 and between 1926 and 1936 (A’Hearn, Auria,
and Vecchi 2011).
Over time, public spending in education increases almost always faster than
GDP. For the initial portion of Italy’s history, this reflects the country’s growing
population and standard of living, and the resulting increasing propensity to
invest in a rich-country’s educational system. More recently, school expenditure
was buoyed by a tendency to overstaff schools even as school-age youth began
to decline, and economic growth to slow down.
Table 9.1 displays summary indicators of long-run dynamics and regional
differences in primary school effectiveness, which was poor as indicated by low
literacy rates that until the early 1900s also remain persistently different across
macro regions. Both features are largely explained by local funding of primary
schooling. In the late 1800s restricted democracy polity of most European coun-
tries, the land-owning classes endowed with political power were not much
interested in raising the literacy of their prospective salaried workers (Lindert
2004). Their propensity to fund education was even lower at the local level,
where it would have spurred political awareness and wage-increase pressure,
also through out-migrations. Although these factors were likely relevant across
the whole country, in the South they operated more strongly: local resources
(as measured by gross domestic product [GDP] per capita) were slightly lower
than elsewhere and this naturally reduced municipalities’ propensity to fund
human capital 259
Table 9.1 Illiteracy and schooling over time and across regions
Regions 1871 1901 1921 1951 1951 1971 2001 2010
(I) (P) (I) (P) (I) (P) (I) (P) Average years of
schooling of 25–64
population
Northwest 42.4 63.3 21 67.5 8.2 71.1 2.9 68.7 5.2 5.7 8.9 11
Northeast 68.2 41.1 40.7 58.7 18 72.7 6.3 72.2 4.6 5.3 8.6 11
Center 70.5 31.8 49.3 48.2 28.8 61 11.3 70 4.4 5.3 8.8 11.3
South 83.9 22.2 69.6 33.4 47.2 45 24.2 68.3 3.1 4.1 7.4 10.2
ITALY 68.8 38.5 48.5 49 27.4 57.6 12.9 68.3 4.1 5 8.3 10.8
Note: (I) Illiteracy rate: percent ratio of illiterate individuals to population older than six years of age.
(P) Primary schooling enrollment: percent ratio of primary school enrollment to six to fourteen years
old population. Average years of schooling: computed on the basis of minimum number of years
necessary to attain the highest educational title held.
Source: Regional indicators up to 1951 are taken from Felice (2007), where they refer to the total adult
population; here, they are rescaled to the age structure and overall average from the 1971 census. Later
data are taken from the census (between 1971 and 2001) and from the Labor Force Survey for 2010.
education as it was seen as a relative luxury; A’Hearn, Auria, and Vecchi (2011)
show that in regions with better-funded primary education a higher share of
municipal tax receipts were spent on education, and note that regional diversity
was likely rooted in cultural, political, and economic differences. The demand
for literacy and numeracy skills was related to the presence of modern indus-
trial firms, hence much weaker in the South, where the dominance of land-
lords in local politics was possibly stronger; the stronger presence of Catholics
and their fears vis-à-vis public schools may also have played a role. In the case
of males, military service taught basic literacy and numeracy at scuole reg-
gimentali (founded in the 1830s in Piedmont, expanded throughout the inde-
pendence wars period, and only abolished in 1892; Della Torre 2010). Because
the draft was dodged by many in southern regions, the northern regions lit-
eracy advantage was especially high for males, who also had a prominent role
in formal economic activities, thus amplifying North’s human capital advan-
tages. Regional differentials persisted almost unchanged until the early 1900s.
Although primary enrollment caught up quickly by 1921 and was more or less
uniform by the 1950s, differences in illiteracy rates in the overall population
and, more broadly, in the average years of schooling of adult population were
still wide in 1951. Today, most of them have been eliminated, at least among
younger cohorts.
The dynamics of postprimary enrollment lag behind those of primary
enrollment in Figure 9.1. For a long time, secondary schools and their students
were not many but high-quality. They mostly focused on classical studies, with
a strong presence of technical schools. A quantitatively significant vocational
Table 9.2 Regressions for ten-year average schooling years of twenty-five to

thirty-four population at the municipal level
T M F T M F
Initial average −0.349 −0.383 −0.428 −0.364 −0.419 −0.488
years of schooling,
0.004 0.005 0.005 0.006 0.006 0.006
twenty-six to
thirty-four
population
1991 and −0.162 −0.364 0.345 −0.147 −0,347 0,402
2001dummy
0.014 0.015 0.016 0.014 0.015 0.017
2001dummy 0.366 0.418 0.484 0.359 0.374 0.469
0.011 0.011 0.014 0.011 0.012 0.014
Initial average 0.02 0.054 0.082
years of schooling,
0.005 0.005 0.006
thirty-five to
sixty-four population
Constant 4.369 4.588 4.754 4.384 4.601 4.758
0.025 0.029 0.025 0.025 0.029 0.025
Observations 24,168 24,168 24,162 24,168 24,168 24,162
R2 0.51 0.52 0.43 0.51 0.53 0.43
Note: T = all individuals, M = males, F = females. Standard errors below point estimates.
Source: Computations by Federico Giorgi on 1971–2001 census data.
secondary track began to grow in the 1930s, and continued to develop after
the World War II especially in the Northwest, but also in the Eastern and
Central Adriatic regions that caught up with the traditional industrial triangle
(Zamagni 1996). Since the 1970s, enrollment has been continuously rising in
the unreformed secondary school institutions that were awkwardly positioned
between scuola media unica and universities. In the 1970s and 1980s, higher
enrollment was concentrated in the more vocationally oriented tracks; since the
1990s, however, the enrollment share of academic tracks, especially liceo scienti-
fico, has increased more strongly.
A quantitative assessment of trends and convergence phenomena is pro-
vided in Table 9.2, where we regress ten-year changes in the educational attain-
ment of young adults (the twenty-five to thirty-four years old) on their starting
level and a set of time dummies (the first three columns, respectively, for the
total, males and females). The following three columns also add as a control the
educational attainment of the previous generation. The average years of school-
ing of thirty-five to sixty-four years old individuals at initial the census date
has a positive coefficient, indicating that intergenerational spillovers increase
the persistence of past historical heterogeneity. The lagged dependent variable
human capital 261
coefficient remains large and significant, however; convergence is strong, and

stronger among females, who also experience faster and accelerating trend
growth.
The evolution of Italy’s human capital was also influenced by the in- and
out-migrations discussed in more detail by Chapter 10. Until the last quarter of
1900s Italy was an out-migration country. Because migrant individuals were on
average less educated than those who remained in Italy (and than of residents
of destination countries), migrations in all likelihood tended to decrease Italy’s
education gap vis-à-vis the other Western countries. This phenomenon was par-
ticularly intense in the decades before World War I and after World War II.
Although migrants were relatively uneducated persons, they were among the
most entrepreneurial in their cohorts and the acquisition of a minimum thresh-
old level of education was very often a trigger factor allowing them to migrate.
In the more recent decades Italy has become an immigration country, and
migratory flows no longer reduce the Italian education gap vis-à-vis other devel-
oped countries: not only because immigrants to Italy are less educated than
Italian natives and the relatively few but well-educated Italian emigrants, but
also because they are less educated than immigrants to other developed desti-
nation countries. The Italian socioeconomic system seems less able than other
developed countries to attract qualified (and legal) immigrants; most immigrants
in Italy are initially irregular and working in the black economy (until they are
regularized by amnesties, taking place every three to five years in recent expe-
rience). Also within Italy the last two decades have seen a reversal of trends
that previously contributed to regional convergence in human capital. Before
World War I, relatively uneducated migrants were leaving the less developed
and least endowed (in terms of human capital) regions in the Mezzogiorno and
the Northeast (individuals from the northwestern regions were likely to migrate
only temporarily in France and Switzerland). Although external and internal
migrations were blocked during the Fascist period, migrations boomed again
in the 1950s and 1960s, with less educated individuals leaving the Mezzogiorno
and settling either in Northern Europe or in the northwest (to work as blue-
collars in the booming manufacturing sector). These flows decreased in later
decades, and their composition changed: since the 1980s individuals leaving
the Mezzogiorno are among the most educated (see Cannari, Nucci, and Sestito
2000; Mocetti and Porello 2010), and internal migration contributes to maintain
the regional gap in human capital endowment.
International Comparisons
Figure 9.2 offers a comparative perspective on Italy’s educational attainment,
plotting the average years of education of the working-age population in a group
of comparable Western European countries. Italy is clearly a laggard in this
group, which is otherwise rather homogeneous apart from Finland, initially at
Average school years of 15−64 population
15
10
0
1860 1885 1910 1935 1960 1985 2010
Austria Belgium Denmark

Finland France Germany
Italy Netherlands Norway
Sweden Switzerland United Kingdom
ALL
Figure 9.2 Time path of average school years of working-age population in twelve
Western European countries (source: Morrisson and Murtin 2009), and in the aggregate
of these countries (weighted by population data from Angus Maddison Web site, http://
www.ggdc.nl/maddison/).
the bottom of the pack and rapidly getting to the top. In quantity terms Italy’s
human capital intensity is always lower than the average, consistently with the
relatively low level of Italy’s income. It does catch up rather steadily (albeit not
as quickly as Finland’s, that overtakes Italy in 1950); even between 1990 and
2000 the relative education intensity of Italy’s potential labor force is still grow-
ing fast, if not as fast as in the nineteenth century.
Not only the quantitative size of the Italian educational system (in terms
of financial resources, students, and teachers), but also its quality needs to be
compared with that of other countries, and across different historical periods.
Before 1900, the quality of the enrollment and expenditure inputs was not high,
because attendance was not enforced, and elementary teachers’ qualifications
were not defined and monitored effectively. The changes since 1970 of the orga-
nization of teacher careers and student assessments may also have had negative
implications for the extent to which formal educational attainment translated
in actual competencies. Theory and empirical evidence suggest that efficient
use of schooling resources is fostered by autonomous choices made by individ-
ual schools but only insofar as standardized students assessments provide for
the right amount of accountability of those choices (Woessmann 2007). Thus,
the evolving institutional and organizational features discussed in the previous
section are potentially much more important than the number of years spent
in school as a determinant of the skills and competencies that are measured by
standardized tests and that may in turn determine economic productivity.
human capital 263
Switzerland Finland
Cognitive skills, all math and science (test score)
5.1 Netherlands
Austria
Belgium
France
Sweden
5
Denmark Germany United Kingdom
4.9
Norway
4.8
Italy
4.7
.88 .9 .92 .94 .96
Share of students reaching basic literacy
Figure 9.3 Horizontal axis: fraction scoring above basic level in literacy tests. Vertical
axis: average mathematics and science test scores. Both standardized across all results
available (in various years) for countries considered in Figure 9.2. Source: Hanushek and
Woessmann 2009.
International surveys of student competencies (PISA for the fifteen-year-old

students, PIRLS and TIMMS for the fourth and eighth grade students) show
wide differences across countries (and within countries) in the actual skills of
individuals with similar formal education. Figure 9.3 displays the standardized
average of all available tests, reported in Hanushek and Woessmann (2009),
for a set of comparable Western European countries (in the complete data set,
only Luxembourg, Greece, and Portugal do uniformly worse than Italy, whereas
Japan is the best performer).
Most of the available evidence on the quality of students’ competencies
refers to the most recent years. To examine whether such a gap has been a
constant of the Italian history we looked at the admittedly more sparse evi-
dence coming from the earliest international comparison exercises. Table 9.3
reports data from 1971, when three different grades were tested, and 1991, when
only two of those three were covered. Because relatively few countries were
participating in both exercises, Table 9.3 reports Italy’s scores in the original
metric and Italy’s scores rescaled with respect to either the European Union
countries participating in each exercises, or the subgroup of five European
Union countries (including Italy) participating in both. In the 2000s data (dis-
cussed in detail by Cipollone, Montanaro and Sestito, 2012), Italian students
fare poorly in the lower and upper secondary schools covered by the TIMSS
and PISA surveys, but have better results in the TIMSS and PIRLS tests taken
at the primary school level. The table shows that this was already the case in
1971, when Italian upper secondary students were a small and select group.
Over time, the survey administered in 1991 shows a particularly pronounced
Table 9.3 Italian students’ test performance at difference ages and times
1971 Survey 1991 Survey
Score EU = 100 5EU = 100 Score EU = 100 5EU = 100
(a) (b) (a) (b)
Ten years old 19.9 104.1 103.4 529 103.5 100.6
Fourteen years old 27.9 105.3 105.9 515 99 98.4
Seventeen to eighteen 23.9 83 86.2 — — —
years old (finishing
secondary school)
Note: Overall reading comprehension average score of Italian youth, normalized (a) by the average
of all EU students taking the same test and (b) by the average of students from the five EU countries
participating in both 1971 and 1991 surveys: Finland, Sweden, the Netherlands, Belgium (Flemish regions
in 1991, all regions in 1971), and Italy.
Source: Elaborations on data from Thorndike (1973) and Elley (1994).
deterioration in the performance of fourteen-year-old students at the end of

the lower secondary school.
Another piece of evidence concerning the possible deterioration in the
quality of the output of Italy’s education system may be drawn from the
International Adult Literacy Survey. The information, collected in 1994, 1996,
and 1998, traces the education (in terms of number of years of formal school-
ing) and skills (in terms of performance on a literacy test) of adult individuals
whose schooling experience dates back to many years in the past. This makes
it possible for Meschi and Scervini (2010) to construct summary statistics along
these dimensions for the cohorts that, in each country, are adequately repre-
sented in the sample, and were born at various times over the last century.
Comparing Italy with the other Western European countries represented in
the International Adult Literacy Survey sample one sees not only that Italian
cohorts lag behind their contemporaries in terms of years of education, but
also that literacy is higher elsewhere than in Italy at almost all education lev-
els in terms of years spent in school. Strikingly, the Italian cohorts born in
1955–1959 achieve more years of education than those born in 1950–1955, but
are not more competent. Although this type of evidence can only be sugges-
tive, it does offer intriguing indications that some of the institutional develop-
ments reviewed previously had measurable negative implications for schooling
quality implications.
The data also indicate that education is more heterogeneous within Italian
cohorts in terms of schooling years and test performance. Sacrificing the pur-
suit of excellence to more equitable results in education might have been a rea-
sonable and deliberate choice of the institutional evolution described in the
second section, which was indeed largely driven by equity concerns. However,
Italy’s education system seems to fare rather poorly also in terms of equity.
Actual competencies vary widely within Italy, along regional lines and across
human capital 265
schools within each region. Southern regions have almost completely caught
up in terms of years of education, but still lag significantly below northern
regions in terms of student competencies. A portion of the geographical test
score variation is related to parental background and schooling inputs varia-
tion (Bratti, Checchi and Filippin, 2007). The teacher allocation mechanisms
discussed previously tend to amplify differences in such observable respects,
however, because it tends to assign relatively ineffective and poorly motivated
teachers to difficult teaching environments (see Barbieri, Rossetti, and Sestito
2011, for further discussion and some evidence). Differences in the expectations
and goals of students may be relevant: in the South (where public employment
is relatively more important) obtaining a formal degree through locally admin-
istered examinations may be more important than achieving the competences
assessed by standardized tests.
Human Capital and Economic

Development
Taking stock of the previous sections’ review of institutional developments and
of evidence regarding the resources, size, and quality of education, this section
discusses whether and how the country’s checkered education history may have
played a role in the 1861–1896 and 1995 to present periods of slow growth, and
in the 1901–1915 and 1950–1980 periods of strong growth.
To foster economic growth, formal education should be available in suitable
quantity and quality, and its production should be organized efficiently so as to
minimize its cost. In all phases of the evolution of Italy’s educational system,
the quantity, quality, and cost of its human capital production was shaped by
changing and controversial views as regards the desirability of equal outcomes,
in a setting where opportunities were far from equalized and the linkages
between efforts and results rather weakly defined. Because the same sociopolit-
ical factors that shaped production of human capital in schools and universities
also influenced the organization of factories and offices, however it is not easy
to conclusively disentangle the specific role of human capital accumulation pro-
cesses from these broader cultural and socio-political factors.
What is clear is that Italy’s economy has generally been much more produc-
tive that one would expect on the basis of its human capital intensity. Figure 9.4
plots the observations of average years of schooling of the working age popu-
lation and of domestic production across all the countries and periods covered
by the Morrisson and Murtin (2009) data. The relationship between the two
indicators for Italy is located on the bottom-right boundary of the data cloud.
Compared with Western European countries with similar historical roots, and
similarly variable exposure to international trade and technologic trends, Italy
Average school years of 15−64 population 15
Italy2010
Italy2000
10
Italy1990
Italy1980
Italy1970
Italy1960
5 Italy1950
Italy1940
Italy1930
Italy1920
Italy1910 Venezuela1960
Italy1900 Iraq1980
Venezuela1950
Italy1890 Venezuela1940
Italy1880 Iraq1970
Italy1870
Iraq1960
0 Iraq1950
−1 0 1 2 3 4
Log of real GDP per capita
Figure 9.4 Horizontal axis: GDP per capita in purchasing power units (source: Angus
Maddison Web site, http://www.ggdc.nl/maddison/). Vertical axis: average school years
of working-age population (source: Morrison and Murtin 2009). All available countries
and periods are plotted. Darker symbols mark observations for the twelve Western
European countries considered in Figure 9.2. Observations for Italy, and some with even
lower education/income ratios, are labeled with country name and year.
was typically producing more than should have been implied by its workers’
human capital. To assess the extent to which the country’s educational system
was suitably configured to exploit the country’s economic structure and chang-
ing comparative advantage, we focus next on the interaction between regional
heterogeneity and the common forces shaping the various stages of economic
development.
Education and Localized Growth in Early Italy

The better performance of northwestern Italy starting in the 1890s may be partly
traced to human capital. The regions that led Italy’s industrial revolution were
also those with the highest preunification literacy rates, and this is not a coinci-
dence. Some evidence along these lines is in Felice (2011), who reports the results
of conditional convergence growth equations estimated across sixteen Italian
regions over different time periods: human capital differentials are positively
and statistically significantly related to growth over the 1891–1911 and 1911–1938
subperiods, and when all periods are pooled together. The human capital dif-
ferentials inherited from the past, and affected by the uneven implementation
of the Casati law, are likely to have interacted with broader developments: polit-
ical unification in 1861 slashed tariffs across regions and, temporarily, vis-à-vis
human capital 267
international partners. This arguably made industrialization easier in the slightly

more developed and better endowed northwestern regions, that would later also
benefit from external trade protection, enacted since the late 1870s, and from
availability of cheap hydroelectric power. All these possibly small advantages
were amplified by the presence of sufficient human capital in the northwestern
regions (Gagliardi and Percoco 2011); other regions specialized in agricultural
production for the internal market, which in some southern regions, such as
Campania and Sicily, replaced export-oriented and labor-intensive modern cul-
tivations (Cohen and Federico 2001). As a result, Italy’s industrial revolution not
only generated the 1900–1915 growth acceleration, but also widened previously
shallow regional differences in the level and sector composition of income and
production (Fenoaltea 2003).
Education and the Postwar Boom

Finding that Italy stands out as peculiarly poorly educated among its industri-
alized peers, we need to wonder what may explain the country’s relatively high
standard of living and its especially fast growth in the period after World War
II. The 1950s–1960s economic boom was largely driven by growth of relatively
low-skill manufacturing industries, which could exploit the interwar expansion
and improvement of primary and secondary education. To produce high and
increasing per capita incomes, however, low-skill labor needs to be combined
with other factors of production, and Italy’s physical capital stock is not higher
than that of comparable countries in available data sets, such as those compiled
by Nehru and Dhareshwar (1993) for the 1950–1990 period, or those included in
the 5.6 release of the Penn World Tables.
The country’s income/education ratio, in data such as those displayed in
Figure 9.4, is higher than that of all but some oil-producing countries. This sug-
gests that Italy’s output may be produced by factors that, like natural resources,
are unrelated to formal schooling and may be more or less strongly demanded
by the global economy. In Italy’s case, the diffused knowledge and habits accu-
mulated in centuries of civilization may well have made it possible to orga-
nize production efficiently through informal organizational arrangements and
knowledge transmission channels. The ability to do so is a type of “social cap-
ital” that is related to generalized trust and respect of the spirit of the law (see
Chapter 11), but need not coincide with it; in Italy, generalized trust is gener-
ally low, and informal arrangements more prevalent than in other countries,
but informal organization and generalized trust seem to be positively correlated
across regions of Italy.
An indication of the small role of formal education in Italy’s postwar suc-
cess story is the fact that, in census data, the lowest incidence of university
education at the province level is in Biella and Prato, where high incomes were
and still are the result of successful textile industries organized in tight distretto
industriale clusters of small firms. More generally, there is a negative relation-

ship between educational achievements and the prevalence of such production
structures also for furniture, shoes, and other typical “Made in Italy” premium
quality light manufactures. This is an unsurprising implication of the fact that,
during the boom decades, youths who could easily obtain employment and on-
the-job training had little reason to enroll in secondary and tertiary schooling.
On the labor demand side, industrial organization might in principle itself be
endogenous to the lack of formal education, but more plausibly make it redun-
dant by providing alternative and more effective channels of intergenerational
knowledge transmission. These include apprenticeship and on-the-job training,
and the less-than-high-school vocational track which, as discussed in Zamagni
(1996), followed much the same time trajectory and regional pattern as the
manufacturing sectors that fuelled Italy’s post-war boom.
From Growth to Stagnation

Italy for a long time managed to sustain a high and increasing, if geograph-
ically unequal, standard of living despite relatively low levels of formal edu-
cation, which did not prevent the early twentieth century infant-industry
growth (but did concentrate it in the region with the highest literacy), and
was not an obstacle (even across regions) to the postwar economic miracle.
In international comparisons, this apparently gravity-defying model may well
be explained by the fact that Italy’s comparative advantage privileged sectors
in which academic and scientific knowledge play unimportant roles. Informal
mechanisms of information transmission and training, within highly special-
ized industrial districts and in the scuole professionali vocational track, were
in fact especially well suited to foster local productivity in such sectors also
across regions within Italy.
Whatever kept Italy growing without education ceased to be effective over
the period when detailed growth-accounting estimates are available from the
Conference Board Total Economy Database (http://www.conference-board.org/
data/economydatabase/) for the twelve-country comparison group of Figure
9.2. In those data, Italy’s 1990–2009 growth performance, at less than 1 percent
yearly average, is the second slowest (only ahead of Switzerland); the contribu-
tion to it of labor composition, measured in terms of years of education, is the
third smallest (only ahead of Switzerland and Germany); and the largest neg-
ative contribution to Italy’s poor performance is made by capital deepening in
information and communication technologies, and, especially, by total factor
productivity, which declines by almost 5 percent over the two decades.
Of course, many factors that lie beyond this chapter’s scope may have
determined the dismal performance of the Italian economy. The evidence and
mechanisms we have reviewed, however, do suggest that the role of education
may have been important, in two related respects.
human capital 269
First, Italy’s formal education gap vis-à-vis other Western countries may
have become more relevant than in the past. Over the last twenty years, expan-
sion of trade opportunities between Western Europe and emerging countries
has reduced Italy’s comparative advantage in low-skill sectors, and information
and communication advances have highlighted Italy’s difficulties in even adopt-
ing (let alone introducing) new technologies. In the postwar boom, the infor-
mal, apprenticeship-based processes of skill accumulation and transmission
exemplified by distretti, and the related vocational schooling provided by scuole
professionali, were key to success. More recently, and especially since the 1990s,
formal education may have become increasingly necessary to exploit Italy’s
comparative advantage. It is not easy, because of data comparability problems
and of the presence of many confounding factors, to seek empirical support
for this plausible hypothesis in patterns of economic and educational develop-
ment across geographic units and over time. The association between low edu-
cational achievements and strong economic performance, discussed previously
as regards distretti industriali and more generally apparent in data that single
out the prevalence of traditional “Made in Italy” sectors, does seem to become
weaker over time. For the most recent period, some supportive evidence is pro-
vided by Schivardi and Torrini (2011), who find that the broader access to ter-
tiary education triggered by the new organization implemented in the 1990s
and 2000s is positively related across Italy with firm-level productivity and
restructuring indicators.
Second, Italy’s education has increasingly suffered from a qualitative gap.
We discussed how various institutional and organizational developments may
have worsened the effectiveness of the country’s schooling system since the
1970s, and we have seen that even as Italy’s education quantity has continued
to catch up, its quality seems to be poorer than in other countries, in terms of
standardized student tests and of adult skills per year of completed schooling.
Because the generations that attended school after the mid-1970s came of age
just as growth ceased in the 1990s, the two phenomena may be related: even
as education kept on growing in terms of the years-in-school measure used
in the growth accounting exercises, the low residual total factor productivity
estimate may reflect its declining quality. Although quality is harder to mea-
sure than quantity, it is very interesting to find that Italy displays not only the
lowest standardized test scores, but also one of the most negative among the
1975–2000 test-score trends that Hanushek and Woessmann (2009) show to be
significantly associated with changes in per capita GDP growth.
Thus, some of the recent marked slowdown of total factor productivity
growth may stem from its education sector and in particular from mechanisms
linking organizational features to cognitive skills (Woessmann, 2007). The lack
of comprehensive reforms of the secondary sector, where many new differen-
tiated curricula have proved expensive and confusing, may have deprived that
segment of the selective orientation that would have maintained quality as stu-
dent numbers increased. The progressive weakening of assessment standards,
rooted in turn in the lobbying power of underemployed teachers, was facilitated

by the progressive dismantling of ministry-based inspective services, and by the
suppression or dilution of external examinations at the end of each schooling
cycle.
It is hard to deny that more and better human capital would make a useful
contribution in Italy’s current conditions. In the early twenty-first century, low
educational attainment and poor quality of education may again be an obsta-
cle to socioeconomic progress in a country that seems to be poorly equipped
to increase the quantity and quality of its human capital, and that may see
resilient regional heterogeneity grow stronger as a federalist reform of the con-
stitution introduces shared competence in education, backtracking over the sin-
gle most important educational milestone of the country’s 150 years of history:
national funding and administration of primary education.
Acknowledgments
The authors gratefully acknowledge helpful comments on earlier versions of this
Chapter by Gianni Toniolo, Daniele Checchi, and by the discussants (Cormac
Ó Gráda and Daniele Terlizzese) and other conference participants. A longer
working paper version is available at http://www.bancaditalia.it/pubblicazioni/
pubsto/quastoeco/quadsto_06/Qse_06.pdf.
Chapter 10
MIGRATIONS
matteo gomellini and

cormac ó GRÁDA
Introduction
Throughout history people have always moved to better their lot, but before the
nineteenth century the extent of such movements was severely constrained by
transport costs and by fear of the unknown. Mass migration from Europe to
the New World began in the 1840s. In the early decades it was mainly confined
to migrants from northwestern Europe, and included few Italians. International
migration within Europe was also limited before the 1880s.
Italy’s emigration rate rose from five per thousand (of population) in 1876
to nearly twenty-five per thousand in 1913.1 Between 1876 (when data on Italian
emigration first become available2) and 1975, twenty-six million emigrated. The
outflow was disproportionately a pre–World War I phenomenon: between 1876
and 1914 nearly fourteen million left. On the whole, more than half headed for
destinations elsewhere in Europe; over 6 million reached the United States and
Canada; and over 4 million chose Argentina and Brazil (Table 10.1).
Before the beginning of the last century, Italian migrants headed mainly for
Europe and Latin America. Thereafter, caused in part by the dynamism of the
US economy and in part by an ongoing transport revolution that made overseas
trips safer and cheaper, there was a big surge of emigration to the United States
that lasted until the war (Hatton and Williamson 1998a). After a temporary halt
because of World War I, emigration resumed, showing a progressive shift from
overseas to continental destinations, mainly because of the restrictive laws on
immigration passed in the United States (Timmer and Williamson 1998). In 1927
the Fascist regime, in turn, enacted legislation to restrict emigration from Italy.3
Table 10.1 Italian emigration by main destinations

Year Average rate of Europe United States Brazil and Total
emigration (million) and Canada Argentina (million)
(per thousand) (million) (million)
1876–1900 6.7 2.5 0.8 1.6 5.3
1901–1913 17.6 3.5 3.5 1.4 8.1
1920–1938 5.1 1.9 0.9 0.7 3.8
1948–1973 5.2 4.9 0.9 0.6 6.8
Source: Our elaboration from Istat (various years).
Because of a combination of these restrictions and of the Great Depression, only

2.5 percent of the population emigrated in the following decade and the ratio of
return migration to gross emigration fluctuated between 60 and 80 percent.4
The post–World War II emigration was definitely a European one: the over-
seas share of emigration dropped to an average of 10 percent of the total. Gross
flows were nonetheless sustained: 8.5 million people emigrated in this period,
7.3 million of them before 1975. The numbers returning were also high.
Although most migrants remained abroad for good, a significant but vary-
ing proportion always returned. A sense of the relative importance of return
migration in the cases of the United States and Argentina may be obtained by
comparing gross migration flows and the numbers of Italian-born residents as
recorded in the census (Table 10.2). Thus, a gross migration of more than 0.6
million Italians during the 1890s led to an increase in the number of Italian-
born of only 0.3 million in the United States between 1890 and 1900, whereas a
gross outflow of 1.2 million in the 1910s increased the number of Italian-born
by less than 0.3 million between 1910 and 1920. In Argentina, by comparison,
gross outflows of 0.6 million in 1876–1895 and 1.2 million in 1896–1914 yielded
increases in the numbers of Italian-born of 0.4 million in 1869–1895 and more
than 0.4 million in 1896–1914.5 Italiani brasiliani were more likely to remain
because of their faster assimilation (Trento 2002, 3–23).
After 1923 the proportion of returnees from Europe surpassed that from
the United States. This was mainly caused by the huge numbers of returnees
from France, whose economy virtually stagnated between 1924 and 1927. The
ratio of returnees to leavers rose until World War II, driven by the reduction
in outflows. In the second part of the twentieth century, the ratio of return to
total emigration reached 60 percent in 1963. Then, in the first part of the fol-
lowing decade the ratio was stable, whereas in the second part gross outflows
decreased and the return to total emigration reached unity in 1973.
As far as regional aspects are concerned, over the entire period about half
of the emigrants came from northern regions, two-fifths from southern regions,
and one-tenth from the regions in the center (Figure 10.1).
Although the share of emigrants from regions in central Italy remained
steady during the entire period, the shares of the South and North fluctuated
migrations 273
Table 10.2 Italian emigration and Italian-born

residents in the United States and Argentina,
1880–1920
Year Italian-born in Decade Gross Migration to
United States United States
1880 44,230 1876–1879 16,345
1890 182,230 1880–1889 267,660
1900 484,027 1890–1899 603,761
1910 1,343,125 1900–1909 1,930,475
1920 1,610,113 1910–1919 1,229,916
Year Italian-born in Period Gross Migration to
Argentina Argentina
1869 71,403
1895 492,636 1876–1895 590,125
1914 912,209 1896–1914 1,197,029
Sources: Historical Stats of the U.S., pp. 66, 56–7, and Commissariato
Generale della Emigrazione Italiana (1927).
considerably. In particular, in 1876 emigration was an almost entirely Northern

phenomenon. By 1900, the shares of North and South had converged and
remained similar until the early 1920s. After the US Quota Act of 1924, the
Southern share fell, losing 10 percentage points: its average during the Fascist
period would be around 30 percent. After World War II the situation was
reversed, with the Southern share rising from 45 percent during the 1950s to 75
percent in the crisis year of 1963.
100%
80%
60%
40%
20% South North Centre
0%
1876 1881 1886 1891 1896 1901 1906 1911 1916 1921 1926 1931 1936 1947 1952 1957 1962 1967 1972
Figure 10.1 Emigration: Shares from the North, Center, and South of Italy (percentages).
Sources: Our elaborations from Istat (various years).
During the 1970s emigration flows decreased substantially, notwithstanding

the high level of unemployment in Italy during that period. It seems that the
gains made during the years of the “economic miracle” were mainly responsible
for this apparently counter-economic choice. Emigration today is very low and
restricted mainly to highly skilled and specialist workers.
Almost from the outset Italian migrants spread themselves widely over
a range of destinations. The choice was rarely accidental; the immigrant to
Australia who declared that it had never occurred to her “that Australia was
not in America” (Choate 2008, 23) was quite atypical. It will be argued later
that, by and large, before 1914 swings between destinations—mostly in Europe,
North America, and Latin America—reflected shifting relative prospects in
the different receiving countries, although the sharpness of such swings was
attenuated by the size of preexisting migrant stocks. Migration to Brazil totaled
about one million between the early 1880s and the early 1900s, but declined
rapidly thereafter, whereas migration to Argentina reached 0.7 million in the
1900s. The increasing preference for Argentina (where in 1914 one inhabitant
in nine was Italian-born and where over half the population today can claim
some Italian ancestry) over Brazil is accounted for by the relative decline of the
latter’s economy. After 1914, war and immigration policy mattered: with access
to the United States severely limited, Europe became the most important desti-
nation of Italian migrants.
This chapter focuses on some economic aspects of the phenomenon (over-
looking other important features) and is organized as follows. The second sec-
tion describes migrant characteristics, with particular attention given to the
issue of self-selection: were those who left the “best and the brightest”? The
third section focuses on the determinants of emigration. A particular concern is
whether emigration as a whole raised the living standards of those who stayed
and whether it promoted interregional convergence within Italy. In the fourth
section we do simulation exercises and calculate the short- and long-run effects
of emigration on per capita gross domestic product (GDP); the contribution of
emigration turns out to be significant with respect to the growth of living stan-
dards and to regional convergence.
Finally, in the recent past Italy has become a country of large-scale net
immigration. The fifth section offers a review of that immigration. It focuses
on the links between migration, economic activity, the labor market, balance of
payments, crime, and public opinion.
Emigrant Characteristics
Generalizations are always necessary for analysis to proceed. Although it makes
sense to model Italian migration as consisting of unskilled workers because
migrations 275
(a) Age-distribution of Roma passengers, 1902–05 (b) Age at arrival of Italian-born US residents 1900
25 25
20 20
15 15
% %
10 10
5 5
0 0
0 10 20 30 40 50 60 70 80 0 10 20 30 40 50 60 70 80
Age Age
Figure 10.2 Age and gender distribution of migrants.

Source: Ellis Island Ship Database [at: http://www.ellisisland.org/search/ship_year.asp?lett
er=r&half=2&sname=Roma]; IPUMS 1900 U.S. census sample.
most in periods of mass migration, such as 1880–1914 were unskilled (see

below), Italians were also associated at one time or another with niche occu-
pations, such as picture-framers, plaster figure makers, barbers, fish and chip
merchants, ice-cream makers, and tunnel workers.
Migrant characteristics may be inferred from the many publications
of Italian scholars quoted previously (see note 4), but also from quantitative
sources, such as census data, shipping records, and official inquiries, and also
from qualitative sources. Three of the richest sources include the massive report
of the Dillingham Immigration Commission (United States Congress 1911), a
by-product of nativist concerns about the social and economic impact of immi-
gration into the United States; the Annuario statistico della emigrazione dal 1876
al 1925, drawn up by the Commissariato Generale per l’Emigrazione, an insti-
tution founded in 1901 by the Luzzati Law (n. 23, January 31), a by-product of
Italian concern for emigrant welfare6; and the Ellis Island archives detailing
immigrants into New York from 1892 onward.
Ship passenger lists offer valuable insights into the age and gender aspects of
migration. As noted, when the fixed cost of migration is high, there is a presump-
tion of a bias in favor of young adult males and infrequent return migration.
Figure 10.2a describes the age and gender distributions early in the last cen-
tury of thirty thousand or so Italian emigrants on the steamship S.S. Roma, which
made the crossing from Naples to New York several times a year between the early
1900s and the 1920s. Figure 10.2b describes the age at arrival of Italian-born males
and females as reflected in the US census of 1900. Some features of the migration
are clear. First, males were much more likely to leave than females: in the period
in question more than 70 percent of the emigrants were male. Over half the males
were aged fifteen to twenty-nine years, although the significant proportion of older
males on board (more than 30 percent were aged thirty or above) is also striking.
The Annuario Statistico reveals that migrants from the South were more likely to
be temporary or seasonal migrants. Thus, between 1905 and 1920 more than one-third
(a) SEI by age group (15–19 to 55–59):

Italian (black line) and US born, 1920
40
35
30
25
20
15
15 20 25 30 35 40 45 50 55
(b) EDSCOR50 by age-group (15–19 to 55–59):

Italian and US born, 1920
18
16
14
12
10
6
15 20 25 30 35 40 45 50 55
Figure 10.3 Earnings and occupational status of Italian immigrants and U.S. born
first-generation Italian-Americans.
Note: SEI and Edscor50 are two-widely used IPUMS proxies for earnings/job status. SEI
measures occupational status based on the income level and educational attainment
associated with each occupation in 1950, while EDSCOR indicates the percentage of
people in the respondent's occupational category who had completed one or more years of
college. Source: http://usa.ipums.org/usa/.
of migrants from the regions of Lazio, Abruzzo, and further south returned, whereas
the proportion from regions to the north was about 10 percent. The exceptions were
Sardinians (who were very reluctant to migrate in this period but, when they did,
mostly left for good) and Ligurians (of whom over half returned).
In the 1900s an unskilled male worker from the Italian south might have
hoped to earn the equivalent of 500 lire annually at home or 2,000–2,500 lire
($400–$500) in, say, New York. He would have weighed such numbers against
the duration of the voyage (seven to ten days); the cost of getting from his
home village to the port of embarkation; the 170–190 lire fare for a steerage
or third-class passage to the United States in an iron steamship carrying hun-
dreds of passengers; and the uncertainty of gaining employment on landing
(Commissariato Generale dell’Emigrazione 1927; Fenoaltea 2002; also Keeling
2007). The cost could have constrained his initial move outward, but the
migrations 277
frequency with which some males crossed the Atlantic (notably the “golondrine”
or “birds of passage,” who travelled as seasonal migrants) implies that it was
not a constraint for them.
Figures 10.3A and 10.3B capture one aspect of immigrant adaptation by
comparing the socioeconomic and educational status of Italian immigrants and
first-generation Italian-Americans (i.e., those with at least one Italian-born par-
ent) in 1920. Based on the IPUMS census sample, they track the mean values of
SEI and EDSCOR50, two widely used IPUMS proxies for earnings/job status, by
age-group (from fifteen to nineteen years, to fifty-five to fifty-nine years). Both
measures indicate that the immigrants acquired few skills after arrival, but the
children of immigrants fared better. Moreover, those who arrived when young
were at an advantage, even after controlling for language and literacy (compare
Hatton and Williamson 1998a, 137–138). Italian immigrants fared relatively better
in the northeastern states than the US-born, perhaps because their skills were
more readily recognized where they were most numerous. The returns to age
were much greater for those born in the United States than for immigrants. This
could mean that it was easier for the US-born to acquire experience because they
changed jobs less frequently, or else (as Hatton has suggested) that the market
did not fully recognize the value of increases in immigrant human capital.7
Migrant Selection in the Age of Mass Migration

and after World War II
Migrants are not randomly selected from the population of their countries of
origin. Each generation in the host country believes that the latest wave of immi-
grants is of poorer “quality” (slower to assimilate, more criminal, less indus-
trious) than those that preceded it. In sending economies, however, the worry
has long been that the departures of their best and brightest created a “brain
drain.” Public opinion in the United States a century ago, reflected in the report
of the 1907–1911 Immigration Commission, notoriously distinguished between
“old” and “new” immigrants to the United States and argued that the latter
(which was heavily Italian) were less educated and slower to adapt to American
culture than their Northwestern European predecessors. That conviction was
partly responsible for the literacy tests stipulated in the 1917 US Immigration
Act, harbinger of a series of restrictive measures seeking to screen newcomers.
For Robert Foerster, however, author of a classic work on the Italian diaspora,
the self-confidence of Italian emigrants who braved the Atlantic indicated that
they were “of the race of Columbus still” and, furthermore, their “energy and
prowess” placed them well ahead of their stay-at-home neighbors (Foerster 1919,
419). Foerster’s account was largely deductive and impressionistic, however, with
little hard evidence in support of his assertion of positive selection.
The nature and direction of selection in migrant populations remains
controversial. In one respect, the presence of self-selection is clear: emigrants
Table 10.3 Literacy by age and gender

Arrivals in Census Year
1880 1900 1910
Age-Group M F M F M F
10–19 67.9 73.9 58.4 56.6 64.7 74.7
20–29 73.8 60.1 47.1 43.3 60.5 52.5
30–39 72.8 53 44.7 36.2 47.2 44.6
40–49 70.2 56.1 46 34.3 46 45
Note: the “arrivals” in 1880 include all those resident in the

U.S. in that year.
Source: our elaborations on IPUMS.
tended and tend to be disproportionately young and healthy. In the past, the
gender bias toward males entailed a reduction in labor force productivity in
the sending country. Common sense suggests that those with most to gain left,
unless prevented from doing so by legislation. Were those who left also bet-
ter schooled, more self-confident, and less risk-averse than their peers? These
aspects of human capital are less easily identified. One proxy often used to
signal positive self-selection is, for example, upward mobility within and across
generations. Hatton (2010) invokes the superior labor market performance of
the children of immigrants (and this certainly holds for Italian-Americans in
the United States before 1914) as evidence that they inherited valuable charac-
teristics that their disadvantaged parents had failed to capitalize on; Ferrie and
Mokyr (1994) infer positive selection bias from the overrepresentation of immi-
grants among US entrepreneurs. Again a priori, the high cost of migration
from Eastern and Southern Europe during the pre-1914 age of mass migra-
tion and the large gap between incomes in sending and host economies tip
the scales toward positive selection bias (Hatton and Williamson 2005, 14). In
general, the greater is the gap between incomes in the sending and receiving
economies, the greater the presumption that the more skilled will leave.
There is little doubt that emigrants were relatively uneducated (Sori 1979,
205). Moreover, the literacy rate among Italian emigrants was low compared
with that of other immigrant groups in the age of mass migration (in line with
Italian disadvantage in the population at large; see Chapter 9), and the illiteracy
rate was highest for those from Southern Italy (Cipolla 1971, 93).
Nonetheless, there is some evidence based on different indicators that points
to a positive selection of Italian emigrants.
Table 10.3 reports the percentages of Italians arriving in the United States in
1900 and 1910 and of all Italians resident in the United States in 1880 described
as literate in the census. The relatively small number of arrivals in the United
States before the mass migration of the 1880s and later were clearly in a different
migrations 279
league than the immigrants of later decades. Fewer than half of males and
females arriving in their twenties in 1900 were literate, although the propor-
tions that were literate rose thereafter. Still, the post-1880 emigrants were more
literate than the average in the south whence most of them came. Those data
refer to the United States; the literacy rates of Italian-born brides and grooms
in Uruguay a century or so ago—89.9 percent for grooms and 65.8 percent for
brides in 1907–1908 (Goebel 2010, 221)—imply stronger positive selection among
emigrants there.
The mean height of a community or population is a widely accepted mea-
sure of its health and nutritional status (A’hearn, Peracchi, and Vecchi 2009). A
recent anthropometric study of Italian-Americans based on Massachusetts nat-
uralization records offers a second indication of positive selection bias in the
pre-1914 period. It finds that early twentieth-century Italian immigrants in the
United States were taller than the mean in the regions they left: 165 centimeter
on average for adult, mainly southern, males born after 1880, three to four cen-
timeter taller than military recruits from the south born around the same time.
The outcome is striking, even if the sample is rather small and perhaps biased
by the tendency for self-reporting to exaggerate heights somewhat (Danubio,
Enrica, and Vargiu 2005).
A third piece of evidence, less supportive of positive selection bias, invokes
wage data on skill differentials. The Roy hypothesis (see Borjas 1987) states that
emigrant selectivity is a function of relative skill premia in receiving and send-
ing countries. The trends in skill premia in Italy and the United States (Betran
and Pons 2004) described in Figure 10.4 implies that, ceteris paribus, between
1880 and 1930 the departure of unskilled workers lowered the skill premium in
Italy and increased it in the United States (although the line is slightly upward
sloping between 1900 and 1915).
1.9
USA
1.8
1.7
1.6
Italy
1.5
1.4
Source: Bertran and Pons (2004)
1.3
1880 1885 1890 1895 1900 1905 1910 1915 1920 1925 1930
Figure 10.4 Skill premia (Italy versus United States), 1880–1930.
The ensuing loss of human capital to the Italian economy was mitigated by
three factors. The first is emigrant remittances, discussed later in this chapter.
The second stems from the impact of emigration on the literacy of the stay-at-
homes. An increasing probability of leaving must have led to increased invest-
ment in schooling by all those who had some prospect of emigrating, and not
simply those who left (Coletti 1911, 257–259; Sori 1979, 207; Stark, Helmenstein,
and Prskawetz 1997; Faini 2003; Williamson 2011b). The third relates to return
migration: migrants may well have returned endowed with human capital accu-
mulated abroad (Dustman, Fadlon, and Weiss 2010).
The continuing ambiguities and controversies about migrant selection
underline its Janus-faced character. Anti-immigrant commentary in Italy today
closely mirrors that of anti-Italian commentary in the United States a century
ago. In practice, selection from the middle of the income distribution is a styl-
ized fact about unfettered migration that has almost never been violated since
1492, and Italian migration is unlikely to be exceptional in that regard.
After World War I a series of developments (restrictive US quotas from
1924, the rise of Fascism, global economic depression, and World War II) com-
bined to reduce Italian emigration greatly. When emigration resumed after
World War II its main focus was no longer the New World, but rather Western
Europe. The proportion of emigrants opting for the latter destination rose from
55 percent in the 1950s and 81 percent in the 1960s. The numbers involved were
large: 2.8 million in the 1950s, 2.9 million in the 1960s. As always, the size
and direction of the outflow was sensitive to macroeconomic conditions and
host-country regulations. Emigration begin to decline from the late 1960s, as
Italian wages converged on those further north and the economic recession of
the 1970s led to the closure of labor markets. Although Switzerland remained
the favored destination of Italian emigrants throughout this period (by the
mid-1960s there were nearly 0.5 million Italian nationals, mostly male, working
there) France ceded second place to Germany (Venturini 2004, 10–17) when the
bilateral Italian-German Gastarbeiterprogramm negotiated in 1955 prompted the
migration of more than one million Italians between 1955 and 1973. Even to a
greater extent than earlier the outflows were accompanied by significant return
migration: thus in the 1960s a gross outflow of 2.9 million led to a net emigra-
tion of only 0.8 million (Venturini 2004, 10, 16).
The Gastarbeiterprogramm targeted low-skilled workers. The findings of a
recent analysis of the children of guest-workers who stayed in Germany are
consistent with negative selection bias (Dronkers and de Heus 2010). However,
the particularly poor PISA8 science scores recorded by the children of Italians
may have been partly caused by their parents’ origin in Southern Italy, where
scores were strikingly lower than in the North (ranging from 436 to 450 in
the poorest southern regions to 520 to 540 in the richest northern regions). In
the case of children of Swiss-Italian immigrants, the analysis revealed positive
selectivity, perhaps because Switzerland practiced a strict policy of repatriating
unemployed immigrants.
migrations 281
The Determinants of Emigration

What are the determinants of migration flows? Are push or pull forces (e.g.,
employment opportunities at home and abroad) important, or does the gradual
formation of migrant networks dominate?
The pre-1914 mass migrations from Italy, Tsarist Russia, and “Other Central
Europe” to the United States were uncannily similar in size and short-term fluc-
tuations. The correlations between first differences in the three flows between
1880 and 1914 ranged from 0.7 to 0.8. This implies that all three were prompted
by the relative dynamism of the US economy in that era, but common features
affecting the sending countries (late-comer industrialization and rapid popula-
tion growth) undoubtedly played their part too (Williamson 2004).
At its simplest the economic analysis of migration proceeds with a represen-
tative individual who moves from sending country (S) to host country (H ). The
likelihood of migration, usually represented by the ratio of annual gross migra-
tion to population, is then modeled as a function of the difference between
expected earnings in S and H. If H represents a choice between countries, then
the model predicts that with the highest expected wage. Such a model captures
the overwhelmingly economic motivation of most migrant flows. For added
realism, allowance may be made for the cost of migration, the occupational
flows between S and H (Hatton and Williamson 1998b). The economic motiva-
tion of the migration is likely to influence its age and gender composition, and
its regional distribution. Finally, if S is a very economically backward region,
the response may be constrained by low levels of human and physical capital,
and “income growth [ . . . ] will lead to more migrations” (Faini and Venturini
1994a, 86).
Hatton and Williamson (1998b; henceforth, Hatton and Williamson) is one
of the few quantitative attempts (together with Faini and Venturini 1994a, 1994b;
Moretti 1999) at investigating the determinants of pre-1914 Italian emigration.
Following Todaro (1969) and Hatton (1995), they use a framework in which
potential migrants decide whether to leave by comparing expected incomes at
home and abroad. In addition, they account for dynamics by using adaptive
expectations, and introduce migrant stock to catch a network effect.9 Hatton
and Williamson (1998b, 118–120) have also attempted to model the choice of
destination across Italian provinces between the United States, Argentina, and
Brazil early in the last century.
We replicated the estimates of Hatton and Williamson (1998b) using a dif-
ferent dataset. We collected data on gross emigration for sixteen Compartimenti
of origin and nine destination countries, from 1876 to 1925. Our specifications
follow Hatton and Williamson (1998a) and Faini and Venturini (1994a):
MigRatet,i,j = α + β1Hactivityt-1,i,j + β2Sactivityt,i,j + β3 (Hy/Sy) t,i,j + β4 MigStockt,i,j +

+β5DPassport + β6WPopt-1, i + Dregion+ Dhost + Dyear
where i = 1, . . . 16 is the region of origin; j = 1, . . . 9, is the country of

destination, y is the per capita income; Ds are dummy variables for region of
origin, country of destination, Hactivity and Sactivity are the deviations of the
logs of host and sending country per capita GDP from trend; Wpop is the pop-
ulation in working age; DPassport is a dummy for post-1900 emigration boom.
We experimented with per capita income and wage ratios.10 Measures of
host and sending country economic activity are obtained as a deviation of GDP
per capita from trend (calculated using a Hodrick-Prescott filter). Migrant stock
(MigStock) is the cumulated flow; WPop is the one year lagged share of popu-
lation at working age (fifteen to sixty-four years) obtained using census data of
the population share at working age within each region.
The structure of our data allows us to introduce fixed effects for each
region of origin, country of destination, and year. When we account for these
fixed effects, our results confirm in some respects those obtained by other
authors but differ in some others. The level of host country activity is sig-
nificant and has the expected impact (in particular when relative wages are
considered) domestic activity is often not significant. Relative wages, relative
per capita incomes, and network effects (proxied by previous migrants) are
the variables that explain most; population pressures count mostly in the pre-
1900 period. As far as macro areas are concerned, southern regions exhibit a
lower elasticity with respect to the ratio of per capita incomes and to the rela-
tive wage relative to North-Center regions, but show a stronger network effect
(Table 10.4).
On average, income and wage effects are a little lower than in previous
studies. In particular, Hatton and Williamson (1998b) estimated that a 10 per-
cent increase in the wage ratio would have raised the emigration rate by an
average of 1.3 per thousand a year. Our analysis implies an increase of 0.5 per
thousand in the migration rate in response to a 10 percent increase of the per
capita GDP ratio, whereas a fall of 10 percent in the relative real wage reduces
the migration rate by 0.9 percent.
Our estimates capture an important chain-network effect that is nearly 30
percent higher than previously found: Hatton and Williamson estimated that a
net increase in the migrant stock of a thousand people would lead to an increase
of eighty-three migrants a year, whereas we find the same net migrants (i.e.,
taking into account return migration) would draw another 109 abroad.11
On the Consequences of Emigration

Who really gained from migration? The most obvious winners were those
who left; they were usually the envy of their brothers and sisters who stayed
at home. However, the latter benefited too, because their bargaining power as
laborers was stronger and they stood a better chance of renting land. Taylor and
migrations 283
Table 10.4 FE estimates*

Yratio Stock S_activity H_activity WPop DPassp R-squared
South 0.40 0.97 −0.11 0.05 −0.32 0.10
0.87
(N. obs: 1240) 0.000 0.000 0.027 0.411 0.003 0.627
North-Center 0.52 0.95 0.004 0.08 0.20 0.37
0.87
(N. obs: 1652) 0.000 0.000 0.861 0.059 0.000 0.007
Italy 0.46 0.96 −0.03 0.02 0.15 0.21
0.87
(N. obs: 2892) 0.000 0.000 0.205 0.528 0.000 0.073
Transocean 0.94 0.93 −0.06 0.02 0.16 0.008
0.88
(N. obs: 1552) 0.000 0.000 0.046 0.002 0.000 0.000
European 0.40 1.02 −0.17 0.02 0.16 0.05
0.90
(N. obs: 1340) 0.000 0.000 0.000 0.002 0.000 0.000
Pre-1900 −0.30 0.98 −0.05 0.03 −0.38 —
0.88
(N. obs: 935) 0.000 0.000 0.569 0.458 0.085
Post-1900 0.83 0.96 −0.07 0.03 −0.05 —
0.89
(N. obs: 1827) 0.000 0.000 0.054 0.461 0.300
Wratio Stock S_activity H_activity WPop DPassp R-squared

South 0.66 1.00 −0.06 0.04 −0.14 —
0.87
(N. obs:375) 0.000 0.000 0.615 0.000 0.552
North-Center 0.85 0.91 0.13 0.03 −0.14 —
0.87
(N. obs: 573) 0.000 0.000 0.216 0.000 0.306
Italy 0.83 0.96 0.06 0.03 −0.12 —
0.84
(N. obs: 948) 0.000 0.000 0.451 0.000 0.000
Transocean 1.1 0.87 0.10 0.08 0.17 —
0.87
(N. obs: 543) 0.000 0.000 0.233 0.000 0.204
European 0.8 0.97 −0.14 0.04 — —
0.92
(N. obs: 405) 0.000 0.000 0.950 0.073
* Dependent variable, log of emigration rate. Emigrants per 1,000 population. P-values in italics. Dummies
for region-of-origin and years. Variables: Yratio is the log of foreign over domestic per capita GDP; Wratio
is the log of foreign over domestic wage; Stock is the stock of previous migrants; H and S_Activity are the
deviations of the logs of Host and Sending country per capita GDP from trend; Wpop is the population in
working age; DPassp, dummy for post-1900 new legislation. Our elaboration (data sources are in the text).
Williamson (1997; henceforth TW) find that international migration accounted

for 70 percent of the convergence in wages between the Old World and the New
World between 1870 and 1914, and that it increased real Italian wages by 22 per-
cent.12 To be more precise, unskilled workers and their families who remained
gained, whereas landowners and capitalists were likely to lose. Opponents of

Italian emigration in the past articulated the interests of such people.
Conversely, the Stolper-Samuelson theorem predicts that unskilled workers in
the United States would have been the most strenuous opponents of Italian immi-
gration. The perception (exaggerated though it certainly was) that immigrants
were crime-prone, charity-dependent, and unwilling to integrate into the cultural
mainstream broadened the coalition that inspired the anti-immigrant report of
the Dillingham Commission in 1911. The report found that Italian and other new
immigrants had brought few skills with them, competed for employment with
the most disadvantaged natives, and were slow to integrate. Articulating the con-
cerns of the labor movement, it argued that “the development of business may be
brought about by means which lower the standard of living of the wage earners,”
and accordingly called for slower economic growth (U.S. Congress, 1911, I:45).
Goldin (1994) and Hatton and Williamson (1998a) support claims that immi-
gration reduced unskilled wages in the United States The former found that a 1
percent increase in the foreign-born share of the population reduced wages by
1–1.5 percent, whereas the latter reckoned that real wages in the United States
would have been 11–14 percent higher in the absence of immigration after 1870
(1998a, 173). Immigrants concentrated in the urban northeast and in jobs in
slow-growing sectors, with the result that they had an important negative impact,
“just as the Immigration Commission argued” (1998, 174). Allowing for migrant
selection complicates the outcome; the departure in disproportionate numbers of
the healthier and more resourceful among the unskilled could be damaging to
the sending country, whereas the converse could hold for the receiving country.
The human capital characteristics of the migrant flow are therefore very impor-
tant but often difficult to pin down. Did out-migration in earlier eras, such as
before 1914 and after 1945, penalize those Italian regions where it was heaviest?
Some critics of emigration argued that its age-structure imposed an addi-
tional significant capital loss on the Italian economy. The cost of the emigrants’
upbringing and education was borne by Italy, whereas host economies benefited
from the arrival of “ready-made” adults equipped for immediate employment.
The loss was compounded by the return in their twilight years of migrants likely
to impose a further economic burden on the mother country. The claim builds
on a life-cycle view of production and consumption, whereby the young and
the old are net consumers and those aged in between net producers. Vilfredo
Pareto reckoned the annual cost to the Italian economy of this life-cycle char-
acter of migration at between 400 and 450 million lire (or about 2 percent of
GDP) in the early 1900s (Pareto 1905; Choate 2008, 93).
“A Fantastic Rain of Gold”: Remittances

Their close links to home and their high probability of returning perma-
nently increased the likelihood that Italian migrants would remit some of their
migrations 285
0
1861 1868 1875 1882 1889 1896 1903 1910 1917 1924 1931 1938 1945 1952 1959 1966 1973 1980 1987 1994 2001 2008
Figure 10.5 Remittances as a share of GDP (%).

Sources: Borghese (2010) and Baffigi (2012).
earnings to the home country. The most recent estimates put remittances’ share
of GDP in 1876–1913 at 2.7 percent (ranging from 0.3 percent to 5.8 percent: see
Borghese 2010 and Figure 10.5).
Details on the number of remitters are lacking, but data from other sending
countries imply that they may numbered as many as three million annually in
the 1900s (Esteves and Khoudour-Castéras 2009, Appendix B).
The impact was clearly much greater in low-income regions of high emigra-
tion, and so helped reduce the regional disparity in incomes, if not in produc-
tivity. There remains some controversy as to how the remittances were spent.
Were they spent or invested (Balletta 1978; Sori 1979)? Either way, the benefits
to the sending regions must have been significant.
Even not allowing for the savings of “birds of passage” who travelled sea-
sonally across the Atlantic, between 1880s and 1900s the role of remittances in
financing the deficits in the balance of payments on current account was of
the utmost importance (Massulo 2001; Esteves and Khoudour-Castéras 2009).
Foerster (1919, 448) linked Italy’s ability to convert its foreign debt in 1906 and
the lira’s strength on the foreign exchanges before World War I to remittances
and its subsequent weakness to the decline in “the export of labor services” (on
this point see too Cesarano, Cifarelli, and Toniolo 2009).
Remittances found their way back through a variety of channels, formal
and informal, but as the size of the outflow increased, the scope for institution-
alizing the remittance business also rose. The Dillingham Commission reported
that Italians remitted money through 2,625 banks in 1907. The sense that remit-
ters in the United States were subject to systematic exploitation by predatory
banchieri was highlighted in the US press, and this prompted Italian Treasury
Minister Luigi Luzzatti in 1897 to propose a plan to replace the banchieri
by a reliable and low-cost means of transferring remittances. After a highly

acrimonious debate, the still privately owned Banco di Napoli was given the
privilege in 1901 (De Rosa 1980). The role of the Banco di Napoli in reducing
the risk and cost of making transfers was notable, although hardly dominant.
In its first year it remitted 9.3 million lire, and it was sending back nine times
that amount, mostly from the United States, by 1914. Boosted by wartime infla-
tion, remittances through the Banco di Napoli peaked at nearly one billion lire
in 1920 (Choate 2008, 79–80).
Remittances had also an important positive impact on financial develop-
ment. Savings banks became important hosts for repatriated savings, helping
facilitate the spread of financial know-how. In Italy as a whole, the volume of
deposits in post office savings accounts rose from 323 million lire in 1890 to
more than two billion lire in 1913, whereas the share of emigrants’ savings rose
from 0.03 to 4.4 percent (Esteves and Khoudour-Castéras 2010). Southern sav-
ings banks, in particular, benefited from remittances.
Because the income gap between sending and receiving economies is
greater, today emigrant remittances are probably a more important factor in
the economic well-being of the world’s poor economies than in Italy before
1914. They average about 6 percent of GDP in the poorest two-thirds, com-
pared with 1 percent in the top third. In 2009, without emigrant remittances,
the current account deficits of Romania and Poland would have been over half
higher than they were. In the 2000s non-EU immigrants in Italy remitted an
annual average of €2,500–€3,000 per head, most of it to developing countries.13
In 2007, Senegal’s 63,000 Italian immigrants remitted an estimated total of €252
million, the equivalent of about 2 percent of Senegalese GDP. The proportionate
loss in host economies was not commensurate: in 2007–2008 in Italy, for exam-
ple, workers’ remittances by immigrants were worth about 0.4 percent of GDP
(€6 billion of a GDP of €1,600 billion).
Evaluating the Economic Impact of Migration: A

Counterfactual Analysis
Massive immigrant flows invariably generate fears about their impact on the
host economy. Such fears, amply represented in print and in economic stud-
ies, often focus on the impact of immigrants on unemployment, wages, and
on the long-run budgetary position of the host country (because of difference
between costs and contributions to the welfare system; Coppel, Dumont, and
Visco 2000).
The literature on the economic effects of emigration on the source coun-
try is sparse by comparison, although emigration can have a major economic
impact. The sign of this impact is not ex ante determined and depends on the
interplay between different factors: the amount and use of remittances; the
migrations 287
2200
2000
1800
1600
1400
1870 1880 1890 1900 1910

Year
treated unit synthetic control unit
Figure 10.6 Actual (treated) and counterfactual (synthetic) GDPs.

Our elaborations. Sources in the text.
characteristics of the population outflow in terms of gender, age and skills,

brain drain/brain gain effects; and the impacts on the labor market and on real
wages. Are the potentially positive aspects of emigration outweighed by the loss
of human capital entailed by the emigration of skilled workers?
We approach these issues by performing two simulation exercises that con-
sider hypothetical no-emigration scenarios. In the first, we perform a counter-
factual analysis (using the methodology developed by Abadie and Gardeazabal
2003)14 and try to evaluate the effects of Italian mass emigration in the early
twentieth century on Italy’s per capita GDP. We construct a sort of “synthetic”
Italian per capita GDP, estimated using per capita GDPs of other European
countries15 and we obtain a counterfactual Italian per capita GDP, as if the early
twentieth-century boom in emigration had not happened.
Figure 10.6 shows actual and counterfactual GDP per capita (Y1 and Y*1) for the
period 1880–1910. After 1900 the lower line represents the synthetic Italy obtained
as a weighted combination of the per capita GDP of some European countries
(that did not experience the post-1900 boom in migration). The upper line is the
actual Italian per capita GDP. This counterfactual scenario implies that had Italy
not experienced its post-1902 surge in emigration its GDP would have been around
5 percent lower (1902–1913 average). This would have deprived it of nearly 10 percent
of its entire GDP per capita growth over the first decade of the twentieth century.
In the second exercise, we draw on TW’s simulation analysis, one of the few
estimates of the effect of emigration on per capita GDP, and important from an
Italian standpoint (see also Sori, 2009). TW study the effects of migration on
convergence in Europe, using a partial equilibrium model to calculate counter-
factual per capita GDPs (and wages, and GDP per worker) for several European
countries. Their results in the case of no emigration show, for Italy, a level of
per capita GDP 12 percent lower than the actual in 1910.16
We apply their methodology using new data and allowing for the impact of
remittances.17 We show how the outcome varies with alternative values of the
model’s parameters and we extend the analysis in space and time by consider-
ing regional aspects and the post-World War II migration flows.
Using a Hicks-neutral production function where migration affects long-run
equilibrium per capita output through population increase and its influence on
labor supply, and allowing for the contribution of remittances to capital accu-
mulation, we derive the following reduced form equation for per capita GDP
growth:
Y* – POP* = θL μ γ M – θK [(1/λ) ∙ R ∙ r∙(θK)-1]- M = (μ γ θL – 1)M –(1/λ)∙R∙r (2)
The additional rate of growth of per capita GDP from nonemigration

depends on the cumulative emigration rate (M), on the labor share (θL), on the
ratio of total remittances to GDP (R) and investment (λ), on the relative labor
participation rate of migrants (γ), on the rental price of capital (r), and on a rel-
ative productivity parameter (μ) that accounts for self-selection.
In performing simulations based on this accounting framework, we set
γ = 1.318; μ at 1.2 for the early twentieth century and at 0.8 from 1945 onward;
on the basis of employment data we assume that 10 percent of the counterfac-
tual population in working age would have stayed unemployed in the absence
of emigration after World War II.19 The θL parameter was calculated using new
GDP data.20
Our simulations imply that per capita GDP in 1910 would have been 2.4
percent lower without emigration. This would account for 6.6 percent of total
growth during 1880–1910 (Table 10.5). Adding half of the remittances (through
investments) would increase the contribution by 0.5 percent. If we cumulate the
effects of migration until the early 1970s the simulation shows that per cap-
ita GDP would have been 4.2 percent lower and would have accounted, on the
whole, for 4.2 percent of all growth. Limiting the calculation to the post–World
War II period, and imposing negative self selection (μ = 0.8) and a 10 percent of
unemployment on nonmigrated workers, yields a contribution of net migration
to GDP per capita growth of 3.8 percent, with a per capita GDP level 2.5 percent
higher (Figure 10.7).
We performed the same exercise to evaluate the long-run contribution of net
migration on per capita GDP by region, adopting, where possible, region-specific
parameters. The contribution of net migration to per capita GDP varied signifi-
cantly by region. The results range from very low for Liguria, Lazio, Sardegna,
and Puglia to very high for Basilicata (where per capita GDP without emigra-
tion would have been 20 percent lower in 1970), Abruzzo and Molise, Sicilia,
and Calabria.21
If we subdivide our sample into macro areas, international emigration
seems to have positively contributed to long-run convergence22: in the North
Table 10.5 Differences in per capita GDP (levels and growth) in a counterfactual scenario with zero emigration (percentage)
TW* New With With half Abadie and
calibration calibration remittances remittances Gardeazabal
Differences in per capita GDP 3.4 2.4 3 2.7 5.6
levels 1910
Contribution to per capita GDP growth 9 6.6 7.2 7 10.7
1880–1910
Differences in per capita GDP 4.7 3.4 4.9 4.2 —
levels 1970
Contribution to per capita GDP growth 5.2 3.8 5.1 4.4 —
1880–1970
Differences in per capita GDP levels in 1970 1.3 1 2.4 1 —
(starting from 1950)
Contribution to per capita GDP growth 2 1.5 3.8 1.5 —
1945–1970
Differences in per capita GDP 5.4 6.2 7.8 7 —
levels 1970**
Contribution to per capita GDP growth 5.9 6.7 8 7.4 —
1880–1970**
Differences in per capita GDP levels in 1970 1.5 1.7 3.2 2.5 —
(starting from 1950: negative self-selection)
Contribution to per capita GDP growth 2.3 2.7 4.9 3.8 —
1950–1970 (negative self-selection)
Our elaboration (data sources are in the text). *Taylor and Williamson (1997). ** Hypothesis on self selection: positive in 1880–1913; negative in 1950–1970.
(a)
Actual
3.4
Counterfactual, no remittances
3.2
Counterfactual, with remittances
3 Counterfactual, with half remittances
2.8
2.6
2.4
2.2
2
1880 1882 1884 1886 1888 18901892 1894 1896 1898 19001902 1904 1906 1908 1910
(b) 16
Actual
14 Counterfactual, no remittances
Counterfactual, with remittances

12
Counterfactual, with half remittances
10
4
1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974
Figure 10.7 Actual and counterfactual per capita GDP, (a) 1880–1913 and (b) 1952–1974
(thousands of euro on vertical axis). Our elaborations. Sources in the text.
net emigration accounted for 4.1 percent of GDP per capita growth (Veneto had
the highest contribution); 5.1 percent in the Center (fuelled by the strong impact
in Marche); and 7.9 percent in the South (Table 10.6).
From Emigration to Immigration

In Italy as elsewhere, immigration is currently a contentious issue. In a 2009
poll it ranked second after the economy as “the most important issue facing
Italy today,” well ahead of crime and education. Opponents worry about the
impact of immigration on wages, unemployment, public finances, and social
conditions, whereas supporters see in it a possible solution to specific labor
shortages and to an ageing population (see Coppel, Dumont, and Visco 2000;
migrations 291
Table 10.6 Differences in per capita GDP (levels and growth) in

a counterfactual scenario with zero emigration: regional analysis
(percentage)
Differences in GDP per Long run contribution of
capita levels: actual versus migration to per capita GDP
counterfactual in 1970 growth.
1905–1973
Piemonte 4.2 4.3
Lombardia 4 3.5
Veneto 7.4 7.7
Liguria 0.9 0.9
Emilia 4.2 4.2
Toscana 3.8 4.4
Marche 9 8.3
Abruzzo e Molise 13.8 13.7
Umbria 5 5.6
Lazio 0.2 1.9
Campania 2.8 3.8
Basilicata 15.8 15.3
Calabria 10 9.9
Puglia 2.3 2.2
Sicilia 9.1 9.8
Sardegna 0.5 0.6
Nord 4.1 4.1
Centro 5.3 5.1
Sud 6.8 7.9
ITALIA* 5.7 6
Our elaboration (data sources are in the text). *Unweighted average.
Einaudi 2007). Today’s anti-immigrant attitudes in Italy and elsewhere have their
close parallels in fears in the 1900s of southern Italians “seeking vengeance . . .
with the stiletto” in the United States or in the 1920s of “Dagoes and Aliens”
displacing “white” workers in Australia (Mayo Smith 1890, 166; Richards 2008,
105–106). In 1960, Italy’s foreign-born population numbered 63,000; two decades
later it was still only 0.3 million. Since then Italy has become a country of sig-
nificant net immigration, with the recorded proportion of foreign residents ris-
ing from just 0.5 percent of inhabitants in 1980 to 2.5 percent in 2000 and 7.6
percent (or 4.7 million) in 2011. Clandestini may have accounted for a further
0.5–0.75 million in 2011. The increase in the number of foreign-born residents

accounted for all of Italy’s population growth between 1980 and 2010.
Like Italian emigrants in the New World a century ago, migrants to Italy
in recent decades have been disproportionately concentrated in high-wage,
high-employment regions.23 In the late 2000s the regional distribution of
Italy’s foreign-born closely mirrored the regional distribution of living stan-
dards. Every extra one thousand euros in provincial GDP per head was asso-
ciated with about 0.4 percentage points in the proportion of foreign-born in
2008, ranging from less than 2 percent in the south and islands (where GDP
per head in 2008 was less than twenty thousand euros) to nearly 10 percent
in Veneto-Lombardy-Emilia-Romagna (where GDP was more than thirty-two
thousand euros). Settlement patterns varied by country of origin; Albanians,
Moldovans, and Macedonians were most likely to be located in high-income
regions; high numbers of Ukrainians and Poles were attracted to the regions of
Lazio and coastal Campania. Immigrants from afar (Indians, Chinese, Filipinos,
and Ecuadorans) are clustered in a small number of regions.
Whereas host countries a century ago obtained most of their migrants from
a relatively small number of countries of origin, today’s Italian immigrants
arrive from virtually every corner of the globe. Although the top three sending
countries (Romania, Albania, and Morocco) accounted for more than two-fifths
of the all foreign-born residents in early 2009, the top sixteen sending coun-
tries accounted for only three-quarters of the total. With the remaining quarter
representing 175 nationalities, the immigration of the recent past has been truly
global (Caritas Migrantes 2010).
Is the immigration a mirror image of the emigration of an earlier era in
other respects? This section offers a brief overview of immigration in the light
of our findings on earlier Italian emigration.
Size and Impact of Immigration:

Actual Versus Perceived
First, size matters. Italian migration in the 1876–1914 period dwarfed present-day
flows as a proportion of Italian population and of the population of receiving
countries. Between 1900 and 1914 when it was at its most intense, the annual
net outflow reached 2 percent of the population. The impact on the demogra-
phy of receiving countries varied. In Argentina, where it was greatest, Italians
by 1895 already accounted for almost one resident in eight, a share they main-
tained until 1914. In the United States in the 1900s Italians added 0.86 million
to the population, more than any other sending country but still less than 1
percent of the total population.
Immigration into Italy just a century later was unprecedented by Italian
standards, rising from insignificant levels in the 1990s to a peak net migration
migrations 293
rate of over ten per thousand inhabitants in 2003, and falling gradually there-
after. It was modest, however, compared with the rates experienced by the
United States and Argentina before World War I. Moreover, even in the 2000s
the net migration rate into Italy was considerably less than that into Spain and
Ireland.
The gap between the actual share of immigrants in the total population
and popular perceptions of that share is striking. In 2009, immigrants consti-
tuted about 7 percent of Italy’s population. Yet according to the Transatlantic
Trends poll (2010), the estimated migrant share varied from one-fifth according
to those with a college education to one-quarter according to those with only
an elementary education. Females, people with only elementary education, and
those affiliated to the political center and right were more likely to exaggerate the
migrant share. So were the young: whereas those aged eighteen to twenty-nine
years estimated the migrant share at 27 percent, those aged sixty-five and older
estimated it was 20 percent. Moreover, most Italians believed that most migra-
tion was illegal, whereas in reality only a small fraction was illegal.
The poll results summarized in Table 10.7 reflect the prevailing negativity
about immigration in Italy in the late 2000s, but also highlight how attitudes
varied across age, education, gender, socioeconomic group, and political out-
look. In 2008–2009 those more favorably disposed toward migration, legal or
illegal, were more likely to be well-educated and in white-collar occupations.
They were also more likely to be male and left-leaning in politics. The link
between age and attitudes to migration was not straightforward: although the
young were most likely to deem most migration illegal, they were also most
likely to agree that migrants filled job vacancies that Italians did not want.
Although most respondents in all categories in Table 10.7 professed worry
about illegal immigration, less than half of college graduates professed similar
worry. Although almost three in five of those with little education believed ille-
gal migrants should be sent home, only one-third of graduates did. There was a
similar cleavage between left and center-right voters on these same questions.
The impact of immigration on wages and unemployment in the host econ-
omy remains a hotly contested issue. At first glance it is difficult to imagine
why unskilled immigrants might not displace or reduce the wages of native
unskilled labor. Surely, “the labor demand curve is downward sloping” (Borjas
2003). This is certainly what TW (1997, 36, 40) found for the United States and
Argentina before 1914 (although wages grew between 1870 and 1910, TW reckon
that they were 27 percent less than they might have been in the absence of
immigration).
Such impacts on wages explain why unskilled Argentine and US workers
would have been hostile to immigration, whereas capitalists and skilled workers
would have welcomed immigration. However, these “headline” results assume,
crucially, that migration did not induce complementary flows of capital that
could have reduced the impact of immigration on wages considerably (see
Taylor 1997).
Table 10.7 Italian attitudes to immigration 2008–2009

“Most “I worry “Immigrants take jobs “Immigrants fill jobs
migrants are about illegal away from natives” Italians don’t want”
illegal” immigration”
Strongly Strongly Strongly Strongly
agree disagree agree disagree
Education
Elementary 71 86 10 34 28 8
school
Some high 67 83 13 37 34 4
school
High school 63 81 5 43 33 6
graduate
College 49 72 0 58 47 4
graduate
Politics
Left 57 70 6 52 42 7
Center/Right 71 89 10 33 27 5
Age Group
18–24 75 79 7 39 20 4
25–34 66 87 8 35 32 7
35–44 63 87 8 36 29 5
45–54 66 84 9 46 34 7
55–64 66 80 9 37 33 6
65+ 69 82 9 40 36 7
Gender
Male 64 82 8 41 33 6
Female 69 89 8 36 30 6
Occupation
Self-employed, 55 85 8 38 40 7
etc.
White-collar 65 82 5 44 38 5
Manual 70 88 15 34 25 7
migrations 295
“Immigration Legal Legal Immigrants in Illegal migrants

will influence migrants migrants Italy are
my vote a lot” should be should be
Too A lot Should be Should
temporary given a
many but sent home be
chance to
not too allowed
stay
many stay
Education
Elementary 20 23 66 60 32 59 26
school
Some high 23 18 75 55 35 54 37
school
High school 23 17 74 49 40 51 36
graduate
College 17 10 79 28 53 33 49
graduate
Politics
Left 16 13 80 35 48 35 48
Center/Right 22 23 66 62 31 62 31
Age-group
18–24 23 17 17 42 48 47 44
25–34 22 22 22 51 40 56 33
35–44 22 19 19 59 31 58 31
45–54 19 19 19 50 37 52 32
55–64 22 23 23 56 36 53 31
65+ 21 18 68 63 28 56 28
Gender
Male 20 18 73 50 37 54 33
Female 23 21 68 58 36 54 31
Occupation
Self-employed, 26 17 73 49 34 55 29
etc.
White-collar 20 14 76 45 43 49 37
Manual 19 25 65 57 34 57 30
Source: Transatlantic Trend database. 2008 and 2009 data combined; the entries are percentages of the
relevant sub-group replies.
Although recent immigration into Italy has not prompted comparable

inward movements of capital, research into the labor market impact of that
immigration finds little evidence of a negative effect on the wages and employ-
ment prospects of native workers. Gavosto, Venturini, and Villosio (1999) found
that immigration impacted positively on the wages of native unskilled labor,
whereas Venturini and Villosio (2002, 2006) found that immigrant share had no
effect on the transition from employment to unemployment for native workers
and that immigration had a positive effect on wages. Staffolani and Valentini
(2010) differentiate between “clean” and “dirty” unskilled work and find that
native workers’ wages always rise with immigration. Less surprisingly, such
results are in line with some research on the labor market impact of recent and
contemporary immigration in Italy, Europe, and the United States (Dustman,
Frattini, and Halls 2009; Brandolini, Cipollone, and Rosolia 2005; Ottaviano
and Peri 2008; Cingano and Rosolia 2010; D’Amuri, Ottaviano, and Peri 2010;
contra, see Borjas 2003).
The specialist literature on migration offers several possible explanations
for such an outcome. Ottaviano and Peri (2008) claim that immigrant and
native unskilled workers have been complements rather than substitutes. A sec-
ond possibility, raised by Shapiro and Stiglitz (1984), is that the threat from
immigrants caused domestic labor to shirk less. A possibility explored for Italy
is that immigration did not threaten the wages of native workers because of the
weak assimilation of nonnative workers into the Italian labor market (Venturini
and Villosio 2008). Hatton and Williamson (2008) surmise that the reduced
importance of immobile factors may explain why wage effects today are lower
than they were in 1880–1914.
Another major difference between Italian emigration a century ago and
Italian immigration today is the income gap. A century ago, Italian GDP per
head was over half that of the United States and over three-quarters that of
Argentina, the two main destinations for Italians at the time. Today GDP per
capita in the main source countries of Italian immigration is less than one
quarter the Italian level. Perhaps this helps explain why today’s immigrants are
more reluctant to leave in times of high unemployment than Italians were a
century ago.
The gap may also help explain why the rates of immigration to Italy in
recent years are more responsive to fluctuations in the unemployment rate
than those to Ireland and the United Kingdom. Italian migration has been
less responsive to the economic downturn of the late 2000s than migra-
tion elsewhere in Europe (Gomellini and Ó Gráda 2011). The much bigger
gap between incomes in host and sending economies—4:1 for Italy today as
against less than 2:1 for Ireland, for example—may help account for the differ-
ent response in those two destinations. However, even in Italy there are signs
that the rate of growth of the foreign-born population is decelerating (Koehler
et al. 2010).
migrations 297
Some Remarks on “Welfare Shopping” and Crime

Milton Friedman’s claim that “you cannot simultaneously have free immigra-
tion and a welfare state” has been interpreted as an argument against immi-
gration by some commentators and an argument for curbing or harmonizing
welfare systems by others. In the era of mass migration before World War I the
dilemma did not arise, but the growth of the welfare state during the twentieth
century has prompted fears in host countries that some immigrants seek wel-
fare rather than work. In Italy, immigrants cannot claim social security benefits
unless they have been paying for them, and healthcare for immigrant nonclaim-
ants is restricted to emergency hospital treatment.
The belief that “welfare tourism” accentuates the fiscal burden on taxpay-
ers has fuelled demands for restrictions on immigration.24 Experts disagree as
to the macro fiscal impact of immigration, although most find that it is small
(Borjas 1990, 152–153; Borjas 1999; Lee and Miller 2000; Rowthorn 2008, 2009;
Dustman, Frattini, and Halls 2009). Nonetheless, its perceived importance has
been the most important cause of hostility to immigration, followed by fear of
job market competition and crime (Boeri 2009). The richer and more unequal
the host country and the more extensive its welfare system, the greater is the
hostility toward immigrants (Hatton and Williamson 2005).
If today’s Italy were to be deprived suddenly of all its immigrants the pop-
ulation share of those aged 65 years and older would increase from 20.2 to 21.6
percent, and the dependency ratio from 52.2 to 54.4 percent. Such increases may
seem modest, but Italy’s combination of an aging population and a low fertility
rate has rather alarming implications for the future viability of its social secu-
rity regime and, indeed, its economic well-being. A recent prediction reckons
that, in the absence of further migration, Italy’s population will fall from today’s
60 million to 55.55 million by 2030, and its elderly dependence ratio25 rise from
its current 32.2 percent to 50.6 percent. Maintaining migration at current levels
would keep numbers from falling (Billari, Graziani, and Melilli 2010), as migra-
tion has done since the early 1990s; even so, the elderly dependency ratio would
still rise to 44.8 percent by 2030. Immigration is thus not a panacea against
population aging, although it can moderate its impact.
The hostility toward immigration, in Italy and elsewhere both today and
a century ago, stems also from the perceived link between immigration and
crime. According to the Transatlantic Trends 2010 poll, Italian perceptions dis-
tinguished sharply between legal and illegal immigration; whereas two respon-
dents in three denied that legal migrants increased crime, nearly four in five
believed that illegal immigrants did so. Moreover, those with little education
were more inclined to link migration, legal and illegal, with crime.26
Yet again, the available evidence suggests that the link between the two
is less straightforward than as reflected in the media and public opinion. A
century ago in the United States, the widespread belief that Italian immigrants
were particularly crime-prone, which was heightened by a number of horrific

high profile cases (including the murder of the chief of police in New Orleans
in 1890 by the Mafia, which led to the lynching of eleven Italians accused of
his murder) fuelled anti-immigrant prejudice. Yet, the Dillingham Commission,
no friend of immigration, was forced to concede in 1911 that no “satisfactory
evidence” proving a link between immigration and an increase in crime was
forthcoming. On the contrary, the statistics of crime and population indicated
that immigrants were less prone to commit crime than native Americans.
Moehling and Piehl (2009) corroborate, finding that a century ago the rela-
tive youthfulness of immigrants and their geographic distribution accounted for
their edge in conviction rates. Controlling like with like dissipates much of the
immigrants’ greater criminality.27
The significant overrepresentation of nonnationals in Italian prisons sus-
tains the widespread sense that immigration and crime are correlated. Again,
the gender and age structure of the immigrant population, its low socioeconomic
status, and limited opportunities account for a considerable proportion of the
raw gap in criminality (Bianchi, Buonanno, and Pinotti 2008; compare Caritas
Italiana 2009). Mastrobuoni and Pinotti (2011) highlight the link between legal
status and immigrant crime in Italy. Their finding that the achievement of legal
status reduces the probability of recidivism by more than half may argue for
a more relaxed immigration policy, but at the likely cost of higher immigrant
inflows.
So is the fear of crime-prone immigrants “irrational”? Is this another
instance where the gap between popular perception and a less dramatic statis-
tical reality matters, and has informed voter choice?28 Regression analysis using
the Transatlantic Trends 2010 poll (see Gomellini and Ó Gráda 2011) indicates
that the perceived link between illegal immigration and crime was significantly
boosted by personal characteristic variables representing poor education, living
in the South, low skill levels, and conservative political preferences.
Research and controversy about the impact of immigration will continue.
In the meantime, majority opinion among researchers into the issue implies
that the impact on native wages and employment, fiscal burden, and crime
are modest. What remains to be explained is the apparent disjunction between
public opinion, political rhetoric, and reality.
Conclusions
Migration has loomed large in the history of Italy since the foundation of the
state. In the era of mass emigration, beginning in the 1880s and ending in the
1970s, its reach was truly global; since the 1980s, the Italian magnet has attracted
immigrants from far and near.
migrations 299
Here we have focused on the economic aspects of migration, ignoring

important social, cultural, and political ramifications. We began by investigating
emigrant characteristics in the age of European mass migration and we found
that different indicators points to a positive self-selection of Italian migrants.
Then we investigated the determinants of the early twentieth-century Italian
emigration. Our study confirms the finding of earlier scholars that migration
has a strong economic rationale. In our analysis, the role that networks (formed
by those previously migrated) had in shaping Italian emigration emerges more
strongly than in previous studies.
We also found that before World War I and in the postwar era, emigration
contributed significantly to rising living standards and in all likelihood pushed
toward a reduction of the North-South economic gap. According to our find-
ings, over the long run the contribution of the huge outflow of Italians to per
capita GDP growth ranged from 4 to 5 percent of all growth; the impact in the
South was double that in the North.
Italy’s recent history of migration is almost a mirror image of its role dur-
ing the era of mass migration before 1914; the fears that stoked anti-immigrant
resentment in the United States a century ago find an echo in Italy today. Yet,
now as then, the gains from immigration outweigh the losses. Public opinion
tends to exaggerate the link between immigration, on the one hand, and crime,
fiscal pressure on the welfare state, and living standards, on the other, and may
turn out to have underestimated the responsiveness of the return migration rate
to economic downturns.
Acknowledgment
The authors thank Alberto Baffigi, Federico Barbiellini Amidei, Claudia Borghese,
Alfredo Gigliobianco, Claire Giordano, Ferdinando Giugliano, Kevin O’Rourke,
Lorenzo Prencipe, Roberto Tedeschi, Gianni Toniolo, and Jeff Williamson for
comments and guidance. The views expressed in this chapter are those of the
authors and do not reflect necessarily those of the Bank of Italy.
Notes
1. See Toniolo (1990) for an economic history of Italy from 1850 to 1918.
2. For a reconstruction of Italian emigration flows from 1869 to 1876 see Carpi (1887).
Studies of Italian emigration, in particular by Italian scholars, are numerous (e.g.,
Rosoli [1978], Sori [1979], Bevilacqua, de Clementi, and Franzina [2002], Del Boca
and Venturini [2003], and Corti and Sanfilippo [2009]). Rosoli and Ostuni (1978)
is an extremely rich bibliographic essay on Italian emigration. The present chapter
does not aim to review these works.
3. Although the law also sought to dampen internal mobility and urbanization as
potential threats to the regime, de facto there was high intraregional internal
mobility.
4. The available official data on return migration (lacking until 1905) imply that
the ratio of return to gross emigration cannot have exceeded half in the pre-1914
period. Giusti (1965) offers an alternative estimate of net migration flows based on
censal and natural increase data. Gomellini and Ó Gráda (2011) suggest caution
in using the Giusti data; hence our choice of postponing elaborations on return
migration for a future study. See Bandiera, Rasul and Viarengo (2010).
5. This tallies with the high correlation (0.67) across regions between the proportion
of all emigrants returning in 1905–1920 and the proportion choosing the United
States in 1876–1910.
6. One of the many aspects not addressed here is the evolution of legislation
referring to migration, including the important Legge Luzzatti of 1901 (Coletti
1911). For the legislation on immigration, see Einaudi (2007).
7. A recent study of migrants in Lombardy, toward which more skilled and
educated immigrants have tended to gravitate, finds that the return on immigrant
investment in schooling was very low and virtually nonexistent in the case of
illegal migrants and immigrants from Latin America (Accetturo and Infante 2010).
This outcome points to the nontransferability of human capital accumulated in
the home country. Discrimination is one likely reason for this, although the low
quality of that capital may also play a role.
8. Programme for International Student Assessment. The data refer to 2006.
9. Such models are geared to periods when migration was unrestricted. In practice,
public policy also influenced the size and destinations of migrant flows. Before
1914 and after World War II Italian policy toward emigration was broadly
supportive; the focus was on migrant welfare rather than on discouraging
people from leaving (Choate 2008). During the interwar Fascist era, policy was
ambivalent, disapproving of but not prohibiting emigration outright (Cannistraro
and Rosoli 1979; Choate 2008, 230–231). Restrictions in the United States, the
main host country, exemplified by literacy restrictions and quotas introduced by
the Immigration Acts of 1917 and 1921, hit would-be Italian migrants hard in the
1920s. Reduced demand for immigrant labor in the New World reduced migration
further in the 1930s. Gross migration to the United States fell from 350,000 in
1920 to annual averages of 42,000 in 1921–1930 and 12,000 in 1931–1939.
10. Internationally comparable regional GDPs per capita are obtained by using
Maddison (2009b) and the regional indices proposed by Daniele and Malanima
(2007). Internationally comparable regional wages (from 1905) are obtained from
Williamson (1995) and the indices of regional wages proposed in Arcari (1936).
11. Of special interest is the relation between the emigration rate and the level of per
capita income. At low income levels a “poverty trap” could emerge because the
cost of emigration to overseas destinations could be beyond reach and for low
levels of income one can find emigration growing when income grows. After a
certain income threshold (see Faini and Venturini 1994a) the relationship between
income and emigration reverses. For a recent analysis that points to the existence
of a poverty trap in the age of mass migration, see Gomellini and Ó Gráda (2011).
migrations 301
12. We estimated the effect of migration on real wages using different data
than Taylor and Williamson (1997). Our computations suggest that the
emigration-induced increase in real wages was about 12 percent.
13. http://ec.europa.eu/economy_finance/publications/publication6422_en.pdf; http://
www.mandasoldiacasa.it.
14. The authors examine the effects of terrorism in the Spanish Basque region in
terms of induced per capita GDP loss. They found that terrorism reduced per
capita GDP in the Basque region by about 10 percent.
15. Ferenczi and Wilcox (1929). See Gomellini and Ó Gráda (2011) for a detailed
discussion of the methodology and for the interpretative caveats we have to bear
in mind while adapting Abadie and Gardeazabal (2003) to our analysis.
16. This seems to be a very high value. It implies that emigration alone would have
accounted for more than one-third of per capita GDP growth between 1870 and
1910. In fact, the 1870 level of GDP per capita was 1,244 (Geary Khamis $ [GK$]);
the actual level in 1910 was 1,933 GK$. The counterfactual level was 1,692 GK$,
12 percent lower than the actual. In terms of growth, the actual growth was 55
percent. The counterfactual is 36 percent, so 19 percentage points can be attributed
to emigration (i.e., a share of 35 percent of the entire growth rate [19/55 = 0.345]).
In the same context they estimate the effects of migration on real wages finding
that in 1910, in a counterfactual no-migration scenario real wages in Italy would
have been 22 percent lower. Our estimates, not presented here, point to a virtual
zero-migration real wage 12 percent lower than the actual.
17. The simulations make some neutrality assumptions on the fertility rate of
nonmigrant people in the regional analysis (see Livi Bacci 2010, 60); the possible
migration-induced human capital accumulation (on human capital, see Chapter 9);
and the possible effects on foreign trade and productivity (for analyses on trade,
productivity, and immigration, see Peri 2010 and Peri and Requena 2010). We use
new GDP estimates from Baffigi (see Chapter 6), wage data from Fenoaltea (2002),
and remittances data from Borghese (2011). For details of the simulation model,
see Gomellini and Ó Gráda (2011).
18. Rather than TW’s 1.65, on the basis of census data and data drawn from
Commissariato Generale per l’Emigrazione (1927), which reports age and gender
structure of migrants (also by region of departure).
19. For the mass emigration period assuming an unemployment rate is not very
meaningful. If people wanted to work they could, but in a structural condition of
underemployment (Alberti 2010; Luzzato 1953, 4:5).
20. TW set θL = 0.485; our computations produce a θL ranging from 0.567 to 0.650.
21. These results are correlated with the size of the emigration rates, although not
perfectly. A finer calibration using regional specific parameters might improve our
results.
22. For short-run analysis, see also Chapter 20. We have also estimated the
contribution of internal migration to per capita GDP growth using the same
model. Our very preliminary findings suggest that internal migration was
a win-win game. Migrants would have stayed unemployed in the regions of
departure while they contributed to productivity growth in the regions of
destination (see Peri 2010). Adding internal migration to the scenario, the 9.8
percent long-run contribution of Sicily (a region of outflows) shown in Table 10.6
would become around 17 percent and for Piedmont (a region that had inflows) the
long-run contribution would double from 4.3 to almost 9 percent.
23. The correlation between the foreign-born proportion of the population and
regional GDP per head in 2008 was +0.87.
24. Over two-thirds of a recent sample of Italians who thought immigrants were
“too many” believed they constituted a fiscal burden, only one-fifth of those who
declared that immigrants were “not many” believed they were a burden (GMF
database).
25. The elderly dependency ratio is defined as [population aged 65+]/[population aged
15–64].
26. In July 2003 a poll of Italian teenagers found that nearly half of them believed
“immigrants make cities less safe” (http://www.angus-reid.com/polls/27215/
racism_present_in_some_italian_teens/).
27. Compare Bell, Machin, and Fasani (2010) on the United Kingdom in the 1990s.
28. Kaplan (2001) reports that according to the Survey of Americans and Economists
on the Economy nearly half of noneconomists think “too many immigrants”
is a major reason why the economy is underachieving, whereas four-fifths
of economists think it is “not a reason at all.” In Italy similarly wide gaps in
perceptions may be found between those with more and less schooling. Thus
although most respondents to the Transatlantic Trends 2009 poll professed worry
about illegal immigration, less than half of college graduates did. Although almost
three in five of those with little education believed illegal migrants should be sent
home, only one-third of graduates did.
Chapter 11
DEMOCRATIZATION
AND CIVIC CAPITAL
Luigi Guiso and Paolo Pinotti
If the democratic model of the participatory state is to

develop in these new nations it will require more than
the formal institutions of democracy—universal suffrage,
the political party, the elective legislature. These in fact
are also part of the totalitarian participation pattern, in
a formal if not functional sense. A democratic form of
participatory political system requires as well a political
culture consistent with it.
Gabriel Abraham Almond and Sidney Verba,
The Civic Culture: Political Attitudes and
Democracy in Five Nations
Introduction
To explain why differences in economic success across countries tend to persist
over the course of centuries, during the past decade a new literature has drawn
attention to the role of institutions in affecting economic performance and its
persistence. One strand of literature led by the work of Acemoglu and others
(Acemoglu, Johnson, and Robinson 2001; Acemoglu and Johnson 2005), has
focused on the role of formal institutions. Protection of property rights and
limitations on the power of the executive, which they claim are essential to the
development process, are built into the formal institution of a county and tend
to persist over the centuries. A parallel strand, linked to La Porta et al. (1998),
has emphasized the importance of legal traditions and the beneficial effects
of British legal origin for the development of financial markets and ultimately
for economic development. Dismantling dysfunctional formal institutions and
replacing them with more economy-friendly ones, such as institutions and
political processes that constrain the power of the executive, may be seen as a
recipe for economic development. One important issue is then what makes an
institutional reform successful.
A second strand of literature has called attention to the role of infor-
mal institutions, in particular the prevalence of cultural values of coopera-
tive behavior and beliefs of mutual trust (Tabellini 2010; Guiso, Sapienza, and
Zingales 2004, 2008; Knack and Keefer 1997) and values of fairness and indi-
vidualism that instill a sense of self confidence in economic actors (Roland and
Gorodnichenko 2011a, 2011b) promoting achievement and innovation, in the
tradition of Max Weber. Although it has often been recognized that there could
be complementarities and mutual influences between informal cultural norms
and formal institutions (e.g. Tabellini 2008), these two strands have mostly
moved in parallel. Yet, because cultural norms in general evolve more slowly
than formal political or legal institutions (Williamson 2000), they may act as a
constraint (Roland, 2004) and may affect the success of institutional reform and
ultimately the type of institutions that actually prevail in a country. This was
indeed the path-breaking contribution of Robert Putnam (1993)—showing that
the performance of (formal) regional governments instituted in Italy in 1970
depended on the (informal) set of values and beliefs (i.e., the civic traditions)
prevailing in each region. More recently, Murrel and Schmidt (2011) argue that
the important institutional change brought about by the Glorious Revolution of
1688 was made possible by the cultural changes that preceded formal institu-
tional reforms.
This chapter examines how preexisting cultural norms of civic behavior
interact and affect the success of a major institutional reform—a democratiza-
tion reform through the extension of voting rights from a restricted elite to a
vast segment of the population. We draw data from the Italian 1912 enfran-
chisement, which granted voting rights, once restricted to a minority based
on income, to almost all adult males. We document that when voting was
restricted to the elite participation in political elections was significantly and
consistently higher in the Southern regions of the country, those that according
to Putnam (1993) and more recently Guiso, Sapienza, and Zingales (2004, 2008,
2010) are less endowed with civic capital. This feature may sound puzzling pre-
cisely because electoral turnout itself has been used to document the prevalence
of norms of cooperation and civic engagement in the North of Italy. After the
enfranchisement participation drops in the North and in the South but much
more in the latter than in the former so that there is a reversal.
democratization and civic capital 305
We argue that the pattern in the data is consistent with a simple theoretical
framework where voting in political elections is driven by a private rent-seeking
motive, because political power can give rise to private benefits, and by the dif-
fusion of cultural norms of civic engagement, which regard voting as a duty. In
principle, the importance of such motives differs across individuals within the
population. In particular, the benefits of political power are likely greater for the
members of the elites, who comprise both sides of political connections (politi-
cians and entrepreneurs, respectively); moreover, civic engagement differs across
communities, strong in the North and weak in the South in obedience to the
different civic traditions of the country initially documented by Putnam (1993);
Banfield (1958); and, more recently, Guiso, Sapienza, and Zingales (2008).
These assumptions imply that the enfranchisement of nonelites decreases
voting turnout, the more so in less civic regions. We then test this empirical
prediction on electoral data across Italian regions during the period between
unification and the advent of Fascism (1861–1921). We find indeed that the 1912
enfranchisement lowered electoral turnout across the board but much more so
in the low civicness regions: the drop is estimated to be between 14 and 20
percentage points larger in the Southern regions than in those in the North,
and this effect is strong enough to reverse the higher political participation
among the elites in the South. This result is not caused by differences in civic
capital reflecting differences in literacy or in economic development between
Northern and Southern regions at time of enfranchisement, because it persists
when we control for these factors. We also control for the relative size of the
newly enfranchised nonelites (i.e. the “treatment intensity” of enfranchisement),
as approximated by the change in the electorate between the last preenfran-
chisement and the first postenfranchisement election.
This evidence is consistent with the view, first explored in the seminal
and influential work of Almond and Verba (1963), that democratization to be
effective requires that nonelites be ready and willing to exercise their voting
rights when reforms grant them voting power. This willingness and readi-
ness depends in turn on whether a culture of civicness is already diffuse. To
examine this issue more directly we study how nonelites voted after they were
granted democratic rights. Arguably, a democratization reform is successful if
nonelites make extensive use of these rights and if their votes are not captured
by preexisting elites but are used to strengthen their representativeness. That
is, the reform is successful if it generates a substantial reallocation of political
power away from elites. We find that after the enfranchisement, radical social-
ist and communist parties whose manifestos better reflected nonelite interests
gained a significant consensus only in the civicness-rich Northern regions,
where these parties reached almost 50 percent of total votes in the last elections
before Fascism. Thus, lack of civic culture threatens the success of democrati-
zation reforms because fewer members of nonelites choose to use their voting
power and because those who do so are strongly influenced by previous elites
in their choices.1 These findings add to parallel work by Larcinese (2011), who
also investigates the effects of the 1912 enfranchisement on the electoral success
of radical parties.
Overall, these results show that de jure concession of political rights taking
place with the enfranchisement resulted at the time in a de facto reallocation
of political power only in the regions where the nonelites were willing to actu-
ally exert those rights. Did this difference disappear over time as people voted
repeatedly and possibly learned how to benefit from extended democratic rights?
Did the formal democratic rights contribute to the development of what in the
Almond and Verba’s original study are the values and attitudes that sustain dem-
ocratic institutions and that relate to the manner in which people within a polity
view their relationships with others vis-à-vis their own interests? Put differently,
did the 1912 enfranchisement and the subsequent extension of voting rights to the
whole population independently of gender after World War II bridge the gap in
people’s civicness across regions of the country? A simple comparison of partic-
ipation in political elections after World War II reveals a persistent gap between
North and South, suggesting that democratization did not bridge the gap.
The rest of the paper is organized as follows. First we describe the historical
background and present descriptive data about participation before and at the
time of enfranchisement, particularly the dramatic reversal in voting turnout
between Northern and Southern electoral districts. Then we discuss a theoret-
ical framework of voting decision, from which we obtain empirical predictions
that are then confronted with the data in the fourth section.
Historical Background
Preunification Institutions and Civic Traditions in Italy

The unification of Italy in 1861 is the end of a long process of political disinte-
gration into a large number of local powers and subsequent consolidation that
started around the turn of the first millennium. This process was triggered by
the collapse of the Carolingian Holy Roman Empire under which today’s Italian
borders where unified. As the central power of the Empire fell a number of
local powers emerged to fill the vacuum. The way this lack of power was filled
in differs between the North and the South of Italy, and this difference is pre-
sumably at the origin of different civic traditions. Because of a number of his-
torical contingences (the greater distance from the headquarters of the Emperor,
the relative weak army of the Papal state) the South of Italy was conquered by
the Normans, which replaced the authority of the Emperor and established a
highly hierarchical system of government that persisted, under different rulers,
until Italian unification for about seven hundred years.
The North instead saw the affirmation of self-government in cities, a feature

that spread over North-Central and Western Europe (Reynolds 1997; McKitterick
2004) but whose development was particularly strong in North-Central Italy
between 1100 and 1300.Initially, in response to this vacuum of power and to man-
age the problems of common interest to which the absenteeism of the Emperor
was giving rise (e.g., the maintenance of the city walls, the security of trade
routes, and so forth), small groups of individuals in some cities joined forces
and formed a pact to provide mutual help and collaboration to solve problems
of common interest. In some cities (e.g., Genoa) this alliance involved promi-
nent families of the marine aristocracy who swore to work together to manage
the city. From this seed, slowly more stable institutions started to develop. An
initial creation was the consulate—a group of citizens that hold power for a year
and were then replaced by another group, allowing a vast share of the popula-
tions to take charge of local government and acquire familiarity with political
engagement. According to Milani, the counsels mark the most visible sign of
the rise of the free city as an independent political body (Milani 2005, 23).
Over the course of the centuries these initial institutions evolved into a for-
mal parliament of elected members that allowed for wider participation of the
population in the decision-making process. With these changes, the indepen-
dent city-state was fully developed. It provided law and order, collected duties
and tolls, took care of the walls that provided the basic protection to the citi-
zens, and was responsible for the maintenance and security of the roads, essen-
tial to guarantee trade, which was developing fast. In the mid-twelfth century
a new word came into use to describe the independent town communities and
their government: commune. As Reynolds (1997) notes “ . . . its use in urban
context may derive from communia, meaning common property: not only walls
and streets but also cathedrals and churches were increasingly regarded as the
responsibility and therefore the property of the local community. Their rights
and liberties were also their common property which it was their responsibil-
ity to maintain” (170). Indeed, the word commune is a synonym for republic
(res publica, common property) and is used with this meaning. This sense of
responsibility for the common good that citizens of independent towns devel-
oped and consolidated over two centuries of self-government is the civicness
Putnam refers to, which seems to characterize the North of the country and
which was missing in the South because the hierarchical system of government
suppressed any involvement of its populations with the management of power
and the responsibility of government.
Guiso, Sapienza, and Zingales (2008), who provide a fuller account of the
evolution of the free cities, highlight three features of the free system of cities
that have contributed to shaping its citizens political culture. First, the polit-
ical entity was not identified with a single person ruling but rather with the
whole community. Second, the ruler ruled in the people name—that is the citi-
zens were the source of power and thus its exercise required people consensus,
although obviously prominent families mattered a lot. Third, the commune has
a statute, similar to a constitution, enacted by an assembly and norms apply

to the whole population independently of status, as it was in feudal times. In
sum, the commune grants legal protection to personal freedoms and thus limits
the power of the executive, a feature that as argued by Acemoglu and Johnson
(2005) is necessary for development.
Finally, all these democratic characteristics of the free city and its emergence
were not the result of unilateral concessions from the Emperors but rather a need
for their citizens to provide local government services when the central authority
of the Empire stopped to function. We will come back to this point later.
The system of free cities evolved over time as cities fought against each
other and the losers were conquered by the winners; with time, elected bodies
were slowly replaced by more centralized forms of government, which evolved
into the Signoria—the power of the lord. However, even these centralized pow-
ers retained many traits of the free cities, in particular the principle that power
originated from people and was exercised in people’s name.
When the process of unification started around the Congress of Vienna in
1815, Italy was a politically divided country with many kingdoms but with an
even bigger culture divide: that between the South, at the time dominated by the
Bourbons, and the North, where the civic culture created with free cities pre-
vailed. In the South citizens were probably well characterized by what Almond
and Verba (1963) defined as “parochial” (politically sleepwalker, not involved,
with little or no knowledge or interest in the domestic political system);in the
North they were probably much closer to the “participant” type(people possess-
ing a strong sense of influence, competence, and confidence in understanding
domestic political matters).
Indeed, such differences were to be found in the civic capital endowments
accumulated many years later, after the unification of the country. Although in
general information on civic traditions during the past centuries is not read-
ily available, the Ministry of Agriculture, Industry and Commerce (1888) pub-
lished regional statistics on the diffusion of voluntarily mutual aid societies and
cooperatives, which is one of the main indicators of civic capital considered by
Putnam (1993, 139).2 The picture in Figure 11.1, plotting the distribution of such
organizations over total population across Italian regions, is consistent with the
persistence of a huge cultural divide between North and South even decades
after unification of the country.
From Unification to the

Enfranchisement of 1912
Political fragmentation of the Italian peninsula finally came to an end dur-
ing the second half of the nineteenth century with the Risorgimento (the
Regions under the Bourbons before 1861
Figure 11.1 Civic capital across regions in 1883, as measured by the

diffusion of mutual aid societies. Notes: This figure shows the number of mutual aid
societies over population across Italian regions in 1883.Darker colors correspond to
greater diffusion.
resurgence). The nationalistic sentiments once confined to the narrow circle

of intellectual elites spread out in the aftermath of the Congress of Vienna,
which imposed the dominion of the Habsburgs over most of Northern Italy,
whereas the Center and South were still controlled by the Church State and
the Bourbons, respectively. After a number of crushed insurrections during the
period between the 1820s and the European revolutions of 1848, the strategic
alliance with Napoleon III allowed the Kingdom of Sardinia (actually centered
around the Savoy Monarchy in Piedmont) to overcome Austria in 1859, whereas
the Bourbons were defeated with the expedition of Garibaldi in 1860. After the
proclamation of the Kingdom of Italy in 1861, another war against Austria for
the northeastern regions (1866) and the annexation of the remaining territories
of the Church State (1870) completed the reunification of the country.
Throughout these events (maybe with the exception of the Garibaldi expe-
dition), the Risorgimento remained essentially an affair between the Savoy
monarchy and the urban high class, whereas large segments of the peasant pop-
ulation were at best skeptical about, or even fiercely against, the process of uni-
fication. This influenced deeply the institutional architecture of the newborn
Kingdom of Italy, which among other things restricted suffrage in elections for
the National Parliament to wealthy adult males paying more than forty Italian
lire of taxes, about 420 thousand individuals in 1861, or 1.9 percent of total
population. In 1876 the income threshold was lowered from forty to 19.80 lire
(and the minimum age from twenty-five to twenty-one), but it was not until
1912 that the census criterion was finally abolished, at least for all individuals
older than age thirty; even for those aged between twenty-one and thirty, com-
pliance with compulsory military service became a sufficient condition for vot-
ing, extending the suffrage to almost 8.7 million individuals, about the entire
adult male population.
Interestingly, the enfranchisement of 1912 did not represent a political achieve-
ment of the left; rather, it was a concession of the liberal coalition led by Giolitti.
Although its political motivations are subject to considerable speculation among
historians, the reform was probably aimed at undermining the strength of the
revolutionary movement amid increasing social unrest during the first decades
of the twentieth century, consistent with the idea of Acemoglu and Robinson
(2000) that the risk of a violent revolution may trigger political reforms.
Whatever the reason for such a concession, Figure 11.2 shows that the
enfranchisement had immediate effects on electoral participation in Italy: par-
ticipation declined everywhere after the enfranchisement; and the drop was
significantly larger in Southern than Northern regions, leading to a reversal
in voting turnout between the two areas before and after 1912.Importantly, the
differential accumulated in the first decades of the twentieth century is not dis-
sipated during the following one hundred years, characterized instead by a con-
tinuous divergence between Northern and Southern regions.
.8
.6
.4
1850 1900 1950 2000
Southern regions Northern regions
Fascism and WW2 years
Figure 11.2 Voting turnout in northern and southern regions, 1861–2008. Notes: This
figure plots the voting turnout in northern and southern regions during all national
elections held since the formation of the Italian state (1861). The vertical line corresponds
to the change from restricted suffrage (on an income basis) to the enfranchisement of the
entire male population.
In the next section we discuss to what extent differences in civic capital

endowments between northern and southern regions provide an explanation
for these patterns. By focusing on the differential dynamics between north and
south we instead neglect the long-run increase in voting turnout that character-
izes both areas, which likely reflects a continuous process of accumulation of
human capital and other aspects of economic development.
Theoretical Framework
When deciding whether or not to vote, individuals weight the benefits of elec-
toral participation against its costs. The latter may include the need for acquir-
ing information about parties and candidates, the “shoe-leather” cost of actually
going to the polling station, the time spent in the line, and so forth. The ben-
efits of participation depend instead on two elements: the extraction of private
rents and the social value associated with political participation.
Private rents might include the returns to connection with politicians;
favors obtained from supporting a candidate; the possibility of exercising polit-
ical control and thus diverting resources in a desired direction; or the labor
market premium enjoyed by former politicians, for instance because of their
subsequent involvement in lobbying (Fisman 2001; Diermeier, Keane, and Merlo
2005; Ferguson and Voth 2008; and Acemoglu et al. 2010). We assume that
access to such rents increases with membership in elite groups (e.g., belonging
to the same restricted club may facilitate connections between appointed politi-
cians and entrepreneurs). This is indeed the picture that emerges from the his-
torical portrait of American elites depicted by Mills (1945). Therefore, we should
expect that voting turnout decreases, on average, after the enfranchisement of
nonelites in period T :
(V
Vit Vis f s T < t.
for (1)
where Vit denotes the voting turnout in region i at time t.

Apart from private gains, political participation may also be motivated by a
genuine desire to contribute to the functioning of the political system, what we
call civicness. For instance, voting in elections allows for an ordered succession
of powers in democratic systems: whereas in large elections the probability that
each single voter is pivotal tends to zero, nevertheless the individual decision to
vote contributes to the existence of an electoral result, in the same way as the
participation of infinitesimal agents contributes to the existence of many other
public goods.
Civicness would increase electoral participation of elites and nonelites, thus
mitigating the drop in voting turnout after the enfranchisement:
E(Vit Vis | Ci ) < E(V

(V jt V jsjs C j ) for s < T t and Ci < C j . (2)
where Ci denotes the level of civic capital in the i-th region.

Equations (1) and (2) taken together imply that voter turnout should fall
after the enfranchisement of 1912, the more so in less civic regions. We can test
this empirical prediction by estimating the following difference-in-difference
specification,
Vit αPostt t βP
Post Post t Ci + γ ’ Xitit + i + εit . (3)
where Post t is a dummy equal to one in all periods after the enfranchise-
ment, γ ’Xit is the effect of other (observable) determinants of voting turnout,
νi summarizes the effect of other (unobserved) region-specific characteristics,
including civicness, and εit is a residual term.
Historical Evidence
The preliminary evidence presented previously documents stark changes in
voting patterns across Italian regions before and after enfranchisement of the
nonelites in 1912. The latter was followed by a general decline in voter turn-
out, which was more marked in Southern regions. We next provide additional
econometric evidence in this respect by estimating the equation (3) across
Italian regions over nineteen elections held in the period between unification
(1861) and Fascism (1921). The data come from the Atlante Storico Elettorale
d’Italia (2009), produced by the Istituto Carlo Cattaneo, which provides infor-
mation on voter turnout and electoral results at the regional level for the entire
unitarian period (thirty-seven free elections held between 1861 and 2008, plus
three plebiscites during the Fascist period).3
Baseline Results
In the first column of Table 11.1 we regress voter turnout in region i and year
t on an indicator variable for elections held from 1912 onward. The estimated
coefficient quantifies the average drop within each region at 4.6 percentage
points, doubling to 9.3 when we include a linear trend (column 2) to control for
the long-run increase in voter turnout that is evident from Figure 11.2. When
we split the sample to distinguish between different areas of Italy (columns
3 and 4), the average drop is more than four times larger in Southern than
in Northern regions. The difference-in-differences specification in column (5)
Table 11.1 Voting turnout before and after the enfranchisement
(1) (2) (3) (4) (5) (6) (7) (8) (9)
All regions North South All regions, difference-in-differences specification
Post −0.046*** −0.093*** −0.042** −0.176*** −0.209***
(0.014) (0.016) (0.016) (0.016) (0.016)
North x Post 0.188*** 0.188*** 0.134***
(0.018) (0.015) (0.020)
North x Trend 0.002***
(0.000)
Associations x Post 0.171*** 0.120***
(0.023) (0.029)
Associations x Trend 0.002**
(0.001)
Observations 340 340 207 133 340 340 340 322 322
Region FE YES YES YES YES YES YES YES YES YES
Trend NO YES YES YES YES NO NO NO NO
Year FE NO NO NO NO NO YES YES YES YES
R2 0.383 0.429 0.259 0.624 0.580 0.693 0.708 0.634 0.644
Notes: This table presents the results of OLS estimates of the differential effect of the enfranchisement of 1912 on voting turnout across Italian regions. The unit of analysis is region-
election observations for eighteen Italian regions over nineteen national elections during the period 1861–1921 (two regions did not vote in the first election in 1861). The dependent
variable is the fraction of people that voted in each region-election. The main explanatory variables are the indicator variable Post, which is equal to one for all elections held after the
enfranchisement and zero otherwise, and two alternative measures of civicness: an indicator variable for regions in the north, which were not under the control of Bourbons before
1861; and the number of voluntarily associations per 10,000 inhabitants in 1885 (this last measure is not available for one region in the sample). The bottom part of the table indicates
whether the regression includes in addition a linear trend or region and election fixed effects. Robust standard errors are reported in parenthesis; *, **, and *** denote coefficients
significantly different from zero at the 90 percent, 95 percent, and 99 percent confidence level, respectively.
confirms that the estimated coefficients are significantly different from each
other and quantifies in almost 20 percentage points the additional drop in
Southern regions; such findings are unchanged when we include a full set of
year-specific fixed effects (column 6).
One threat to the validity of the difference-in-differences approach is the
presence of preexisting differential trends between the two groups of regions,
which are indeed apparent from Figure 11.2. For this reason, in column (7) we
allow for area-specific trends, so that the coefficient of the interaction Northr
x Postt captures the postenfranchisement differential drop net of the long-run
differential trends in the voter turnout of the two groups of regions. Even under
this very requiring specification, the effect of interest remains strongly statisti-
cally significant and of the same order of magnitude.
In principle one cannot rule out the alternative explanation that cultural
values themselves changed around the enfranchisement, determining a rever-
sal in voting behavior even in the absence of any civicness-mediated effects of
(changes in) electoral institutions. Although this alternative explanation con-
trasts with a burgeoning literature on the slow moving and persistent nature of
cultural traits (Guiso, Sapienza, and Zingales 2010 for a review), we nevertheless
explore this possibility by examining the persistence over time of an observable
measure of civic traditions across Italian regions, namely the incidence of vol-
untary associations already described in Figure 11.1. Therefore, in Figure 11.3 we
plot the same measure for years 2001 and 1883, as reported by the last available
Census and by the Italian Ministry of Agriculture, Industry and Commerce
(1888), respectively; the graph does not suggest any reversal in civicness between
Northern and Southern regions.
In the last two columns of Table 11.1 we reestimate the same specifica-
tion plugging the incidence of voluntary associations, as an observable mea-
sure of civicness, in place of the crude distinction between Northern and
Southern regions. The results are qualitatively similar but lower in magnitude.
In particular, the estimated coefficient in column (8) implies that an increase
in the incidence of voluntary associations equal to the difference between
North and South (0.3 and 0.9 associations per 10,000 inhabitants, respec-
tively) is associated with a differential increase in voter turnout of 10 percent-
age points after the enfranchisement, which is lower than the corresponding
difference-in-differences between the two groups of regions (column 6). This
suggests that the difference-in-differences estimates may partly capture varia-
tion along other dimensions in addition to civic traditions.
To reduce the scope for spurious effects, we thus include a number of
additional control variables on the right-hand side of the equation. Besides
region-specific and year-specific factors, there are other possible determinants
of voter turnout that differ between Northern and Southern regions. In par-
ticular, correlates of economic development, such as human capital and indus-
trialization, are likely related to civicness and can also shape the response of
nonelites to the enfranchisement.
Voluntary associations × 10,000 inhabitants, 2001 Vda

6
Tos
5
Ero Umb
Ven Mar
4 Mol Lig
Bas Lom
Pie
3
2 Abr
Cal
Cam
Pug
1 Sic Laz
0 .5 1 1.5
Voluntary associations × 10,000 inhabitants, 1885
Northern regions Southern regions

Figure 11.3 Incidence of voluntary associations across
Italian regions, years 1885 and 2001. Notes: This figure plots the number of voluntarily
associations over population across Italian regions in the year 2001 (vertical axis) against
the same variable in the year 1885 (horizontal axis).
Therefore, we have collected literacy rates and measures of industrialization

from the 1911 Italian census (i.e., around the period of the enfranchisement)
and interact them with Postt on the left-hand side of equation (3); the results
are presented in Table 11.2. Controlling for literacy has little or no effect on
the difference-in-differences between Northern and Southern regions, whereas
it halves the estimated coefficient of interest when civicness is measured by the
number of voluntary associations (columns 1 and 5, respectively); the same is
true when we control for the level of industrialization, as measured by the num-
ber of firms and people employed in industry over total population (columns 2
and 6) or, alternatively, by per-capita energy consumption in each region (col-
umns 3 and 7). However, the drop in the coefficient could be caused by the fact
that part of the effect of better civic traditions on voter turnout may go through
higher human capital and economic development.4 In any case, the estimated
coefficient of civicness remains statistically significant, even when we control
for all variables at the same time (columns 4 and 8).
Heterogeneity in Enfranchisement Rates

The regional analysis conducted so far confirms that the reversal in voter turn-
out displayed in Figure 11.2 is statistically significant and robust to control for
several other determinants of electoral participation. In principle, however, one
Table 11.2 Voting turnout in northern and southern regions, before and after the
enfranchisement (robustness)
(1) (2) (3) (4) (5) (6) (7) (8)
North x Post 0.173*** 0.146*** 0.159*** 0.160***
(0.022) (0.021) (0.021) (0.026)
Associations 0.084*** 0.085*** 0.103*** 0.053**
x Post
(0.030) (0.022) (0.025) (0.025)
Literacy x −0.001 0.001 0.004*** 0.002**
Post
(0.001) (0.001) (0.001) (0.001)
Firms x Post 14.537 11.036 26.560* 25.760
(10.391) (11.913) (14.908) (15.845)
Employed in 0.576 0.909* 1.016* 0.186
Industry x
Post
(0.386) (0.519) (0.518) (0.628)
Energy 0.727** −0.022 1.496*** 0.513
production x
Post
(0.313) (0.279) (0.335) (0.328)
Observations 340 340 340 340 322 322 322 322
Region FE YES YES YES YES YES YES YES YES
Election FE YES YES YES YES YES YES YES YES
R2 0.694 0.705 0.699 0.706 0.660 0.679 0.663 0.685
Notes: This table presents the results of OLS estimates of the differential effect of the enfranchisement
of 1912 on voting turnout across Italian regions. The unit of analysis is region-election observations for
eighteen Italian regions over nineteen national elections during the period 1861–1921 (two regions did
not vote in the first election in 1861). The dependent variable is the fraction of people that voted in each
region-election. The main explanatory variables are the indicator variable Post, which is equal to one
for all elections held after the enfranchisement and zero otherwise, and two alternative measures of
civicness: an indicator variable for regions in the north, which were not under the control of Bourbons
before 1861; and the number of voluntarily associations per 10,000 inhabitants in 1885 (this last measure
is not available for one region in the sample). Additional controls include interactions of Post with
literacy rates, firms over total population, workers in industry over total population, and percapita
energy consumption; the source of all these variables is the Italian census of 1911, the detailed description
is reported in the Appendix. The bottom part of the table indicates whether the regression includes
in addition a linear trend or region and election fixed effects. Robust standard errors are reported in
parenthesis; *, **, and *** denote coefficients significantly different from zero at the 90 percent, 95
percent, and 99 percent confidence level, respectively.
Table 11.3 Voting turnout before and after the enfranchisement, controlling for
changes in the electorate
(1) (2) (3) (4) (5) (6)
North x Post 0.188*** 0.183*** 0.160***
(0.015) (0.015) (0.027)
Associations x Post 0.171*** 0.175*** 0.062**
(0.023) (0.030) (0.028)
Ln(Electorate) −0.029*** −0.022* −0.033*** −0.022**
(0.010) (0.011) (0.010) (0.011)
Observations 340 338 338 322 320 320
Region FE YES YES YES YES YES YES
Year FE YES YES YES YES YES YES
Additional controls NO NO YES NO NO YES
R2 0.693 0.701 0.711 0.634 0.648 0.692
Notes: This table presents the results of OLS estimates of the difference-in-differences effect of civicness
on voting turnout, before and after the enfranchisement of 1912. The unit of analysis is region-election
observations for eighteen Italian regions over nineteen national elections during the period 1861–1921
(two regions did not vote in the first election in 1861). The dependent variable is the fraction of people
that voted in each region-election. The explanatory variables of main interest are the interaction between
the indicator variable Post, which is equal to one for all elections held after the enfranchisement and
zero otherwise, and two alternative measures of civicness: an indicator variable for regions in the north,
which were not under the control of Bourbons before 1861; and the number of voluntarily associations
per 10,000 inhabitants in 1885 (this last measure is not available for one region in the sample). The
control variable ln(Electorate) is the log-number of people in the electorate in each election-region. All
regressions include region and election fixed effects; the bottom part of the table indicates whether the
additional controls in Table 11.2 are also included (interactions of Post with literacy rates, firms over
total population, workers in industry over total population, and percapita energy consumption). Robust
standard errors are reported in parenthesis; *, **, and *** denote coefficients significantly different from
zero at the 90 percent, 95 percent, and 99 percent confidence level, respectively.
cannot exclude that differential changes in voter turnout between Northern and
Southern regions reflect omitted variation in the share of newly enfranchised
voters. In particular, if the share of nonelites was lower in Northern than in
Southern regions, lower treatment intensity (as opposed to higher civicness)
could explain the lower drop observed in the former than in the latter.
To address this concern, we augment the specification with the log number
of people in the electorate in each region-election; after controlling for common
time effects and other determinants of voter turnout, differences in enfranchise-
ment rates across regions constitute the main source of within-region changes
in the size of the electorate over the sample period. The results in Table 11.3
confirm that a greater expansion of the electorate is associated with an average
decrease in voter turnout; still, the coefficients of interest are basically unaf-
fected relative to the estimates reported in Tables 11.1 and 11.2.
Reallocation of Political Power

The evidence so far is consistent with the view that, for democratization to be
successful, it is required that nonelites be ready and willing to participate in
the political process when the reform grants them voting power; however, this
willingness and readiness depends in turn on whether a culture of civicness is
already diffuse. Lacking the latter, nonelites may fail to benefit from the new
potential political influence leaving the distribution of powers unchanged and
thus certifying a de facto failure of the democratization reform. To examine
this issue more directly we study how nonelites voted once they were granted
democratic rights. Arguably, a democratization reform is successful if nonelites
make extensive use of these rights and if their votes are not captured by pre-
existing elites but are used to strengthen their representativeness. That is, the
reform is successful if it generates a substantial reallocation of political power
away from the elites.
Socialist and Communist parties represented the traditional political outlet
of nonelite popular masses in Italy. Starting with the beginning of the twenti-
eth century, they went to replace the so-called sinistra storica (historical left),
which represented the progressive trends among the elites and dominated the
political scene in Italy during the last quarter of the nineteenth century. This
process received undoubtedly an impulse after the enfranchisement of the non-
elite masses. More precisely, after a slight increase in voter turnout at the first
postenfranchisement elections, radical parties doubled their combined electoral
share between 1913 and 1919 (Figure 11.4). This was made possible by the change
in the electoral system from majoritarian to proportional, which weakened the
position of incumbent politicians to the advantage of younger political forma-
tions; it was also favored by the spread of radical political ideas among soldiers
during World War I (Atlante Storico Elettorale d’Italia, 2009).
Yet, the same graph shows that political change was far from uniform.
Radical parties gained significant political power (almost half of the votes in
the last elections before the Fascist period) in Northern regions only, where
enfranchisement resulted in an effective increase in political participation of
the nonelites; by contrast, the electoral share of the same parties in Southern
regions remained always below 15 percent.
These patterns are confirmed in Table 11.4, where we regress the voting
share of Socialist and Communist parties on voter turnout. Although higher
voter turnout is associated with a greater electoral success of leftist parties
throughout all periods (column 1), the relationship is much stronger after the
enfranchisement (column 2). After controlling for region and election fixed
effects, a differential percentage point increase in participation raises the elec-
toral stake of radical parties by 0.3 percentage points on average, but by twice
as much after enfranchisement. One obvious interpretation of this finding is
that increases in turnout after enfranchisement were mainly driven by greater
participation of the newly enfranchised nonelite masses, which represented the
.5
.4
.3
.2
.1
1860 1880 1900 1920
Northern regions Southern regions

Figure 11.4 Share of votes to socialist and communist parties in
northern and southern regions, 1861–1921. Notes: This figure plots the fraction of voted
obtained by socialist and communist parties in northern and southern regions during
all national elections held from the formation of the Italian state (1861) to the advent of
Fascism (1921). The vertical line corresponds to the change from restricted suffrage (on an
income basis) to the enfranchisement of the entire male population.
major constituency of Socialist and Communist parties. These results are unaf-
fected when we control for other correlates of the political support for such par-
ties, namely union density and the incidence of workers’ strikes (columns 3–5).
The Postwar Period

The results presented so far show that de jure concession of political rights
taking place with the franchise resulted in de facto reallocation of political
power only in the regions where nonelites were willing to actually exert those
rights. One wonders whether this difference in civicness disappears over time
as people voted repeatedly and possibly learned how to benefit from extended
democratic rights. Put differently, did the 1912 extended franchise to the male
population and the subsequent extension of voting rights to the entire popu-
lation independently of gender after World War II bridge the gap in people
civicness across regions of the country? After all, the main explanation that has
been put forward to explain why civicness differs so much between the North
and the South of Italy is Putnam’s (1993) story. He was the first to argue that
the civic capital divide between the North and the South of Italy arose when
history in these two parts of the country bifurcated around the turn of the first
Table 11.4 Electoral support to socialist and communist parties in northern and
southern regions, before and after the enfranchisement
(1) (2) (3) (4) (5)
Voting turnout 0.436*** 0.299*** 0.296*** 0.294*** 0.294***
(0.071) (0.080) (0.079) (0.079) (0.079)
Voting turnoutx Post 0.631*** 0.586** 0.568** 0.610**
(0.234) (0.262) (0.249) (0.263)
Union density x Post 0.305 −1.276
(0.841) (1.529)
Strikes x Post 0.813 2.716
(1.318) (2.304)
Observations 340 340 340 340 340
Region FE YES YES YES YES YES
Year FE YES YES YES YES YES
2
R 0.678 0.687 0.687 0.688 0.689
Notes: This table presents OLS estimates of the relationship between voting turnout and the electoral
results of Socialist and Communist parties. The unit of analysis is region-election observations for
eighteen Italian regions over nineteen national elections during the period 1861–1921 (two regions did not
vote in the first election in 1861). The dependent variable is the fraction of valid voted in favor of Socialist
and Communist parties in each region-election. The main explanatory variable is the voting turnout in
each region-election, possibly interacted with the indicator variable Post, which is equal to one for all
elections held after the enfranchisement and zero otherwise. Additional controls include interactions
of Post with union density and participation into workers’ strikes over total population; the source of
these variables is the Italian census of 1911, the detailed description is reported in the Appendix. The
bottom part of the table indicates whether the regression includes in addition a linear trend or region
and election fixed effects. Robust standard errors are reported in parenthesis; *, **, and *** denote
coefficients significantly different from zero at the 90 percent, 95 percent, and 99 percent confidence
level, respectively.
millennium. The North experienced for centuries a system of free cities that
allowed its citizens to participate in the political process and to learn the ben-
efits of democratic involvement, which crystallized into people’s culture. The
South instead ended up being dominated by highly hierarchical governments
that never involved nonelites in political decisions and political management
until Italy’s unification in 1861. Nonelites, the story goes, have thus internalized
norms of dependence from elites and of noninvolvement in the making of col-
lective decisions. Have a century of democratic concessions and formal demo-
cratic rights bridged the civicness gap?
One simple way to address this question is to compare the gap in partici-
pation in parliamentary elections between South and North since the 1912 fran-
chise. The first national elections after the promulgation of the Constitution,
held in 1948, were still characterized by higher voter turnout in Northern
than in Southern regions; even though the difference between the two areas
was initially relatively narrow, the gap widened considerably over the following
sixty years (Figure 11.2). On this account, there seem to be no convergence in
civicness.
Conclusions
Using historical data on democratization and voter turnout in Italy we find that
the 1912 franchise led to a lower average participation in political elections but
the decrease was much larger in the South than in the North, to the point that
a reversal emerged and the gap has since never been bridged. We interpret these
results in the context of a simple theoretical framework where participation in
politics is driven by a private motive for the potential benefit that involvement
with power may give rise to and a social motive induced by preexisting civic
culture.
These findings have two implications: first, a process of formal democ-
ratization through the concession of voting rights to a larger segment of the
population is less likely to succeed and may indeed fail to work altogether if
the beneficiaries of the new rights lack the civic culture necessary to practice
these rights and translate them into effective political participation. Democratic
reform supplies the potential for democratization, but its ultimate success rests
on the existence of a demand for political participation based on the new vot-
er’s actual willingness to use democratic rights. To create this demand requires
a preexisting civic culture, as argued by Almond and Verba (1963).The second
point is that democratization seems also to fail to produce civic culture in such
a way as to fill the gap between the two areas of the country: after decades
of experimentation with democracy and repeated voting in local, national, and
European elections, and in referenda, the gaps in political participation and in
civic engagement between the North and the South remain unchanged. This
raises one important question: can this lack of influence be consistent with the
idea, first proposed by Putnam (1993) and supported by the evidence in Guiso,
Sapienza, and Zingales (2008), that the difference in civic values between the
North and the South reflects difference in exposure to democracy and famil-
iarity with participation in the management of the public good that dates back
to the experience of the free cities in the cities of the North? Why did the free
city experience of democratic engagement affect people’s civic culture, whereas
the concession of democratic rights did not? One possibility is that the free city
experience lasted for about three centuries, much longer than the practice of
universal suffrage after 1912. The latter may be too short to dismantle a culture
of weak involvement that tends to be transmitted from generation to generation
and, as such, shows persistence. A second explanation is that although the 1912
suffrage was a concession of elites, perhaps to avoid bigger transfers of power

under the threat of a Socialist revolution (Acemoglu and Robinson [2000]), the
emergence and invention of democratic participation in the free cities was the
result of big historical shocks (the collapse of the Holy Roman Empire and the
disorder that followed) that required people’s direct involvement in the man-
agement of the public good. This would suggest that a civic culture—“a set of
beliefs, attitudes, norms, perceptions and the like, that support participation”
(Almond and Verba 1963, 178)—is more likely to emerge when circumstances
require that not only elites but the entire population or very large segments take
responsibility in the solution of collective action problems.
Appendix: List of Variables
Dependent Variables
Voter turnout: share of voters over total electorate in each
region-election. Source: Atlante Storico Elettorale d’Italia (2009)
Electoral support to Socialist and Communist parties: share of
votes obtained by such parties over the total valid votes in each
Explanatory Variables
North: indicator variable for Northern and Center regions, which were not
under the control of the Bourbons before unification.
Post: indicator variable for elections held after the enfranchisement of 1912.
Associations: number of voluntarily associations per 10,000 inhabitants
in each region in year 1885. Source: Ministry of Agriculture, Industry
and Commerce (1888)
Literacy: percentage of people older than twenty-one able to write and
read in each region in year 1911. Source: 1911 Census
Firms: number of firms over total population in each region in year 1911.
Source: 1911 Census
Employed in industry: share of total population employed in industry in
each region in year 1911. Source: 1911 Census
Energy production: per-capita energy produced (in kilowatt/hours) in each
region in year 1911. Source: 1911 Census
Ln(Electorate): log of the total number of people in the electorate in each

Union density: union members over total population in each region in
year 1911. Source: 1911 Census
Strikes: number of workers involved in strikes over total population in
each region in year 1911. Source: 1911 Census
Notes
1. This pattern of behavior is consistent and probably has contributed to shape
Mosca’s (1939) sceptical view about the working of democracies where a minority—
the elite—ends up exercising the political power and controlling the majority
thanks to their greater organizational skills. Lack of civic culture and thus of an
understanding of the power of voting among nonelites can be seen as limited
possession of “organizational skill.”
2. Mutual aid societies were formed among urban artisans and craftsmen as an
insurance device against accidents and economic hardship; similarly, cooperatives
provided mutual assistance to their members, be they workers, producers, or
consumers. As argued by Putnam (1993), “mutual aid societies provided a locally
organized, underfunded, self-help version of what the twentieth century would call
the welfare state ( . . . ) represented collective solidarity in the face of the economic
insecurities peculiar to the modern age.”
3. The Istituto Carlo Cattaneo is an Italian nongovernmental organization that has
been active for several decades in the collection and analysis of electoral data (see
www.cattaneo.org).
4. Indeed, faster human capital accumulation is considered one of the main payoffs of
higher social capital accumulation (see Knack and Keefer 1997).
part iii
INTERNATIONAL
COMPETIVENESS
Chapter 12
A LONG-RUN
PERSPECTIVE ON
COMPARATIVE
ADVANTAGE
Giovanni Federico and

Nikolaus Wolf
Introduction
Richard Cobden famously suggested that Italy’s ideal specialization was to grow
oranges and produce silk. He was correct at the time, but he did not expect the
situation to change in the future. In its 150 years of history as a unified country,
Italy has proved him wrong. Since the 1930s, it has exported more manufactures
than primary products and currently it is the third largest exporter of manu-
factures in the European Union and sixth in the world. Exports of industrial
products have arguably been the most dynamic sector of its ailing economy in
the last decades. This chapter details this long-run change in trade and special-
ization from 1862 to the present, with a consistent analytical framework and a
comparable data set. It complements Chapter 13, which deals with the causes of
aggregate performance of Italian exports.
We start with a brief survey of the (scientific) literature on Italian trade,
stressing how the debate featured alternate waves of optimism and pessimism,
which tally well with the cyclical fluctuations of the Italian economy. Then we
describe the main macroeconomic trends (degree of openness, trade balances,
328 international competitiveness
share of Italian exports on world market, and so forth), and outline the long-
term changes in composition of products and destinations. Whenever possible,
we compare Italy with other European countries. Next we deal with the changes
in Italy’s comparative advantages. We use the Lafay index (1992), which unlike
the revealed comparative advantage or RCA (Balassa 1965), takes into account
exports and imports. The next section then explores, with a simple “shift-share”
analysis, the relation between the relative growth in exports of manufactures,
both total and divided by technological level, and their destination. The last
section very briefly sums up the results, puts forward some speculative ideas
about the relation between long-term change and overall economic growth, and
concludes with an assessment of the prospects for Italian trade in the world
markets.
Exports and Economic Growth in Italy

The nexus between trade and economic growth has been a prominent topic
in Italian economic thinking and policy over the last 150 years. The preva-
lent mood has been rather pessimistic. For most of the period, Italian elites
nurtured a sort of ideologic antipathy for trade. They considered imports a
threat to the livelihood of producers, and did not believe that exports could
be an engine of growth. Exports were deemed necessary to pay for the essen-
tial imports of raw materials, but little more. Exports were reckoned to have
spurred growth only in the 1860s and 1870s, and to some extent during the
“boom giolittiano,” the twenty years before the outbreak of World War I
(Einaudi 1900). This hostility to trade peaked during the 1930s when the Fascist
regime regarded independence from foreign trade (autarky) as one of its key
economic goals. Optimism gained ground again during the golden years of
the European economy after World War II when Italy achieved unprecedented
rates of gross domestic product (GDP) growth. Exports were regarded as an
essential source of aggregate demand and as a strong stimulus to increase the
competitiveness of Italian industry (Ciocca 2007). Furthermore, scholars her-
alded the change in the composition of Italian exports as evidence of conver-
gence with the more “advanced” European countries, such as Germany and
France (Cao Pinna 1965; Miurin and Santini 1971; Conti 1973; Onida 1999). The
season of optimism did not last for long. Since the late 1970s, growth slowed
and pessimism returned. Few asked for protectionism and many still contin-
ued to consider exports potentially as a main source of growth. Regardless,
several scholars argued that Italy’s long-term prospects for trade-led growth
were poor, because the country still exported mainly low-technology, “tradi-
tional” goods, which were subject to increasing competition from emerging
markets, rather than the growth-fostering, science-based manufactures (Conti
a long-run perspective on comparative advantage 329
1978; Guerrieri and Milana 1990; Gomellini and Pianta 2007). Indeed, in the
1980s and 1990s, Italy’s specialization changed fairly little and thus the dif-
ference with the advanced European countries persisted (Bugamelli 2001; De
Benedictis 2005; Di Maio and Tamagni 2008). An alternative, more positive,
view of Italy’s export performance in the 1980s and 1990s argues that the
aggregate data are misleading. In fact, Italy succeeded in positioning itself on
the top of the market for “traditional” goods, exporting high-quality and high
value-added products, and thus enjoyed some degree of market power (Fortis
2005; De Nardis and Traù 2005; Lanza and Quintieri 2007). Microeconomic
research at firm level shows that the recent success owes a lot to a massive
process of restructuring after the euro (Bugamelli, Schivardi, and Zizza 2008).
However, the effort has been largely thwarted by the economic crisis. Export
pessimism has again emerged as an important component of the widespread
narrative about Italy’s long-term stagnation and relative decline.
This literature suffers from a two-fold problem. First and foremost the
quantitative evidence is scarce for the period before 1939 and confusing for
the period after 1950. Italy did publish complete and fairly reliable statistics
since 1862 (Movimento Commerciale), but their sheer size (up to three thou-
sand products in the 1930s) and the repeated changes in classification of prod-
ucts have deterred scholars from using them. Thus, the historical literature
on the pre-1939 period is based almost exclusively on anecdotal evidence, with
very few data and almost no international comparisons. After 1962, scholars
can rely on the United Nations data on world trade. However, they use an
array of different measures with different levels of product disaggregation
and implicitly focus on short- to medium-term trends. Many of their works
consider only benchmark years rather than yearly series and none extend the
analysis beyond periods of twenty-three years. The only exception to this
short-termism is a very recent paper by Vasta (2010), which covers the whole
period 1862–2010. However, it deals only with exports and reports original
research only for the period before 1939, relying on a survey of the literature
for postwar trends.
This chapter addresses these shortcomings. It provides a long-term view of
Italian trade and specialization from unification to the present, with a consis-
tent analytical framework. For the period before 1939, we rely on the results of
a massive research project, funded by the Banca d’Italia (Federico et al. 2011),
which has copied the whole set of Italian trade statistics from 1862 to 1949 and
reclassified them according to the SITC classification (Rev. 2). The data will
soon be available on the Banca website. From 1950 onward, we use the United
Nations data as published in their annual Yearbook of Trade Statistics. For the
period through 1961 we have to rely on printed summaries (United Nations
1962), whereas afterwards the data are available in a number of databases. We
use the NBER-UN world trade data for the period 1962–2000 (see Feenstra
et al. 2005 for a description of the data set) and complement this with the UN
Comtrade data for the period 2000–2009.
A First Look at Macro-Trends:

1862–2009
Let us start with the degree of trade openness, the ratio of total merchan-
dise trade (imports plus exports) to GDP. Figure 12.1A compares Italy with the
two powerhouses of the European continent and Italy’s main trading partners
(Germany and France), and with Spain, a smaller and, for most of the period,
more backward country than Italy.1
Before the Great Depression, differences between countries were sub-
stantial. Italy remained less open than France and Germany, although not
less than Spain, throughout all its first fifty years as a unified state. The
degree of openness remained roughly constant around 0.20 until the 1890s
and then increased to 0.25 on the eve of the war, five points less than France
and almost thirteen less than Germany. It remained on that level during the
1920s and, as everywhere, collapsed during the Great Depression. Since the
1950s, the degree of openness has continuously increased in all four coun-
tries. In Italy, the growth has been fairly steady, with the exception of a short
period of stagnation in the 1980s. Openness exceeded the 1913 level around
1970 and then peaked in the mid-2000s, around 0.55, before declining some-
what during the current crisis. The Italian economy is as open as France’s
and Spain’s, but still less than the German economy. This growing open-
ness is a key factor that has shaped the economic history of the Italian (and
European) economy.
Italy has almost always exported less than it imported (Figure 12.1B). The
trade balance was heavily negative after the unification and improved in the
1870s, but stayed negative for more than a century with wide fluctuations
between 1 and 8 percent of GDP. Exports only exceeded imports during the
“economic miracle” of the late 1950s and early 1960s and for a few years in the
early 1990s. The balance turned negative again in recent years.
When compared with the three other countries, Italy’s share in world mar-
kets at current prices was remarkably stable over this period (Figure 12.2A).2 It
declined in the late 1880s, from around 3–3.5 percent to about 2.5 percent, and
remained at this level until the early 1950s. As usual, Italy performed worse
than Germany, which managed to keep about 10 percent of the market from
the 1880s to the 1930s, despite the collapse of exports in the early 1920s. Italy
performed marginally worse than Spain, but remarkably better than France,
whose share plummeted from 15 percent in the 1860s to less than 5 percent
during the Great Depression. Since 1950, Italy’s share of world exports began
to rise, as the country as other European ones benefitted from membership
in the European Union and from trade liberalization under the GATT and
successor agreements, which did not extend to countries still under Socialist
(a) 1
0.9
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France Germany Italy Spain
(b) 6
0
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–2
–4
–6
–8
–10
Figure 12.1 (A) Openness ratios (trade/GDP), Italy, France, Germany, and Spain
1862–2009. (B) Italian balance of trade as percentage of GDP, 1862–2009.
regimes. The share peaked around 1990, well above 4.5 percent, before it came
down to 3.5 percent in the 2000s as new competitors, most notably China,
entered the world market. This fall has raised some concern about Italy’s
competitiveness, but it can be viewed more optimistically as a return to its
long-run average.
One can object that a comparison of absolute shares between economies of
widely different size is misleading. Thus, in Figure 12.2B we correct by normal-
izing with the country’s share of world GDP (Maddison 2009a). The Italian
ratio remained below one until the 1950s, with a clear downward trend in the
first half of the twentieth century (0.76 in 1870, 0.82 in 1900, 0.74 in 1913, and
0.70 in 1939). Italy exported substantially less than it should have, given its GDP.
(a) 25.00
20.00
15.00
10.00
5.00
0.00
1862
1867
1872
1877
1882
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Italy France Germany Spain
(b) 2.50
2.25
2.00
1.75
1.50
1.25
1.00
0.75
0.50
0.25
0.00
1862
1867
1872
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1922
1927
1932
1937
1942
1947
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1962
1967
1972
1977
1982
1987
1992
1997
2002
2007
Italy Germany France Spain
Figure 12.2 (A) Shares in world trade, Italy, France, Germany, and Spain 1862–2009.
(B) Share in world trade relative to share in world GDP, Italy, France, Germany, and
Spain, 1862–2009.
The ratio for France and Germany declined before 1939, but their starting point
was much higher (1.75 and 1.5, respectively). Spain’s normalized share was lower
than the Italian share in 1870, but much higher in 1900 and 1913. With this
metric, Italy’s performance is decidedly disappointing. As expected, the postwar
trade boom featured a sharp increase in the ratios. By 2008, in all four coun-
tries, the ratios were at their postwar maximum: the Italian ratio was at 1.6, as
high as France’s and Spain’s, but well below the German one (2.15). In the last
half century, Italy has been roughly the European norm, and Germany the out-
lier. Furthermore, the recent fall in its share in world trade (Figure 12.2A) can
be interpreted, in a somewhat less alarming fashion, as an unavoidable outcome
of the relative decline of its economy rather than the evidence of a pure loss of
competitiveness.
Italy’s Foreign Trade

Since the pioneering work by Kuznets (1967b), structural change in trade is
deemed a key feature of modern economic growth. Backward countries, such
as postunification Italy, export primary products and import manufactures.
Industrialization increases the share of manufactures on exports and of pri-
mary products, most notably raw materials, on imports. More recent work has
highlighted the growing role of exchange of manufactures between advanced
countries (intraindustry trade), without questioning the outline of changes in
the early stages of modern economic growth. The case of Italy tallies only par-
tially with the received wisdom. Figure 12.3 reports the share of manufactures,
defined as the sum of SITC (Rev. 2) one-digit categories five to nine, excluding
raw silk before 1939.3
Even in the 1860s and 1870s, manufactures accounted for less than half of
imports, because Italy lacked most key raw materials including coal and cotton.
The need to import them clearly contributed early on to the country’s negative
trade balance. The share of manufactures fluctuated between a third and half
of total imports until the 1980s and then increased sharply, as a consequence
of a significant increase in intraindustry trade. Trends on test export side are
closer to the conventional wisdom. After its unification, Italy exported very few
industrial products, unlike France and Germany. Manufactures accounted for
50–60 percent of all French exports in the 1860s and for 70 percent of German
exports in the 1880s, and for 10 percent and 30 percent of imports, respectively.4
Italy was closer to Spain, where industrial products accounted for about half
the imports and a mere 12 percent of exports in 1877 (Tena 2007). However,
although the composition of Spanish trade did not change much until 1951,
Italian exports of manufactures grew decidedly faster than total trade and on
the eve of World War I, their share reached almost 40 percent. The percent-
age increased further in the 1920s. The war had disrupted the exports of pri-
mary products significantly more than of manufactures, and the divergence
continued after the end of hostilities. The exports of primary products recov-
ered slowly and they only exceeded their prewar levels in the late 1920s, for
few years and by less than a fifth. In contrast, exports of manufactures grew
fairly fast throughout the decade. In 1929, they exceeded their prewar level by
about 80 percent and Italy’s share on world exports of manufactures reached
3 percent for the first time. The Depression hit all exports to the same extent,
but exports of manufactures were boosted by the conquest of Ethiopia in 1936.
In 1936–1939, industrial products accounted for 49.6 percent of total exports but
for only 43.7 percent exclusive of exports to colonies. Thus, on the eve of World
War II, despite its progress, Italy still had not yet caught up with France and
Germany. After the war, the change in composition of exports resumed, and
continued steadily up to the early years of the twenty-first century, when manu-
factures exceeded nine-tenths of total exports. This share is roughly as high as
in Germany and decidedly above that of Spain and France.
(a) 100
90
80
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60
50
40
30
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0
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(b) 0.25
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1862
1866
Figure 12.3 (A) The composition of Italian trade: manufactures as a share of imports
and exports, 1862–2009. (B) The composition of Italian trade: Herfindahl Index of export
diversification, 1862–2009.
Composition of Italian Exports

This structural change came along with a significant increase in the level of
diversification of Italian exports. A simple measure is the Herfindahl index,
HFI
Ft ∑a
2
it
where ait is the share of four-digit SITC (Rev 2) product i in total exports in
year t. In the 1860s, this index was above 0.15, because the five most important
products (silk, olive oil, sulfur, silk cocoons, and wine) accounted for 65 percent
of total exports. Italy’s dependence on a handful of products steadily declined
80
70
60
50
40
30
20
10
0
1862
1866
1870
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SITC5 (Chemicals) SITC6 (Textiles, Metals etc, until 1939 excl Silk)
SITC7 (Machinery and Transport Equipment) SITC8 (Miscellanus, incl. Clothing, Footwear etc.)
SITC9 (Non Classified)
Figure 12.4 The composition of Italian manufacturing exports

(percent shares of SITC Rev 2, one digit), 1862–2009.
to the mid-1900s, when the five most important products, including cotton and
silk cloth, accounted for no more than 39 percent of total exports and the index
was about 0.08. It then collapsed to about 0.03 on the eve of World War I and
declined further to 0.016 in the late 1930s, when the five top products accounted
for just 18.3 percent of exports. The index declined further during the golden
age of the 1950s and 1960s, down to a minimum around the 1980s. Despite a
small rebound in the late 1990s, export concentration remained low at around
0.013. The five most important products, all industrial, accounted for 16 percent
of total exports.
The discussion so far would not justify the pessimism about the perfor-
mance of Italian exports. Trends in the share of world markets are broadly
consistent with its level of development, and exports show a healthy trend
toward diversification. Actually, most misgivings about the long-term prospects
of Italian exports, in the past and currently, are related to their composition,
and especially to the allegedly excessive share of “traditional” manufactures.
Are these concerns justified? As Figure 12.4 shows, the one-digit SITC groups
6 (“Manufactured goods classified chiefly by material”) and 8 (“Miscellaneous
manufactured articles”) together account for about 40 percent of total exports of
manufactures, whereas the share of chemicals (group 5) hovers around 10 per-
cent. The four most “traditional” industries, that is, textiles and yarns (65 in the
two-digit SITC classification), clothing and apparel (84 ), footwear (85), and fur-
niture (82) still supply between a sixth and a fifth of Italian industrial exports.
However, the key change is the rise of the share of SITC group 7 (“Machinery
and transport equipment”). It became the second largest group, after textiles, in
the 1930s, although largely thanks to exports to the colonial captive market, and
45.00
40.00
35.00
30.00
25.00
20.00
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10.00
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0.00
1920
1923
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1986
1989
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1995
1998
2001
2004
2007
Low Tech (excl Silk up to 1939) Medium Tech High Tech
Figure 12.5 Export shares of low-, medium-, and high-technology goods, 1921–2009.
the largest group in the 1960s. In the last fifty years, this group has contributed
about two-fifths to total Italian exports.
On a more general issue, one could question whether aggregate data at the
one- or two-digit SITC category level are adequately representative, because
most of them hide large differences in terms of sophistication and skill-content
of exports. Scholars have put forward a number of alternative classifications of
goods along these lines, using three- or four-digit categories (Peneder 2003).
Several works (e.g., Guerrieri and Milana 1990, Gomellini and Pianta 2007) use
the classification by Pavitt (1984) in four groups: (1) science-based, (2) scale-
intensive, (3) supplier-oriented, and (4) traditional industries. However, this tax-
onomy had been conceived to classify firms rather than products and indeed it
mixes different criteria (technology level, type of demand, organization of pro-
duction). In contrast, the more recent taxonomies by Organisation for Economic
Cooperation and Development (1996) and Lall (2000) classify products accord-
ing to only their technologic level. The latter, which we prefer as more precise
and detailed, allocates manufactures in three classes: (1) low, (2) medium, and
(3) high technology.5 However, we do not deem it suitable to capture the tech-
nologies of the nineteenth and early twentieth century and thus we use it only
from 1920 onward (Figure 12.5).
The share of low-technology manufactures in total Italian exports has
remained fairly stable in the long run at around a third, with a hump in the
1980s. In contrast, the share of medium-technology goods has been rising
throughout the entirety of the period. The growth has been very fast during
the interwar years, but it has continued also after 1950, up to 40 percent in
2009. The share of high-technology products was very low in the 1920s, which
is of little surprise given that most of the relevant technologies were only in
0.5
0.45
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2006
UK France Germany OtherEurope Other OECD ROW
Figure 12.6 The geography of Italian exports, 1862–2009.
an early stage. However, the share of these products in all Italian exports has
increased fairly little in the last decades. As we detail in the next section, the
differences between these groups extend from their shares of exports to the
trade balance.
Geographic Reorientation of Trade

The change in composition toward manufactures and to ever more diverse and
sophisticated manufactures was associated with some quite dramatic geographic
reorientation of trade (Figure 12.6). At the beginning of the period, about 90
percent of Italian exports headed towards Europe. One-third of these went
to France; one-sixth each to the United Kingdom and Switzerland (probably
including a lot of disguised exports to Central Europe), and the rest to other
countries. The overall share of Europe declined thereafter, and on the eve of
World War I European countries accounted for about 60 percent. However, this
apparently steady change conceals the massive shock caused by the outbreak
of the trade war with France in 1888. Before 1887, France had absorbed almost
a half of Italian exports and afterwards its share dropped to less than a fifth.
After 1887, Germany became Italy’s best client and is still the main single desti-
nation for Italian exports. The trend toward a greater geographic diversification
continued into the 1920s and was boosted in the latter years of the 1930s by the
conquest of Ethiopia. Colonies, which previously had been almost irrelevant,
accounted for about one-quarter of Italian exports on the eve of World War
II. This situation was indeed exceptional, and after the war and the subsequent
loss of the colonial empire, the share of Europe rebounded to about two-thirds,
and remained by and large constant until today. Trade with non-European
Organization for Economic Cooperation and Development (OECD) countries
(i.e., the United States and Japan) only once reached 15 percent and has recently
declined to less than 10 percent, whereas trade with developing and emerging
markets recently increased to more than 25 percent of total exports.
Italy’s Comparative Advantage

There are many ways to measure comparative advantages (Laursen 1998). The
workhorse of the empirical work is still the RCA index by Balassa (1965). It
compares the share of a given country in world exports for each product to the
total market share of that country: a value over one suggests a specialization in
that good and vice versa. An alternative approach uses commodity-specific net
exports as a measure of comparative advantage. The most common index along
this line has been suggested by Lafay (1992),
⎡⎛ x m ⎞ ⎛ X M ⎞ ⎤ ⎛ x + m ⎞
F i = 100 ∗ ⎢⎜
LFI ⎟ −⎜ ⎟⎥⎜ ⎟
⎣⎝ x + m ⎠ ⎝ X M ⎠ ⎦ ⎝ X M ⎠ ,
where x refers to exports and m to imports. Lower case letters denote com-
modity-specific trade, and capital letters denote total trade (i.e., X = Σx).6 In a
nutshell, the Lafay index is the difference between the normalized net-balance
for the ith product and the total normalized net-balance, weighted with the
share of the product on total trade. Thus, a positive value implies a specializa-
tion in the ith good. All indexes sum up to zero, with a maximum range from
200 to −200 in the extreme case of complete specialization of both exports and
imports (and balanced trade).7 The Lafay index offers three distinct advantages
over the RCA (and various modifications thereof):
1. It controls for distortions from an overall net deficit (which was the
most common case in Italy) and, above all, it takes the level of imports
into account. This is a particularly appealing feature for the analysis of
recent trends when outsourcing and intraindustry trade have become
increasingly relevant. For instance, Italy would seem to have enjoyed a
comparative advantage in iron and steel products in 1998, with a RCA
of 1.05 (De Benedictis 2005), whereas actually it was a net importer.
As a general rule, the distortion from neglecting the import side is
potentially greater the higher the level of aggregation and the share of
intraindustry trade.
2. It measures the contribution of different products to changes in total
comparative advantage. From this point of view, the RCA can be
seriously misleading, especially for minor products. Let’s hypothesize
that a country with a 1 percent share of world exports has a monopoly

on a product accounting for 0.01 percent of world trade; the RCA for
that good would be a whopping one hundred, but the product would
still account for only 1 percent of the country’s exports.
3. Last but not least, it needs only national trade statistics. This feature is
particularly helpful for a long-run perspective, because data on world
exports with a suitable disaggregation are available only after 1962. The
figures by Tyszynski (1951) and Yates (1959) are highly aggregated and
the implicit classification is quite idiosyncratic and differs markedly
from the SITC classification we use for other data.
The data in Figure 12.7A show the changes in Lafay indices for all manufactures
(defined again as SITC one-digit categories from five to nine). The index turns
out to be positive throughout the period (except for a few years in the 1860s)
only if raw silk is included. If it is excluded, as we believe it should be, the
picture is rather different: Italy apparently had no comparative advantage in
industrial products before the turn of the century. The Lafay index was heav-
ily negative after Italian unification but started to grow after the mid-1880s,
and reached a positive value for the first time in 1898. It hovered around zero
until World War I, but with a short dip around 1907. The index jumped upward
during the war and afterward, peaking in 1921 when German firms were hob-
bled by defeat and hyperinflation. The return of world markets to more nor-
mal conditions caused the index to decline, but it remained positive and high
throughout the interwar period. The spike of the late 1930s is largely spurious
because it reflects manufacturing exports to colonies. Regardless, even when
we omit these years, the index remains well above zero and fairly high (8.3 for
the period 1923–1936). During the golden years of the postwar period and also
in the bleak 1970s, the index continued to grow, increasing to values around
or even above twenty until the mid-1980s. Then it started a long decline. In
the 2000s, the strong increase in imports of industrial products (Figure 12.3A)
drove the aggregate index down to five or below, a level it had not reached since
World War I.
Figure 12.7B decomposes the Lafay index by type of manufacturing prod-
ucts at the one-digit level.
Before World War II, the indices for chemicals (5), engineering (7), and mis-
cellaneous manufactures (8) were low in absolute values and changes were fairly
modest despite the on-going industrialization process. The index for engineer-
ing remained almost constantly negative. Indeed, Italy was a net importer for
most engineering products (if measured at the two-digit level) throughout the
1920s and early 1930s. Only road vehicles (group 78) have remained significantly
positive from the early 1900s to World War II. Chemicals are an interesting
case. Italy had a sizeable positive balance in the 1870s and 1880s, mostly thanks
to exports of traditional tanning materials, soap, and perfumes. The overall bal-
ance deteriorated during the “boom giolittiano” and remained slightly negative
(a) 25.00
20.00
15.00
10.00
5.00
0.00
1862
1866
1870
1874
1878
1882
1886
1890
1894
1898
1902
1906
1910
1914
1918
1922
1926
1930
1934
1938
1942
1946
1950
1954
1958
1962
1966
1970
1974
1978
1982
1986
1990
1994
1998
2001
2005
2009
–5.00
–10.00
–15.00
–20.00
Manufacturing Manufacturing (excl. Silk)
(b) 20
15
10
05
00
1862
1866
1870
1874
1878
1882
1886
1890
1894
1898
1902
1906
1910
1914
1918
1922
1926
1930
1934
1938
1942
1946
1950
1954
1958
1962
1966
1970
1974
1978
1982
1986
1990
1994
1998
2002
2006
–05
–10
–15
–20
SITC5 (Chemicals) SITC7 (Machinery and Transport Equipment)
SITC8 (Miscellanus, incl. Clothing, Footwear etc.) SITC9 (Non Classified)
SITC6 (Textiles, Metals etc, until 1939 excl Silk)
(c) 16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00
1929
1932
1935
1938
1941
1944
1947
1950
1953
1956
1959
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
1920
1923
1926
–2.00
–4.00
LFI_LT (excl. Silk up to 1939) LFI_MT LFI_HT
Figure 12.7 (A) Lafay-index for manufacturing exports (sum over SITC one-digit
categories five to nine), 1862–2009. (B) Lafay-index for manufacturing exports (SITC
one-digit categories five to nine), 1862–2009 (for 1862–1939 category six excluding silk).
(C) Lafay-index for different technology classifications, 1921–2009.
after the war. Thus, the observed dramatic change of Italy’s comparative advan-
tage toward manufactures reflects changes in group 6—or more precisely in
textiles (65), which here exclude silk. Their index shifted from heavily negative
values (around or below −7) until the 1890s into positive ones. On the eve of
World War I, textiles, most notably cotton cloth, were already the third largest
contribution to net exports, after raw silk and fruits. They became the main
Italian export after the late 1920s with index values over seven, but they lost
this position after World War II. Their index declined steadily throughout the
1950s, down to 1.5–2 in the 1960s. Meanwhile, Italian exports had diversified with
substantial net balances in nonmetallic mineral manufactures (66 i.e., marble,
stones, and tiles); clothing (84); footwear (85); and to a lesser extent furniture
(82). However, the defining trend during the economic miracle was the boom
in engineering products. At the end of the 1960s, all two-digit SITC categories
of engineering products were positive and five out of ten categories were in
the top eleven, if ranked by the Lafay coefficients. “Road vehicles” (78) had the
highest index of all sectors at the two-digit level (2.88), ahead of clothing (2.85).
This was the moment when Italy came closest to the “European” (i.e., German)
pattern of specialization in the whole period covered in this chapter. However,
the convergence was short lived. Textiles enjoyed a revival in the late 1970s and
1980s and the competitive position in the so-called “made in Italy” products
(clothing, footwear, furniture) remained quite strong until the late 1980s. Then,
their index started to decline, as exports stagnated while imports were grow-
ing quite fast. The decline was driven by a combination of factors, including
a considerable increase in imports of road vehicles from Germany and of such
products as articles of apparel and clothing from France, jointly with difficul-
ties in selling these goods in the international market. Thus, by the late 1990s
specialized machinery for industries (72 and 74) sat at the top of manufactures
if ranked according to the Lafay index. In contrast, the trade balance for road
vehicles was negative from 1982 onward, and in the late 1990s their Lafay index
was the second lowest of all two-digit categories, after oil products.
The reader may infer from these data their own assessment of the tech-
nologic level of Italian comparative advantages, but Lall’s (2000) classification
scheme adds some precision. As Figure 12.7C shows, Italy has always been
very competitive in low-technology products, and it has managed to consoli-
date a fairly strong position in medium-technology products in the 1960s and
1970s, which it partially lost in the 1990s and 2000s. In contrast, Italy has
never been a significant net exporter of high-technology goods, and its com-
petitive position has been markedly deteriorating since the late 1980s when
a rise in exports in these products was more than offset by an increase in
imports (also compare Figure 12.5). In terms of low-technology products, Italy’s
relative strength is driven by textiles and leather products, such as footwear
(group 851), which have diminished over the last two decades. The develop-
ment in medium- and high-technology industries is deeply related to Italy’s
position in intraindustry trade. The country’s position as a car manufacturer
(group 781) weakened in the 1970s but recently started to improve again.
However, the country is increasingly exporting intermediate goods for the car
industry (group 784), but also other highly-specialized machinery and parts
thereof (728), and electrical equipment, which keeps the international posi-
tion in medium-technology industries relatively stable at a Lafay index value
around five. Finally, the difficulties in improving Italy’s international position
in high-technology products was driven by a significant decline in the export
of office machinery accompanied by a massive rise in imports (group 751),
in part offset by a rise in exports of telecommunication equipment and parts
thereof (groups 764 and 776). Also, exports of medicinal and pharmaceutical
products (541) performed quite well, preventing the index in high-technology
products from falling more sharply.
Manufacturing Exports and

Geography: Where Did Italy Succeed?
The previous sections highlight two major trends: the increase in the shares of
manufacturing exports, which broadly reflect the industrial transformation of
Italy; and the growing geographic diversification of exports. To what extent are
these two trends related? Did exports of industrial products increase across the
board, or was their success only concentrated in a few markets? In particular,
to what extent did Italy manage to penetrate markets for manufacturing goods
in advanced economies, such as France, Germany, or other OECD countries,
rather than to limit itself to markets in less developed countries? To address this
issue, in this section we decompose the change in the share of manufactures in
Italian exports between changes in the share of each country on total exports
and changes in the share of manufactures on exports to each country. The two
can diverge. For example, in 1862 nearly one-third of all Italian exports went
to France but only below 1 percent to Germany (Zollverein). In the same year,
manufactures (without silk) accounted for 30 percent of exports to Germany,
for 18 percent of exports to France, and for 14 percent of total exports. Put
differently, in the early 1860s Italy was relatively more successful in exporting
manufactures to Germany than to France, even if this latter was a much bigger
client. Twenty-five years later, in 1887, total exports to France had increased to
41 percent and exports of manufactures grew more than the total, up to about
a quarter. In the same period, Germany jumped from 1 percent to 10 percent
of total Italian exports: exports of manufactures did increase in absolute value,
but their share on Italian exports to Germany declined to about a fifth. Hence,
Italy successfully penetrated the French market with manufacturing products,
but less so the German market, which was to become its main client in the
next years.
In more formal notation, we calculate the contribution of country j to the

change in Italy’s manufacturing share in total exports between t and t + 1 as
CCCj,Δt:
⎡ (CS j t ++1 MS j t +1 ) − (CS j t MS j t ) ⎤
⎢ ⎥
MSt
CCC j ∆t = 100 ∗ ⎣ ⎦,
⎡ (MSt +1 − MSt ) ⎤
⎢ ⎥
⎣ MSt ⎦
where CSj denotes the share of country j in total exports of Italy and MSj the
share of manufactures in total exports to this country. This gives us the per-
centage contribution of each destination to the observed change in the total
share of manufactures on Italian exports. The latter increased from unification
through 2000; hence, in all of these periods a positive sign in Table 12.1 implies
that the exports to the jth country contributed to the overall increase. It thus
can be read as a success in market penetration. The interpretation of results
would be opposite in cases when we observe a decline in the share of manufac-
tures (e.g., during the last period 2000–2009) and this can be confusing. Thus,
in those years we invert signs. Our geographic disaggregation is constrained by
the information available in the pre-1939 database. We thus report data on four
major countries, the rest of Europe (defined here as sum of Austria-Hungary,
Belgium, the Netherlands, and Switzerland), and the rest of the world which we
obtain as a residual.
Before World War I, Italian industry was successful in all countries but the
United Kingdom (1862–1913) and France after 1887, in all likelihood because of
the trade war. The interwar years give a mixed picture: the 1920s were still a
good period, whereas in 1938 Italian manufactures increased their market share
only in Germany. The total share of industrial products grew only thanks to
the boom of exports to colonies, which in Table 12.1 belongs to the rest of the
world. Unsurprisingly, the export boom during the golden age of the European
economy (i.e., the periods 1938–1962 and 1962–1973) was mostly driven by the
European market. Italian products fared well in the American market in the
1950s, but not in the 1960s, when the US share on total manufacturing exports
and the share of manufactures on this flow remained stable. The period 1973–
1986 is characterized by stagnation, with a poor performance in German and
other European markets that could only be partly offset by gains elsewhere. In
contrast, from 1986 onward we observe large differences between Italy’s per-
formance in Europe, the United States, and the rest of the world. The compo-
sition of exports to advanced countries, its most traditional clients, remained
unchanged, but their share on total exports declined. By implication, Italy man-
aged to recoup some of the losses in the rest of the world, notably emerging
economies that were growing faster than the old OECD countries. The last line
of Table 12.1 considers the contribution of the various geographic areas to the
evolution for the whole period. The message is clear: most of the increase of
Table 12.1 Percentage contribution of various countries to the change in the share of manufactures (excluding silk)
on total exports
Share of Total Period Percentage-Contribution to Total Change by:
Manufactures Change (in
France Germany United Rest of United Rest of
(initial year) percent)
Kingdom Europe States World
1862–1887 0.17 53 75.5 14.8 −24.6 12.3 10 11.8
1887–1913 0.27 52 −65.3 12.2 21.8 14.4 2.8 113.8
1913–1929 0.40 22 2.9 −15.1 6.2 34.4 27.6 112.7
1929–1938 0.49 4 −97.9 43 −160.3 −45.9 −67.7 429
1938–1962 0.51 41 29 42.9 7.4 34.2 22.6 −36.1
1962–1973 0.74 12 64.3 71.1 1.9 17.1 −11 −43.4
1973–1986 0.83 7 23.6 −36.1 39.1 −4.1 57.7 19.8
1986–2000 0.88 2 −138.7 −147.1 23.7 −23.9 2.7 430.7
2000–2009 0.92 −3 −54.3 −110.4 181.7 28.7 −83 300.7
1862–2009 420 7.8 14.3 0.4 9.7 5.1 63.1
Source: own calculations.

the share of manufactures in total exports was driven by the success of Italian
industrial products on overseas (non-American) markets. From this point-of-
view, the relative increase of manufacturing exports to Europe during the
golden age is an exception rather than the rule.
Table 12.2 repeats this exercise separately for exports of low-, medium-,
and high-technology goods.8 As in Figure 12.5, we limit our attention to the
period after World War I, which anyway covers the most sweeping changes in
industrial specialization. As Table 12.2 shows, Italy established its trade posi-
tion in medium-technology products in the interwar period and maintained it
until the 2000s. In the more recent period, the main driver of its success was
exports to the rest of the world, which includes the emerging markets, whereas
trade with OECD countries actually made a negative contribution. The same
holds for trade in high-technology goods where the share on total exports stag-
nated and even slightly declined (from 2001 onward). Italy lost positions on
European markets, while it increased its penetration in overseas markets, both
in advanced countries (rest of OECD) and in emerging ones (rest of the world).
The three lines in bold show the changes in the share of various technology
classes in total trade since 1913. The long-run expansion of medium- and high-
technology exports was initially facilitated by trade with Europe, especially dur-
ing the golden age of growth through 1973. After this we observe that the rest
of the world starts to become significantly more important for Italy’s success in
exporting medium- to high-technology products.
Conclusion
By and large, the results confirm the conventional wisdom about the change
in Italy’s specialization, with two important qualifications. First, they high-
light the key role of World War I. Before the war, Italy was still mostly a sup-
plier of primary products to advanced countries. After the war, it became an
exporter of manufactures, although it sold its wares mostly to the poor mar-
kets of the European periphery and to less developed countries, including, after
1936, its new colonies. Second, they show a major discontinuity around 1980.
The economic miracle (and the Common Market) had featured a reorienta-
tion of exports toward Europe, and a shift in specialization from traditional
textiles and low-technology goods toward medium-technology, most notably
engineering products (although definitely not toward high-technology goods).
For a while, Italy seemed poised to converge to the German model. Since the
1980s, Italy returned to its prewar model, although in the context of a much
more globalized world. In relative terms, it lost competitiveness in (many)
medium-technology products and in European markets, relying on exports of
low-technology “made in Italy” products (plus some specialized engineering
Table 12.2 Contribution of various countries to the change in the share of low-, medium-, and high-technology goods on total exports
Technology Period Share of Total Change Percentage-Contribution to Total Change by:
Classification Technology-Class (in percent)
France Germany United Rest of Rest of Rest of the
(following Lall 2000) in Total Exports
Kingdom Europe OECD World
(initial year)
Low technology 1913–1929 0.23 42 7.3 −4.1 8.3 −6.2 24.6 70.2
(excl. silk)
1929–1938 0.33 −18 19.4 2.4 42.5 11 21.4 3.3
1962–1973 0.30 2.2 329 485.8 −140.9 −2.2 −91.5 −480.2
1973–1986 0.31 22 29.9 −13.9 21.7 18.9 28.1 15.1
1986–2000 0.38 −17.4 −41.4 −51.1 −12.9 −9 −13.8 28.2
2000–2009 0.32 −15.4 −5.4 −35.3 −50.7 −19.5 −22.9 33.8
1913–2009 14.7 79.5 63.9 −52.1 77.6 92.2 −161.1
Medium technology 1913–1929 0.02 346 2 10.7 −0.9 6.6 5 76.6
1929–1938 0.11 52 −2.6 20.6 −0.9 3.7 5.1 74.2
1962–1973 0.32 11.4 64 37.8 24.4 40.2 27.3 −93.8
1973–1986 0.36 −2 −21.3 −93.5 77.4 −52.9 109.7 −119.2
1986–2000 0.35 10.6 −10.1 8.8 −2.1 36.3 13.2 53.9
2000–2009 0.39 3.4 −62.5 −49.6 −53.7 −107.1 −73 445
1913–2009 1,551 10.4 12.5 4.5 17.5 12.4 42.7
Technology Period Share of Total Change Percentage-Contribution to Total Change by:
Classification Technology-Class (in percent)
France Germany United Rest of Rest of Rest of the
(following Lall 2000) in Total Exports
Kingdom Europe OECD World
(initial year)
High technology 1913–1929 0.01 9 −71.9 −17.1 21.5 −53.8 −8.8 230
1929–1938 0.01 239 5.4 2.7 0.1 3.5 0 88.4
1962–1973 0.06 18.3 24.8 21.6 17.9 47.1 −13.1 1.7
1973–1986 0.07 18.9 6.7 20.1 13.9 −7.2 42.5 23.9
1986–2000 0.09 29.8 2.4 −9.3 12.5 32.3 17.4 44.7
2000–2009 0.11 −10.8 −40.5 −14.6 −54.6 −22.2 23.4 8.5
1913–2009 951 10.8 12.5 8.9 23 20.4 24.4
Source: own calculations. Rest of Europe pre-1945 is limited to Austria-Hungary, Belgium, the Netherlands, and Switzerland. After 1945 this is the EU15 without France,
Germany, and the United Kingdom. Rest of OECD pre-1945 is the United States only; after 1945 it is the OECD as of 1974 excluding Europe.
goods) toward non-European countries. The performance was fairly good until
the mid-1990s, but the last decade has been difficult. Italy’s comparative advan-
tage has declined, the share on world markets has stagnated, and the trade bal-
ance has been consistently negative.
This brief sketch raises three questions: (1) What caused the long-run change
in trade patterns? (2) How much can trade explain the long-term growth in the
past (or the lack thereof)? (3) What does the past experience tell us about the
future?
Understanding the causes of long-run changes in specialization is fascinat-
ing and rewarding work, but it is well beyond the scope of this chapter. We can
only make some very general remarks. The long-run trends in trade are bound
to reflect growth at home and abroad and the height of barriers to trade, as
determined by transport technology and policies. Empirical studies have found
that the income elasticity of exports and the (absolute value of the) elastic-
ity of exports to trade costs are typically just below unity (Anderson and van
Wincoop 2004). As a general rule, the specialization of each country reflects
its factor endowment and its technical capabilities, but recent work (Deardorff
2004, Harrigan and Deng 2008) has shown that comparative advantage tends to
be rather localized. The competition is more intense the closer the trading part-
ners and hence the relevant comparison group for an assessment of comparative
advantage is a country’s accessible neighbors rather than the world economy.
Our analysis shows that, from this point of view, Italy had fared fairly well to
the 1980s, but not afterwards.
Our sketch of long-term trends shows a strong coincidence between peri-
ods of economic growth, at home and abroad, and good export performance,
most notably during the “boom giolittiano” and the economic miracle. Such a
coincidence is not really surprising. Most economists believe that an increase
in openness is beneficial for economic growth (Krueger 1998; Berg and Krueger
2003; Frankel and Romer 1999; Irwin and Tervio 2002; Yanikkawa 2003; Alcala
and Ciccone 2004; Feyrer 2009). However, the mechanisms at work, the wel-
fare effects of trade, and the policy implications are still under discussion (e.g.,
Rodriguez and Rodrik 2001). Nobody seriously argues that openness has not
been beneficial to the Italian economy, but the causation is more difficult to
establish, as shown by the failed attempts by Federici and Marconi (2002) and
Pistoresi and Rinaldi (2012). Furthermore, there are some doubts about the
country’s capacity to extract all possible benefits from its openness because of its
comparative advantage. Economists in the 1950s and 1960s regarded a special-
ization in primary products as a dead end, to be abandoned as soon as possible.
This argument has been revived more recently as a “curse of primary products”
(Sachs and Warner 2001). Italy succeeded to move away from specialization in
primary products at a relatively early stage in its modern economic growth. A
recent paper has suggested that this change did not much affect trends or vola-
tility of the terms of trade (i.e., that the “curse” was not that great when Italy
specialized in primary products) (Federico and Vasta 2010). However, much
of the Italian debate deals with its comparative advantages in manufacturing.

One can relate the composition of exports, rather than their aggregate level,
which mattered for economic growth, to the theory of biased technical change
(Matsuyama 1992; Acemoglu 2002). An opening to trade can clearly affect the
incentives to invest in capital-intensive or research-intensive sectors with pos-
sibly large dynamic effects. Recently, Hausmann, Hwang, and Rodrik (2007)
have provided a simple framework where factor endowments (most notably of
capital and human capital) interact with development costs for new products,
such that a country’s specialization pattern might be incompletely determined.
Empirically, they found a positive relation between an index of export sophis-
tication, which captures the quality of exported goods, and the rate of GDP
growth. Along this line, one can decry Italy’s specialization in low-technology
goods as a major problem for long-term growth. As mentioned in the second
section, this view was widely held in the 1970s and early 1980s and has resur-
faced in recent years. However, the policy responses have not been forthcoming.
In the 1970s, Italy tried to foster the growth of allegedly advanced sectors, but
it ended in a string of expensive failures (Roccas, 1977, Federico, 1999). Calls
for such a pro-active industrial policy are fairly isolated in more recent times,
but Italy is not investing massively in human capital to change its comparative
advantages, as implicitly suggested by Hausmann, Hwang, and Rodrik (2007).
Predicting the future is always difficult, but the past performance of Italian
exports shows that too much pessimism may not be justified. Although it has
been worse than the German performance, it is still in line with the European
average. In the long run, Italy has succeeded to prove pessimists wrong time
and again. It may well succeed this time, despite the competition by China and
other emerging countries.
Notes
1. The data on trade at current prices for France, Germany, and Spain for 1862–1939
are from Annuaire Statistique (1951), Hoffmann (1965, Table 125), and Tena (2007,
Table 3); for 1945–1961 from United Nations (1962); for 1972–2000 from Feenstra et
al. (2005); and for 2001–2009 from the Comtrade database. Italian GDP at current
prices for 1862–2009 has been kindly provided by Alberto Baffigi. For French and
German GDP through 1939 we used the series by Toutain (1997), series V41) and
Hoffman (1965, Table 248); for Spain through 1969 we used Prados de la Escosura
(2004, cuadros A.6.6 and A.12.1). The data for 1950–2002 are from Mitchell (2007)
and 2003–2010 from the OECD.
2. For the sources of country data cf. footnote 1. The series of world trade in
current dollars for 1862–1913 is obtained by linking the data from Lewis (1981) for
1862–1913, from the United Nations (1962) for 1913–1939, and from the International
Monetary Fund for 1948–2009. The country data, in national currencies, have been
converted into dollars with exchange rates from www.globalfinance.com.
3. Silk (raw and thrown) is classified in SITC 2 alongside cotton and other industrial
yarns. Yet, most of its value (around 80–85 percent for the raw silk and about
70–75 percent for the thrown one) consisted in cocoons—a purely agricultural raw
material—and for a number of technical reasons processing of cocoons settled
close to the production areas. The case is thus more similar to wine production
or smelting of copper than to cotton production. The classification of silk is very
important, because it was Italy’s main export from the unification to the 1920s:
considering it as an industrial product would give the misleading impression
that Italy exported manufactures. Category 9 (“commodities and transactions not
elsewhere included”) is added to manufactures because it consists mostly of gold
and weapons.
4. See footnote 1 for sources. The figures after 1950 include East Germany.
5. Low-technology products are characterized by stable, well-diffused technologies,
mostly embodied in capital equipment. These include leather and textile products,
such as cotton fabrics, footwear, glassware, or furniture. Medium-technology
products encompass most capital goods and the production of intermediate goods
and are typically based on complex technologies, such as cars and engines, but
also most products of the chemical industries. The production of high-technology
goods require high research and development investments; interaction with research
institutions; and highly specialized technical skills, such as optical instruments, and
electrical and electronic equipment, such as computers, aircraft, or medical products.
6. The original Lafay index also includes an adjustment for the size of the economy
(as proxied by the current GDP), which has been omitted, following Bugamelli
(2001) and Zaghini (2003).
7. This appealing property comes with a price, because the index can be falsely
positive if (x-m)<(X-M ).
8. Note that again we invert signs whenever the share of exports in a technology
group was declining. Hence, whenever we observe a positive sign it can be
interpreted as a successful market penetration; whenever we observe a negative
sign it indicates a failure.
Chapter 13
REAL EXCHANGE
RATES, TRADE, AND
GROWTH
Virginia Di Nino, Barry Eichengreen,

and Massimo Sbracia
Introduction
Italy’s interactions with Europe and the rest of the world and the role of the
external sector in its growth and development are complex and multifaceted. In
this paper we focus on one specific facet: the real exchange rate (RER), or the
price of goods and services in Italy relative to other countries. We use it as a
window onto the policies and circumstances that have shaped the development
of the Italian economy.
Why focus on the RER, just one of many prices affecting the allocation of
resources? A substantial literature connects the RER to economic growth and
development. Balassa (1964) is an early and influential statement of the impor-
tance of a competitive currency in supporting exports. Moreover, competitive-
ness is a key issue for Italy today as it seeks to emerge from Europe’s sovereign
debt crisis.
The RER, to be clear, is not the same as the extent of currency misalign-
ment. Unadjusted, the RER does not adequately represent the competitiveness
of a country’s tradeable-goods sector. As has been well known since Balassa
(1964) and Samuelson (1964), nontradeable goods are cheaper in developing
than advanced countries, reflecting the higher productivity and input costs of
the latter. To adequately gauge competitiveness, one has to correct the RER for
this Balassa-Samuelson effect.
Once this correction is made, it is possible to assess the extent to which
a currency is misaligned and determine its sources. Misalignments, standard
theories imply, are associated with excess demand and price stickiness. In
open economies, excess domestic demand does not affect the price of trade-
able goods, which is tied down by the law of one price, but raises the price of
nontradeable goods, strengthening the RER. Relative to the benchmark where
demand equals supply, the RER becomes overvalued. Similarly, price and wage
stickiness and other frictions that prevent relative prices from adjusting after a
change in the nominal exchange rate can result in temporary undervaluation
or overvaluation.
In this paper, we correct the RER for the Balassa-Samuelson effect and
construct a bilateral measure of currency misalignments vis-à-vis the US dollar
for a panel of countries from 1950 through 2009. For Italy, we then extend the
bilateral measure back to 1861 and forward to 2011. After performing the same
exercise for the country’s main trading partners, we calculate a global mea-
sure of undervaluation from 1861 to 2011. This shows that Italy’s currency was
undervalued for most of its history until the 1990s. Undervaluation then gave
way to overvaluation that persists today.
Our analysis of the determinants of the undervaluation of Italy’s cur-
rency highlights the key role of two factors: an abundant supply of labor to
the manufacturing sector from the rural (especially southern) periphery, which
kept the Italian price level down relative to the international average through
the 1970s; and a fiscal policy that was relatively restrictive from the mid-1890s
to 1913 and from 1945 to the late 1960s. Fiscal policy was more expansionary
during the two world wars, the 1930s, and especially after 1970, pushing up the
price level and making for overvaluation rather than undervaluation.
To analyze the impact of currency misalignment on economic growth, we
build on the evidence provided by Rodrik (2008) on the relationship between
growth and undervaluation for a panel of some 180 countries using post–World
War II data. For a subsample of thirty-four countries, we then extend the time
horizon back to 1861, the year of Italy’s unification. Our conclusions are consistent
with Rodrik’s findings. There is a positive relationship between undervaluation
and economic growth. This relationship is statistically significant and econom-
ically important for developing countries; it is weaker for advanced countries.
These patterns hold for the pre– and post–World War II periods alike.
Trade theory suggests that undervaluation supports growth by promoting
exports and encouraging the reallocation of resources toward more productive
sectors (Di Nino, Eichengreen, and Sbracia 2012c). To verify that this mecha-
nism was at work in postunification Italy, we estimate the effect of undervalu-
ation on Italy’s exports. The results confirm that undervaluation has positively
affected export performance and suggest that its effects are not uniform across
industries. In practice, undervaluation was especially helpful in boosting the
real exchange rates, trade, and growth 353
exports of Italy’s high-productivity sectors, such as machinery and transport

equipment, along with other manufactures.
What are the implications for Italian economic history? Italy benefited sig-
nificantly from an undervalued currency during the catch-up years 1950–1973,
when real gross domestic product (GDP) per capita roughly tripled. The lira
was also undervalued in the 1970s and 1980s and, to a lesser extent, in 1895–1913,
when Italy again grew more rapidly than its European competitors. In contrast,
starting in the early 1990s, a period of slow growth, the currency was overval-
ued and the exchange rate provided a negative, albeit small, contribution to the
country’s growth performance.
The lira was also undervalued in 1861–1895 and during the interwar period,
when growth was, in contrast to the predictions of the theory, disappointingly
slow. Evidently, economic, financial, and political instability in the first 30 post-
unification years and then the Great Depression prevented Italy from taking
full advantage of its competitive position. On balance, these results confirm the
view that an undervalued currency is a facilitating condition but by no means
a guarantee of robust economic growth (Eichengreen 2008a).
Measuring the Undervaluation of

Italy’s Currency
We define the RER as the ratio of the market and purchasing power parity
(PPP) rates, where the latter is the exchange rate yielding the same price level
as in the United States. An increase in the RER, measured in terms of units of
domestic currency per dollar, indicates depreciation. A RER above one implies
that goods and services are cheaper than in the United States.
We first use regression analysis to correct the RER for the Balassa-Samuelson
effect and measure the bilateral misalignment of the currencies of a panel of
countries vis-à-vis the dollar from 1950 to 2009. We then focus on Italy and
extend the bilateral measure of the currency of this country, and those of its
main trading partners, back to 1861 and forward to 2011. This allows us to
compute a trade-weighted measure of undervaluation for the lira/euro vis-à-vis
Italy’s principal trading partners from 1861 to 2011. Lastly, we use this series to
characterize the evolution of the country’s competitiveness and provide some
historical notes on relevant policies and events.
From the RER to Undervaluation

Standard measures of undervaluation are obtained by regressing the RER on
a measure of the development of the country (typically, real GDP per capita).
Undervaluation, as measured by the residual from this regression, captures the

price-level difference between the United States and the country in excess of
what can be predicted from its level of economic development.1
Following Rodrik (2008), we use data from the Penn World Tables (PWT)
for some 180 countries between 1950 and 2009 to estimate the following:2
rerrnPWT
,t = a + b ynpc,t + ct + εn,t , (1)
where rerrnPWT
,t , the log of RER from the PWT of country n at time t, is
xratn,t
rerrnPWT
,t = ln , (2)
PPP
Pn,t
with xratn,t and PPPPn,t denoting, respectively, the nominal and the PPP exchange
rate vis-à-vis the US dollar, ynpc,t is the log of real GDP per capita, ct is a set of
time dummies, εn,t the residual, and a and b are constants. Undervaluation is
then as follows:
∧ ∧
unPWT
,t ε n,t rerrnPWT
,t − r e rnPWT
,t (3)
Equation (1) is estimated by ordinary least squares (OLS). The estimate of b,

−0.26, is strongly significant (Rodrik reports a coefficient of −0.24). The nega-
tive sign indicates that higher income per capita reduces the degree of under-
valuation for a given RER, as expected.
Bilateral and Trade-Weighted Undervaluation

From equations (2) and (3) we can retrieve the RER and a bilateral measure of
undervaluation for the lira/euro vis-à-vis US dollar in 1950–2009. To incorpo-
rate the periods before 1950 and after 2009, we extend PPP Pn,t using the ratio of
consumer price indices (CPIs) for the United States and Italy and use this longer
series to build a RER for the period since unification (the thick dashed line in
Figure 13.1). This may be less than accurate to the extent that the CPIs for the
United States and Italy are based on different baskets.3 However, back-of-the-
envelope calculations suggest that the approximation is reasonable: if we start
from PPP in a given year (say 2009) and construct a series that covers the period
1950–2009 by using CPIs, this new series has a correlation with the PWT PPP
series of 99.6 percent (98.3 percent when expressed in first differences).4
We regress this measure of undervaluation on the RER for the period 1950–
2009 and use the estimated coefficients to extrapolate this measure backward
to 1861 and forward to 2011 (refer to the thin line in Figure 13.1).5 Visual com-
parison of the RER and our measure of undervaluation in 1950–2009 shows
that although the correction changes the level of the latter with respect to the
former, the time profile remains the same.6 The similarity in the behavior over
time of the RER and undervaluation is preserved despite the fact that Italy’s
1.2
1.0
0.8
0.6
0.4
0.2
0.0
1861
1871
1881
1891
1901
1911
1921
1931
1941
1951
1961
1971
1981
1991
2001
2011
–0.2
–0.4
–0.6
–0.8 real exchange rate
bilateral undervaluation (vs. the US)
–1.0
5% confidence interval
–1.2
trade-weighted index
–1.4
Figure 13.1 Real exchange rate and measures of undervaluation of

Italy’s currency: 1861–2011 (1). Source: Authors’ calculations. (1) Data in logs. A positive
(negative) value corresponds to undervaluation (overvaluation). The two selected areas
correspond to the periods 1914–1920 and 1939–1950.
real GDP per capita (the control variable used to estimate undervaluation from
the RER) quintuples between 1950 and 2009 (given that incomes also rise in,
inter alia, the United States).7
To calculate a trade-weighted measure of undervaluation, we first retrieve
the RER vis-à-vis the US dollar for Italy’s main trading partners, which we
extend to the period before 1950 and after 2009 using CPIs.8 Bilateral mea-
sures of undervaluation vis-à-vis the dollar are the residuals of equation (1) for
1950–2009, which are then extended backward and forward using the RER and
regression analysis, as above. The difference in this measure of undervaluation
between Italy and a particular trading partner provides a bilateral measure
of undervaluation of the lira/euro. Then, by using Italy’s exports and imports
from 1861 to 2009 as trade weights, we can construct a weighted average of
Italy’s bilateral measures of undervaluation vis-à-vis its trading partners’ cur-
rencies and obtain a trade-weighted index for the country (the thick line in
Figure 13.1).9
Because bilateral undervaluation unPWT
,t is a residual, it averages zero by con-
struction. Put another way, because equation (1) includes time dummies, the
cross-country average of unPWT,t is zero in each sample year. Thus, the level of
this variable for Italy accurately captures undervaluation only to the extent that
average undervaluation with respect to the United States across countries is
zero. This is not an unreasonable hypothesis given our large sample. The pre-
cise interpretation of our bilateral measure is the undervaluation of Italy’s cur-
rency vis-à-vis the US dollar, with respect to the average undervaluation across
countries. Thus, bilateral undervaluation in each country is a relative measure.
By the same token, the trade-weighted index captures the average undervalua-
tion of the lira/euro against a trade-weighted basket of currencies.
Determinants of Currency Undervaluation

Figure 13.1 suggests that the lira was undervalued for roughly 100 of 120 years
from 1861 to the early 1980s. In the subsequent 30 years, in contrast, the cur-
rency has been persistently overvalued.
Although changes in the nominal exchange rate can have persistent effects
in a world where wages and prices adjust less than instantaneously, it is implau-
sible that price stickiness alone could produce the kind of persistent overeval-
uation and undervaluation that we see in the data. Sooner or later, wages and
prices should adjust. If the authorities resort to serial devaluations, they should
adjust even faster.
Hence other factors must be responsible for the country’s persistent under-
evaluation and overvaluation. Here we consider a set of variables that the lit-
erature (e.g., Edwards 1989 and Eichengreen 2008b) has identified as important
determinants of the RER, starting with labor supply to the manufacturing sec-
tor and the stance of fiscal policy. Labor supply is measured by the number of
workers, calculated in full time equivalent, in agriculture relative to manufactur-
ing. We take this as a proxy for the relative size of the traditional and mod-
ern sectors, in the spirit of Lewis (1954). The stance of fiscal policy is derived
from changes in the stock of public debt as reconstructed by Francese and Pace
(2008), scaled by GDP. Standard theory suggests that an increase in the rela-
tive size of the traditional sector or a decline in the budget deficit increase the
extent of undervaluation.
Monetary policy is introduced by adding the real interest rate, measured as
the difference between the long-term nominal interest rate (from Fratianni and
Spinelli 2001) and consumer price inflation. Theory suggests that an increase
in the real interest rate, so measured, should reduce aggregate demand, lower
domestic prices, and increase the extent of undervaluation.
Other variables considered in empirical studies of RERs are capital account
liberalization and trade openness. Our measure of capital account openness is
from Quinn (2003) and Quinn and Voth (2008). We construct trade openness
as the ratio of Italy’s gross trade (i.e., the value of imports plus exports) to GDP.
A rise in capital inflows after capital account liberalization should exert upward
pressure on the currency and, therefore, reduce undervaluation. Trade liberal-
ization, by making available cheaper foreign goods and reallocating resources
toward more productive sectors, should lower domestic prices and in this case
increase the extent of undervaluation.
Finally, we include labor productivity in the industrial sector. A rise in
productivity in industry boosts competitiveness by lowering tradable goods
prices; in this way it works to increase undervaluation. At the same time,
however, a fast-growing country that records sharp rises in productivity tends
to attract foreign capital, which may generate an appreciation of the currency,
reducing undervaluation. Hence, the sign of this variable is ambiguous a
priori.
Because our dependent variable is stationary while most of the regressors

are not, we estimate the model in first differences, making our benchmark
specification as follows:
⎛A ⎞
∆ut b0 b1 ∆ ⎜ t ⎟ + b2 ∆d
deficit
f t b3 ∆itR + b4 ∆kt b5 ∆Ot + b6 g tLP + εt (4)
⎝ Mt ⎠
where ut is the value of the trade-weighted index of undervaluation of the lira/

euro at year t; Δ is the first-differences operator; At Mt is the relative size of
the workforce in agriculture versus the manufacturing sector; defici e tt is the fis-
cal deficit, which is approximated by Dt Yt − Dt −1 Yt −1 , with Dt Yt being the
ratio of public debt over GDP; itR is the real interest rate, computed as itN − πt ,
with itN being the long-term interest rate and πt the rate of inflation; kt is the
index of capital account liberalization; Ot is the measure of trade openness;
g tLP is the growth rate of labor productivity in the industrial sector; εt is the
stochastic error term; and the bi are constants (for i = 0,1, . . . ,6). The model is
estimated by robust OLS and returns uncorrelated residuals.
The first column of Table 13.1 shows the results for the full period 1861–
2009. The supply of labor to manufacturing and the debt/GDP ratio are statisti-
cally significant and have the predicted signs, as do the real interest rate, capital
account liberalization, and trade openness. Labor productivity enters negatively
(i.e., a rise reduces undervaluation) and is also significant. The findings are the
same when we restrict the sample to the pre–World War II period (1861–1939),
despite the smaller number of observations (see column two of Table 13.1).
When the sample is limited to the post–World War II period (column three
of Table 13.1), however, the coefficients have the same signs but in most cases
are no longer statistically significant.10 The insignificance of the supply of labor
to manufacturing presumably reflects the fact that the industrial sector was
well developed for most of the period after 1945. The insignificance of the fiscal
variable is harder to understand. This may be a function of the limited num-
ber of observations; we therefore also consider a subsample including also the
interwar period (fourth column of Table 13.1). Here the statistical significance of
the deficit/GDP ratio is restored (suggesting that smaller sample size may have
played a key role in the previous result), whereas the insignificance of supply of
labor to the manufacturing sector remains. An interpretation is that, for most
of this subsample, labor supply was no longer unlimited.11
We performed a number of sensitivity tests. As alternative proxies for the
relative size of the traditional sector, we added workers in mining, construction,
and retail trade to agricultural workers. Alternatively, we counted workers using
heads instead of the full-time equivalent measure. These variables have a very
high correlation with our benchmark proxy, equal at least to 98 percent; not
surprisingly, the findings remain unchanged.
As an alternative measure of the stance of fiscal policy, we used the fis-
cal deficit over GDP, using data from Repaci (1962) from 1861 to 1960, and the
Table 13.1 Determinants of undervaluationa

1861–2009 1861–1939 1950–2009 1920–2009
Δagric./manuf. 0.066 0.064 0.178 −0.012
[2.51]** [2.22]** [1.07] [0.28]
Δdeficit −0.080 −0.101 −0.138 −0.142
[1.88]* [2.12]** [0.80] [2.67]***
Δreal interest rate 0.014 0.043 0.013 0.011
[3.30]*** [2.92]*** [3.67]*** [2.52]**
ΔKA liberalization −0.014 −0.021 −0.003 −0.010
[2.60]** [3.19]*** [0.28] [1.73]*
Δopenness 0.859 1.160 0.778
[5.86]*** [4.78]*** [4.30]***
Labor productivity growth −0.266 −0.216 0.437 −0.243
[3.39]*** [2.25]** [2.55]** [2.64]**
Constant −0.002 0.006 −0.016 −0.008
[0.35] [1.01] [2.23]** [1.24]
Observations 118 69 59 67
2
R 0.38 0.43 0.34 0.50
a
Estimates of equation (4).
Robust t statistics in brackets; * significant at 10 percent, ** at 5 percent, *** at 1 percent.
Italian Ministry of Treasury thereafter. Because the first source contains data
for fiscal years, we followed Fratianni and Spinelli (2001) in transforming them
into calendar year data.12 Adding this variable to the benchmark specification
in the place of public debt over GDP and using deviations from trend obtained
by applying a Hodrick-Prescott filter returns a significant coefficient with
the predicted negative sign, whereas the other independent variables retain
their previous signs and significance. In addition, the proxy for the relative
size of the traditional sector now becomes significant at the 1 percent level of
confidence.
We considered additional potential determinants of the RER, such as the
terms of trade (available from the Organization for Economic Cooperation and
Development for the years 1955–2009 and, for the period 1862–1949, from our
own calculations using data from Federico et al. 2011), remittances as a share of
GDP, and the ratio of male to female population.13 Only the first of these vari-
ables is statistically significant (at the 10 percent confidence level) when added
to the benchmark regression, with the predicted negative sign (whereas the
other variables preserve their predicted signs and statistical significance).
Finally, to address the potential for endogeneity, we instrument the rela-

tive size of the traditional sector with lagged values of its first differences.14
The results confirm the sign and significance of the coefficient on the relative
size of the traditional sector (at the 10 per cent level) and point to a somewhat
higher magnitude and significance of this variable for the period preceding
World War II.
In sum, our results suggest that the supply of labor to manufacturing and
the stance of fiscal policy have been key determinants of the misalignments of
the lira/euro since Italy’s unification.
Review of RER History

Figure 13.1 reports misalignments of the lira/euro since 1861. In the following,
we couple this figure with some historical notes in which we recall how the
nominal exchange rate was set in different regimes.
The First Fifty Years

In 1859, on the eve of political unification, the Italian peninsula was divided into
seven legally autonomous political units and six monetary zones.15 Although sil-
ver monometallic and nondecimal systems predominated, the monetary reform
of 1862 implemented a bimetallic and decimal system. This was simply the
extension to the rest of the peninsula of the monetary system of Piedmont,
which in turn derived from the French system.
The Italian authorities deemed the gold standard to be the best available
system and anticipated that it would eventually be chosen by Italy’s neighbors,
but they also acknowledged that national decisions about monetary arrange-
ments are not independent. In modern terminology, they recognized that net-
work externalities characterize international monetary arrangements.16 These
externalities flowed from Italy’s close economic and political ties with France,
strong trade relationships with Germany and other countries in which silver
was the legal tender, and the fact that debt obligations were sold in markets in
which silver circulation was widespread (Corbino 1931). In effect, the choice of
exchange rate regime was driven by factors unrelated to the quest for compet-
itiveness, insofar as bimetallism was adopted to maintain the same monetary
arrangement as in other important partner countries.17
In 1866, with the birth of the Latin Monetary Union and approach of the
third war of independence, Italy suspended the convertibility of the lira (corso
forzoso), which depreciated in response and ultimately became undervalued by
more than 50 percent in trade-weighted terms. After the upswing in economic
activity in Europe in the early 1880s, which was shared by the Italian economy,
the gold standard was reintroduced in 1883. This allowed the lira to remain stable
in nominal terms and the preceding undervaluation to be gradually reversed.
The 1893 financial crisis then led to the suspension of convertibility.18 In
1896, the defeat of the Italian Army in Ethiopia then put an end to the semi-
authoritarian regime of Francesco Crispi (Toniolo 1988). By the mid-1890s, with
the banking crisis finally over, the government embraced fiscal consolidation
and monetary discipline: the ratio of debt to GDP was reduced from about
130 percent in 1897 to less than 80 percent in 1913 (Francese and Pace 2008).
Bonaldo Stringher, appointed Director General of the Bank of Italy in 1900,
carried out a successful monetary stabilization. These policies, pursued both the
floating exchange rate of 1894–1902 and the gold-shadowing policy of 1903–1911,
resulted in a stable nominal exchange rate and a currency broadly at equilib-
rium levels.
From World War I to the 1940s

When World War I erupted, the government resorted to rationing and price
controls to contain inflation. After a period of overvaluation in 1916–1918, sharp
nominal depreciation of the lira (nearly 70 percent vis-à-vis the dollar between
1918 and 1921) more than offset higher consumer prices. Italy therefore exited
the war with an undervalued currency.
Between 1921 and the mid-1930s, the lira then appreciated in real and nomi-
nal terms. A substantial portion of the initial undervaluation was eliminated in
1927 when Benito Mussolini’s government decided to appreciate the currency
in advance of restoring the gold exchange standard. The peg of nineteen to the
dollar and of over ninety to the pound sterling, the so-called quota novanta, was
the cornerstone of Mussolini’s economic policy.19 The lira remained anchored to
gold during the Great Depression, including during the “autarkic policy” period
when trade embargoes were imposed against the country as a result of its inva-
sion of Abyssinia in 1935. Italy was among the last countries to devalue against
gold, in October 1936, fostering recovery in 1937–1939.20
After World War II, the quest for competitiveness grew stronger. In 1943
the military authorities in the South of Italy established a conversion rate for
Allied Military Notes (amlire) of 100 to the dollar, a depreciation that more than
compensated for inflation between 1938 and 1943.21 In January 1946 Alcide De
Gasperi’s government then set the dollar exchange rate at 225, giving exporters
the prize of an additional 125 lire per US dollar. Luigi Einaudi, the Governor
of the Bank of Italy, deemed this insufficient to restore price competitiveness
(Carli 1996). In March 1946, under pressure from textile producers, exporters
were allowed to retain half of the dollars obtained from foreign sales, which
they could convert into lire in the free and black markets (where the lira was
traded at further depreciated levels), giving rise to a multiple exchange rate

system.
Italy maintained multiple exchange rates even after joining the International
Monetary Fund in 1947. Indicative of its success at monetary stabilization, in
1948 the exchange rate quoted on the free market was broadly equal to the offi-
cial rate, roughly 575 lire. In 1949 the official rate was definitively set at 625 lire
per US dollar, where it remained for more than twenty years.
When the authorities set the exchange rate vis-à-vis the dollar in 1949,
they carefully considered the external competitiveness of Italian goods and
services. Whereas the Annual Report of the Bank of Italy had not even men-
tioned the exchange rate from 1941 through 1945, considerations of competi-
tiveness (and the implications of changes in the exchange rate for domestic
prices) again became central to its analysis starting in 1946. For example, in
1948 the Bank of Italy identified an “equilibrium” rate of 596 (Banca d’Italia
1949); because in December 1948 the lira was still quoted at 575 to the dollar,
it effectively called for a further nominal devaluation, which occurred the fol-
lowing year.
The 1950s and 1960s

That the lira was undervalued in the early 1950s is generally accepted (Lamfalussy
1963; Ciocca, Filosa, and Rey 1973; Graziani 1979).22 Boltho (1996) reports an
undervaluation of 17 percent in 1950, compared with our 27 percent (for the
trade-weighted index). He observes that low inflation, caused by wage moder-
ation and rapid productivity growth, contributed to a further real depreciation
in the early 1950s, as in our Figure 13.1. The fact that in the 1950s wage inflation
was subdued is undisputed (Ciocca, Filosa, and Rey 1973, and the references
cited therein). Figure 13.2 confirms that nominal wages in industry grew more
slowly than labor productivity in the 1950s, whereas the nominal value of the
lira remained stable.23
Several factors restrained wages. Migration from South to North and from
the countryside to the cities reached unprecedented levels. In each year between
1951 and 1965, some 1.5 million Italians participated in this internal migration;
the “industrial triangle” (Genoa, Milan, and Turin) alone absorbed more than
100,000 individuals annually (Golini 1978). Unemployment was high: in the
early 1950s the official rate was about 10 percent, with about two million unem-
ployed, whereas the underemployed were estimated to number an additional
one to four million (Ciocca, Filosa, and Rey 1973). For each individual occupied
in manufacturing in 1950 there were still two in the low-productivity agricul-
tural sector.24 Trade unions, which had been dismantled by the Fascist regime,
reemerged divided and inexperienced; wage claims were decentralized and, in
many instances, ineffectively advanced in the 1950s (Horowitz 1966). Finally,
20
wages (2)
15 labor productivity (2)
currency depreciation (3)
10
–5
1950–1959 1960–1969 1970–1979 1980–1989 1990–1999 2000–2007
Figure 13.2 Wage growth, labor productivity growth, and
currency depreciation: 1950–2007 (1). Sources: Bank of Italy; Ercolani (1975).
(1) Annual rates of growth (in percentage). (2) Wages and labor productivity in the
industrial sector. (3) A positive (negative) value corresponds to a nominal depreciation
(appreciation) vis-à-vis the US dollar.
the Italian authorities pursued a cautious fiscal policy, consistently keeping the
deficit/GDP ratio below 3 percent, whereas money growth was also restrained
(Fratianni and Spinelli 2001).
These factors were gradually reversed in the course of the 1960s. Full
employment worked to limit internal migration. It led to a first explosion of
wage claims in the early years of the decade and then to a second wave toward
its end (the so-called autunno caldo). In contrast to the earlier period, wages
now rose faster than labor productivity.
The post–Bretton Woods Period

The 1970s saw the collapse of the Bretton Woods System and an attempt to
recreate the system on a European basis with the Snake. Although the eco-
nomic and financial crisis of the mid-1970s affected Italy negatively, the lira
remained undervalued for much of the decade. It depreciated serially to offset
the country’s relatively high inflation.
The budget deficit widened to 5 percent in 1970–1972 and then to 13 per-
cent in 1973–1978, averaging in excess of 8 percent in the 1970s and 1980s. From
1970 to 1978, the ratio of public expenditure to GDP nearly doubled, from 28
percent to 52 percent. Monetary policy was strongly expansionary, not least
because of monetization of the deficit (Fratianni and Spinelli 2001). Wage infla-
tion exceeded the growth of labor productivity (Figure 13.2) but, as noted, was
largely offset by serial depreciation. In addition, this was a period in which

other countries also suffered high inflation, which worked to limit Italy’s loss
of competitiveness.
European countries worried that exchange rate volatility would under-
mine regional integration, weaken international trade, and breed inflation. The
European Monetary System (EMS), instituted in 1979, was an attempt to contain
these dangers by reinstituting pegged but adjustable exchange rates. There were
periodic realignments from 1979 through 1987 but no further realignments in
the following five years, only Italy’s move from the broad to the narrow band in
1990. But relatively high inflation made for overvaluation, setting the stage for
the crisis that erupted in September 1992, when Italy suspended its participa-
tion in the Exchange Rate Mechanism. The lira depreciated sharply, along with
other weak European currencies. The Italian authorities responded with fiscal
consolidation and by adopting an inflation target. These measures succeeded
in containing the budget deficit and limiting the rise in consumer prices. They
permitted Italy to reenter the Exchange Rate Mechanism in 1996. In 1999, the
currencies of eleven countries, including Italy, were then irrevocably locked and
the euro was introduced. That year Italy’s currency was roughly at its equilib-
rium level in trade-weighted terms.
Figure 13.2 shows that in the 1990s and 2000s wages continued to grow
more rapidly than labor productivity, whose disappointing performance is
unprecedented in the entirety of the post–World War II period. Labor produc-
tivity growth in the 2000s was virtually zero (and not helped by its abrupt
collapse in the global financial crisis). The tendency toward overvaluation that
first appeared in the early 1990s but was corrected by the depreciation that fol-
lowed the EMS crisis returned with a vengeance after the turn of the century.
Nominal appreciation of the euro further eroded Italy’s price competitiveness
and contributed to the overvaluation that persists today.25
Undervaluation and Growth

What is the effect of an undervalued currency on growth, and how does the
effect depend on the country’s level of development? To answer these questions
we exploit the time series and cross-country variation of our measure of under-
valuation and the growth rate of real GDP per capita for a panel of countries.
Our approach extends Rodrik (2008) in two directions. First, we use a more
recent release of the PWT (see footnote 2).26 Second, we extend the time period
back to 1861, the year of Italy’s unification.
For this purpose we gather data on exchange rates vis-à-vis the dollar, CPIs,
and wholesale price indices (WPIs), and real GDP per capita (from Maddison
2010), for thirty-four countries from 1861 to 1939 (see Di Nino, Eichengreen, and
Sbracia 2012c, for further details). This allows us to compute two alternative
measures for the log of the RER:
xratn,t ⋅ CPI
P us ,t xratn,t ⋅WPI
P us ,t
,t = ln
rerrnCPI = ln
P
and rerrnWPI
,t
P
,
CPI
P n ,t WPI
P n ,t
where CPI P n,t and WPI P n,t are, respectively, the CPI and WPI of country n at
time t, while the subscript us stands for the United States. Substituting, alter-
natively, rerrnCPI
P
,t and rerrnWPI
,t
P
in equation (1) in the place of rerrnPWT
,t , we obtain two
CPI
P WPI
P
new measures of undervaluation, denoted by un,t and un,t , which are available
for our entire 150-year period.27
As in Rodrik (2008), we estimate the equation:
g n ,t αn + β ynpc,t −1 + δun,t dt + ηn,t (5)
where g n,t is the growth rate of real GDP per capita of country n, α n are
fixed effects, ynpc,t −1 controls for the initial conditions and dt for time-specific
unobserved effects, unm,t is the measure of undervaluation (m = PWT, CPI, or
WPI ), ηn,t is the error term, and β and δ are constants. Because it takes time
for misalignments to exert their effect on growth, we follow Rodrik and use
five-year averages of all the variables. Therefore, each time t denotes a nonover-
lapping five-year period.
The first two columns in Table 13.2 report estimates for all countries in the
sample, whereas the last two columns concern only developing countries with
real GDP per capita below six thousand US dollars (1990 international dollars).
The coefficient on undervaluation is always positive and significant, ranging
from 1 percent to 3 percent, whereas the coefficient on ynpc,t −1 is always signifi-
cant and with the predicted negative sign. The effect of undervaluation is larger
for the measure obtained from the WPI and for developing countries. A 30 per-
cent undervaluation, like that recorded in Italy in the early 1950s, would raise
the annual rate growth as much as 0.9 percent for five years (i.e., the level of
real GDP would increase by up to 4.5 percent over five years).
These results do not allow us to determine the direction of causality. For
this, one needs to find an instrument correlated with the RER but exogenous
to economic growth. To obtain at least some preliminary indications about this
question, we estimate a dynamic panel model using the difference GMM method
of Arellano and Bond (1991), with additional lags of GDP growth and under-
valuation as instruments for the lagged dependent variable and the independent
variable.28 Using lagged values as instruments shows that the coefficients for
undervaluation are positive and highly significant over the full sample period
(Table 13.3). The elasticities of growth with respect to undervaluation are now
somewhat higher than before (between 1 and 4 percent) and continue to point
to a larger effect for less developed countries.
Overall, Rodrik’s findings are confirmed in the much longer time span of our
sample. There is a significant and positive relationship between undervaluation
Table 13.2 Economic growth and undervaluationa

All Countries Developing Countries
uPWT b uCPI uWPI uPWT b uCPI uWPI
y t-i −0.029 −0.032 −0.036 −0.038 −0.039 −0.029
[6.24]*** [7.77]*** [3.79]*** [4.47]* [5.85]*** [1.83]*
Undervaluation 0.016 0.008 0.015 0.026 0.008 0.026
[3.41]** [2.69]*** [1.80]* [3.99]*** [2.81]*** [3.24]***
Constant 0.297 0.256 0.222 0.31 0.186 0.269
[8.33]*** [9.50]*** [3.84]*** [5.08]*** [4.30]*** [1.95]*
Country fixed Yes Yes Yes Yes Yes Yes
effects
Period dummies Yes Yes Yes Yes Yes Yes
Observations 1,551 1,419 729 852 827 350
Number of 179 161 80 125 130 59
countries
R2 0.25 0.39 0.48 0.21 0.36 0.51
a
Estimates of equation (5) using OLS.
b
Sample period: 1950–2009.
Robust t statistics in brackets; * significant at 10 percent,** at 5 percent, *** at 1 percent.
and growth, which is strong for developing countries and weaker for advanced
countries. There is some suggestive evidence that the causality runs from under-
valuation to growth.
Undervaluation and Exports

The main channel through which undervaluation affects growth is by reallocating
resources to the high-productivity tradable sector and boosting exports (Di Nino,
Eichengreen, and Sbracia 2012c, for theoretical background). To verify that this
channel was at work in Italy since unification, we now analyze the effect of the
undervaluation of the lira/euro on the growth rate and the value of Italy’s exports.
The data span the following periods: 1862–1950 (Federico et al. 2011);
1962–1999 (National Bureau of Economic Research); and 2000–2009 (U.N.
Comtrade).29 Commodities are classified by four-digit Standard International
Trade Classification (SITC) category (for some 750 distinct categories). Data for
1862–1950 include only Italy’s ten major trading partners.30 For 1962–2009, we con-
sider the sixty-one partner countries contained in Bank of Italy’s competitiveness
Table 13.3 Economic growth and undervaluation (dynamic panel)a

All Countries Developing Less-Developed
Countries Countriesb
uCPI uWPI uCPI uWPI uCPI uWPI
y t-1 0.242 0.24 0.199 0.147 0.3 −0.066
[8.80]*** [6.63]*** [5.05]*** [2.51]** [4.51]*** [0.59]
In(GDPt-1) −0.043 −0.041 −0.033 −0.026 −0.026 −0.01
[15.05]*** [10.70]*** [8.30]*** [5.21]*** [3.55]*** [1.26]
Undervaluation 0.006 0.021 0.006 0.025 0.009 0.044
[3.40]*** [3.53]*** [3.26]*** [2.82]*** [1.90]* [4.57]***
Country fixed effects Yes Yes Yes Yes Yes Yes
Period dummies Yes Yes Yes Yes Yes Yes
Observations 1,121 577 651 275 277 80
Number of countries 156 77 123 56 60 23
Sargan test 73.72 89.4 78.79 129.31 70.8 67.66
P value 0.45 0.09 0.30 0.00 0.26 0.01
ARb −1.97 −1.96 −2.82 −2.92 −1.35 −1.47
P value 0.049 0.05 0.005 0.003 0.176 0.141
a
Estimates of equation (5) using GMM.
b
Real income per capita up to two thousand US dollars (1990 international dollars term).
Absolute value of z statistics in brackets; * significant at 10 percent,** at 5 percent, *** at 1 percent.
indicators (Finicelli, Liccardi, and Sbracia 2005). This sample encompasses all
the countries that are important either at a global level or for Italy’s trade.
Export Growth
We are interested in the US dollar value of Italy’s exports of good j to country
n at time t. Because our data are made up of bilateral exports, we also express
undervaluation as a bilateral variable. Specifically, we calculate undervaluation
m
relative to the currency of country n in year t as uIT ,t unm,t , where unm,t is the
undervaluation of country n’s currency vis-à-vis the US dollar at time t accord-
ing to the measure m (where m = PWT, CPI, or WPI ).
We estimate a version of equation (5) in which we replace GDP growth
with export growth as dependent variable as follows:
g nEXP
X
,t , j α n j + βxn,t −1 + δ(u m
( IT ,t unm,t ) + dt + εn,tt j (6)
,t , j is the growth rate of export of good j, to country n, at time t ; α n j

where g nEXPX
controls for country-good fixed effects and dt for time-specific unobserved

effects; xn,t −1 is the log of nominal GDP in US dollars, which controls for the
initial conditions; εn,t , j is the error term; and β and δ are constants.31 To pre-
serve consistency with the estimates of equation (5), in this preliminary analysis
our series are five-year averages, in which t represents nonoverlapping five-year
periods.32
Because of the presence of time dummies, uIT m
,t unm,t simplifies to −unm,t . If
undervaluation of the lira/euro raises export growth, then we would expect δ
to be negative (we expect that overvaluation of a destination market’s currency
raises Italy’s exports to the country in question). Because undervaluation acts
on growth by reallocating resources to the export sector, we expect it to have a
larger impact on exports than on GDP.
Panel A of Table 13.4 shows the results. The coefficients for undervaluation
are strongly significant and display the predicted negative sign across all mea-
sures unm,t . The elasticities are also noticeably larger than in the growth regres-
sion of the section on undervaluation and growth, as anticipated (10–30 percent
against 1–4 percent).33
This specification does not consider industry-specific and time-varying
effects, such as potentially heterogeneous world industry growth.34 We there-
fore consider an alternative in which each variable (including the dependent
variable) has been demeaned by netting out the average across countries as
follows:
g nEXP
X
,t , j t j =(
g .,EXP
X
n j ., j ) + β( xn,t,t x.,t ) + δ(u.m,t unm,t ) (εn,t , j − ε t , j )
Adding time dummies and considering that country-sector fixed effects

encompass sector effects, this specification simplifies to the following:
g nEXP
X
,t , j αn j + βxn,t −1 − δun,t dt + ηn,t j (7)
where g n,t
EXP
X
t j
EXP
X
n,t , j g .,EXP
X
t j and ηn,t , j is the residual.35 In equation (7), we test
whether the growth of Italy’s exports of good j to country n at time t is higher
with respect to Italy’s average export growth of the same good in the same year
because the undervaluation of the lira/euro with respect to country n’s currency
was larger (after controlling for other determinants of nEXP X
,t , j ). Panel B of Table
13.4 presents the estimates of equation (7), which confirm the previous results:
sign and significance of the coefficients on undervaluation are preserved and
the result is consistent across undervaluation measures.
In panel C, we again control for the possible endogeneity of undervaluation
by estimating a dynamic panel model with the GMM method of Arellano and
Bond (1991). The result that undervaluation raises significantly export growth is
supported for two of three measures (the coefficient for unCPI P
,t still has the cor-
rect sign but is no longer statistically significant).
Table 13.4 Export growth and undervaluation
(A) (B) (C)
uPWT a uCPI uWPI uPWT a uCPI uWPI uPWT a uCPI uWPI
Xt-1 −0.85 −0.81 −0.84 −0.8 −0.75 −0.78 −1.15 −1.06 −1.07
[109.23]*** [101.95]*** [93.70]*** [102.55]*** [97.37]*** [90.31]*** [106.31]*** [95.67]*** [88.44]***
Undervaluation −0.34 −0.07 −0.11 −0.28 −0.08 −0.13 −0.17 −0.01 −0.06
[15.91]*** [6.30]*** [5.08]*** [14.62]*** [8.72]*** [7.75]*** [5.95]*** [0.84] [3.46]***
Constant 7.5 7.62 7.89 −2.19 −1.73 −1.72 0.41 0.17 0.48
[27.26]*** [42.96]*** [43.81]*** [8.43]*** [11.88]*** [11.84]*** [29.56]*** [7.00]*** [24.30]***
Country-good fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Yes
Year dummies Yes Yes Yes Yes Yes Yes Yes Yes Yes
Observations 192,780 196,877 167,298 192,780 196,877 167,298 106,083 110,533 93,144
Number of id 44,276 43,376 39,459 44,276 43,376 39,459 29,192 28,303 25,922
2
R 0.28 0.29 0.26 0.14 0.12 0.12
(A) Estimates of equation (6) using OLS. (B) Estimates of equation (7) using OLS. (C) Estimates of a dynamic panel version of equation (7) using GMM as in Arellano and
Bond (1991).
a
Robust statistics in brackets; * significant at 10 percent, ** at 5 percent, *** at 1 percent.
Value of Exports
We can also use annual data to estimate gravity-like specifications, augmented
to include the undervaluation of the lira/euro as follows:
yn,t , j = a + bxn,t + c(u m

(uIT
IT ,t unm,tt ) Zn j + Zt + εn,tt j (8)
where yn,t , j denotes the log value of Italy’s exports of good j to country n in
m m
year t; xn,t is the log value of country n’s GDP at time t; uIT ,t and un ,t mea-
sure respectively the undervaluation of the lira/euro and of country n’s cur-
rency (computed as in the section on measuring the undervaluation of Italy’s
currency, but using annual data instead of five-year averages); Zn j and Zt are
sets of controls that are constant over time (such as the geographic distance
between Italy and country n) and constant across country-good pairs (such as
Italy’s GDP); and a, b, and c are constants.
When we include fixed effects (country-goods pairs) and time dummies,
and demean the variables, the gravity equation (8) becomes as follows:
y n ,t , j α n, j + βxn,t − un,t,t dt + υn,t j (9)
where y n,t , j = yn,tt j − y.,t j , α n j and dt still denote, respectively, country-good

fixed effects and time dummies; υn,t , j is the error term; and β and γ are
constants.36 This simplification follows from the fact that the effect of any Zn j
is captured by the fixed effects and that the set of time dummies controls for
the impact of any Zt (such as Italy’s GDP). Note that among the variables con-
trolled for by dt , there is also the US CPI; hence, we can interpret estimates of
(9) as explaining the nominal value or the real value of exports (i.e., the nom-
inal value of exports in US dollars divided by the US CPI, as in Eichengreen,
Perkins, and Shin 2012). As for equations (7) and (8), the level of Italy’s under-
valuation ( uIT ,t ) is captured by the time dummies. If undervaluation is success-
ful in boosting exports, we expect γ to be negative. Equation (9) tests whether
Italy’s exports of good j to country n at time t are higher with respect to the
cross-country average of Italy’s exports of the same good during the same year,
because undervaluation of the lira/euro with respect to country n’s currency
was larger (after controlling for other possible determinants of this flow, such
as the “mass” of country n, its distance from Italy, and so forth).
Table 13.5 reports the estimated coefficients for the two main measures of
undervaluation unPWT ,t and unCPI P 37
,t . Undervaluation enters significantly and with
its predicted negative sign (recall that un,t is the undervaluation of partner n’s
currency, i.e. it represents the relative overvaluation of Italy’s currency). The
elasticity of exports to undervaluation is very high (in the order of 20 percent)
when the latter is measured by unPWT ,t ; in this case, a 30 percent undervaluation
of Italy’s currency (such as the one observed in the 1950s) boosts its exports by
about 6 percent per year.
Table 13.5 Bilateral export values and undervaluationa

(A) (B)
uPWT a uCPI uPWT a
Xt 0.67 0.79 0.65
[80.33]*** [87.38]*** [77.98]***
Undervaluation −0.21 −0.01 −0.24
[14.54]*** [1.68]* [14.96]***
Undervaluation* Primary products indicator 0.14
[3.74]***
Constant −1.05 −0.05 −1.38
[2.34]** [0.00] [2.41]**
Country-good fixed effects Yes Yes Yes
Year dummies Yes Yes Yes
Observations 919,628 934,599 919,628
Number of id 48,420 46,686 48,420
R2 0.12 0.18 0.12
(A) OLS estimates of equation (9). (B) OLS estimates of equation (9), including an interaction term.
a
Panel B of Table 13.5 reports the estimates of a specification that allows for
a differential effect of undervaluation on the exports of primary goods (those
in the SITC categories one to four),38 by including the interaction of un,t with
a dummy variable for primary products.39 The coefficient on the interaction
term is positive and significant, meaning that the effect of undervaluation is
diversified across primary and industrial goods. The elasticity of primary-goods
exports with respect to undervaluation, which is measured by the sum between
the coefficient of un,t and that of the interaction term, remains negative. The
size of the elasticity for industrial goods (given by the coefficient of un,t ) is
about 10 percentage points higher than that for primary goods. Evidently,
undervaluation provides some support to the exports of primary products, but
it is especially helpful to the exports of industrial goods.
A finer disaggregation can be obtained by estimating a separate elasticity
for each of the ten sectors classified under SITC at the one-digit level. The esti-
mated specification becomes as follows:
y n,t , j α n, j + βxn,t − s un,t dt + υn,t j (10)

Table 13.6 Bilateral export values and undervaluation, by sectora

uPWT b uCPI
Xt 0.67 0.78
[79.19]*** [87.71]***
Food and live animals −0.44 −0.02
[8.56]*** [2.07]**
Beverages and tobacco −0.55 0.02
[4.22]*** [0.63]
Crude materials inedible except fuels 0.17 0.02
[3.13]*** [2.31]**
Mineral fuels lubrificants and related materials 0.49 0.03
[3.59]*** [0.95]
Animal and vegetable oils, fats, and waxes −0.45 0.03
[4.25]*** [1.01]
Chemicals and related products, n.e.s −0.05 0.04
[1.35] [3.36]***
Manufactured goods classified chiefly by material −0.33 −0.02
[12.78]*** [3.08]***
Machinery and trasport equipment −0.17 0.00
[5.78]*** [0.42]
Miscellaneous manufactured articles −0.21 −0.03
[5.64]*** [3.10]***
Commodities and transaction N.E.C. −0.67 −0.11
[3.76]*** [2.16]**
Country-good fixed effects Yes Yes
Year dummies Yes Yes
Observations 904,012 919,256
Number of groups 48,266 46,679
R2 0.10 0.18
a
Estimates of equation (10) using OLS.
b
where γ s (s = 1, . . . ,10) is the sector elasticity. Results, shown in Table 13.6, con-
firm that the effect of undervaluation is quite different across sectors: they sug-
gest that Italy’s exports in all industrial sectors except chemicals are positively
affected by undervaluation of the lira/euro. However, Italy’s exports in some
primary sectors tend to be negatively affected or unaffected.
Overall, these results confirm undervaluation has had positive effects on
the growth of Italy’s exports. This effect is strongest for nonprimary sectors,
where productivity is generally is expected to be higher.40
Implications for Italy’s Economic

Growth and Exports
The standard periodization of Italian economic growth (e.g. Gerschenkron 1955)
distinguishes six main phases: the “miracle” years (1950–1973); two phases of
sustained growth during the età giolittiana (from the mid-1890s to the eve of
World War I) and 1974–1989; and three phases of disappointing growth (1861–
1895, the interwar years, and the two most recent decades). We now discuss
the implications of the lira/euro exchange rate for Italy’s economic growth and
exports across these six periods.
The High-Growth Period

Italy benefited from an undervalued currency during the miracle years 1950–
1973. Undervaluation on the order of 30 percent in 1950s and 1960s contributed
0.3–1.2 percent per year to GDP growth and 3–9 percent per year to export
growth. These are large contributions for the entirety of a twenty-year period,
for exports in particular.
The “Sustained Growth” Periods

During the two phases of sustained growth, the lira was still undervalued,
either slightly (1895–1913) or substantially (in the 1970s and 1980s). In the latter
period, undervaluation was in the order of twenty percent, implying a contri-
bution of the lira of 0.2–0.8 percent per year to GDP growth and 2–6 percent
per year to export growth. In the former, the currency also figured positively in
Italy’s growth, although its contribution was rather small.
The “Disappointing Growth” Periods

In 1861–1895 and in the interwar period, the lira was again undervalued, but
growth rates were disappointing. In the first thirty years after unification, the
causes of underperformance were mainly domestic. Economic, financial, and
political instability prevented Italy from taking advantage of an undervalued
currency. Despite undervaluation, Italy found it hard to develop export indus-
tries. The newly created country was backward and poor and needed to import
industrial raw materials, arms, agricultural commodities, and manufactures.
At the same time, it could not sell abroad much other than silk products and
olive oil. It could not reach many markets beyond France.41 The silkworm and
grape phylloxera had a greater impact on Italy’s exports than economic poli-
cies. The wars plaguing Europe in the nineteenth century also had a serious
negative effect on the economy and its trade relationships. The 1880s, which
saw Italy’s first manufactured exports, were dominated by the uncertainties
about tariffs (Stringher 1911). Moreover, expansionary monetary and fiscal pol-
icies and inadequate supervision of banks of issue set the stage for a banking
crisis in 1893.
From 1920 to 1939, by contrast, the causes of slow growth were mainly
external. This was not a good time to be a small open economy (Ciocca 1976).
In Western Europe, the destination of 60 percent of Italy’s foreign sales, the
volume of exports recovered to 1913 levels only in 1928 (Liepmann 1938); the
ratio of exports to GDP recovered to its 1913 value only in 1929. Then followed
the Great Depression, the protectionist revival, and the trade sanctions that led
to the autarkic policy of the 1930s—a situation in which no contribution could
come from an undervalued currency.
From the early 1990s through the time of writing, another period of slow
growth, Italy’s currency was overvalued. The estimates in the section on
undervaluation and growth suggest, however, that the negative contribution of
the exchange rate to growth in the last twenty years was limited. When the
sample is restricted to the set of advanced countries, to which Italy belongs,
the elasticity of growth to undervaluation is barely positive (0.3 percent). Even
the very large bilateral overvaluation of the lira/euro vis-à-vis the US dollar
(about 40 percent) would translate into only a small decline in growth (of 0.1
percent per year).
In sum, the exchange rate matters. Italy saw phases of rapid growth when,
for reasons of policy and economic structure, the currency was undervalued. A
competitive exchange rate, by itself, did not ensure growth and development.
The external environment mattered, as did economic policies. The long sweep
of Italian economic history suggests that a competitive currency should be seen
as necessary rather than sufficient. It is a facilitating condition rather than a
guarantee of robust economic growth.
Acknowledgment
The views expressed in this paper are those of the authors and do not neces-
sarily reflect those of the Bank of Italy. The authors thank Mary Amiti, Paola
Caselli, Jonathan Eaton, Linda Goldberg, Philippe Martin, Fabrizio Onida,
Paolo Pesenti, Fabiano Schivardi, Gianni Toniolo, and seminar participants at
the Bank of Italy, Brixen Workshop 2011, SADiBa (Perugia Conference) and
the New York Fed for useful comments. They are grateful to Alberto Baffigi,
Claudia Borghese, Claire Giordano, Dennis Quinn, Sandra Natoli, Angelo Pace,
and Alan Taylor for their help in construction of the data set.
Notes
1. Other definitions of the equilibrium level of the RER, such as the fundamental
equilibrium exchange rate (i.e., the relative price of tradable to domestic
nontradable goods that achieves full employment and trade balance), provide very
similar results (see, for instance, Figure 2 in Berg and Miao 2010).
2. Compared to Rodrik, we use a more recent release of the PWT: version 6.3
(Heston, Summers, and Aten 2009), covering the period 1950–2007, which we
extend to 2009 using the May release of PWT version 7.0. We do not rely mainly
on version 7.0 because it underwent very frequent revisions while we were
conducting our analysis. Even the most recent version available at the time of
writing showed substantial inconsistencies. We therefore relied on version 6.3 and
exploited version 7.0 only to extend the data to 2009 (using changes in the main
variables).
3. In practice, however, differences in the basket of goods also affect PPP estimates,
because, for instance, not all goods (and their prices) are available in all countries.
4. Nevertheless, there are some large differences in levels, especially in the years
adjacent to those in which price level data are available to the International
Comparison Program. Because CPIs are indices and not price levels, when
we extend the RER back in time, any error in its level at one point in time is
transmitted to all previous data.
5. The regression of the measure of undervaluation on the RER provides a slope of 1
and an intercept of −0.3.
6. The correlation between the two series is 95 percent in 1950–2009.
7. Other measures could be obtained by extending undervaluation using only
changes over time in the RER based on CPIs or by resorting to other variables,
such as the RER based on other price indices (either plugging them into a
regression model or using only their changes). In practice these alternative
approaches provide very similar results. The preference for using the RER based
on CPIs with respect to other variables is grounded in the fact that this measure
has the largest correlation with undervaluation in the period 1950–2009. The
advantage of the regression approach is also that it allows us to compute
confidence intervals. In particular, the confidence interval for the measure of

undervaluation plotted in Figure 13.1 is obtained from the estimates of the panel
regression (1) for the period 1950–2009. For the remaining period, the confidence
interval takes into account the additional variability caused by the regression of
undervaluation on RER (which is performed only for Italy).
8. The main trading partners are defined as the sixty-one countries included in the
Bank of Italy’s competitiveness indicators (Finicelli, Liccardi, and Sbracia 2005) for
1950–2011; for earlier years these are the ten main trading partners (except Russia)
included in the data set constructed by Federico et al. (2011).
9. A later section describes our trade data.
10. To prevent a stronger decline in the number of observations, trade openness was
excluded because data from 1950 to 1961 were unavailable.
11. In the next section, we suggest that it is in the 1960s that the achievement of full
employment and the related waves of wage claims triggered this regime switch.
12. Specifically, half of the fiscal-year deficit at time t, which ended on June 30th for
most of the sample years, is attributed to the calendar year t-1 and the remaining
half to the calendar year t.
13. Du and Wei (2011) discuss the potential implications of the gender ratio for the RER.
14. In a related theoretical paper, we show that changes in undervaluation may affect
economic growth by modifying the relative size of the low-productivity traditional
sector (Di Nino, Eichengreen, and Sbracia 2012c). Here, instead, we are speculating
that the level of the relative size of the traditional sector affects undervaluation.
This creates a potential endogeneity problem that we address by instrumenting
this variable.
15. A detailed description of the situation at the time of the monetary unification is
in De Mattia (1959). For a comprehensive monetary history of Italy see Fratianni
and Spinelli (2001). More focused accounts about the history of the Italian lira are
Cipolla (2001) and Martinez Oliva and Schlitzer (2005).
16. See Eichengreen (2008b) for a recent perspective on this issue.
17. Limits placed to the convertibility of silver, to prevent the effects of Gresham’s
law, were such that the system was very close to a monometallic gold standard (a
“masked gold standard,” as Fratianni and Spinelli 2001, define it).
18. It is not entirely clear when the gold standard was legally suspended (Cesarano,
Cifarelli, and Toniolo 2012). The Bank Act of 1893, which instituted the Bank
of Italy, was unclear about the obligations concerning the conversion of notes
into gold (indicating that conversion rules would be issued at a later date)—an
ambiguity that was probably intentional.
19. The literature has not reached a unanimous verdict on this policy, which was
driven by political motivations connected to the prestige of the Fascist regime
(Cohen 1972; Ciocca 1976). As De Cecco (1993) famously put it, “it is really difficult
to express opinions about this choice, but also to establish post-hoc its insanity.”
20. The role of the gold standard in setting the stage for the Great Depression,
favoring the transmission across countries, amplifying the magnitude of the crisis,
and finally hampering the recovery for as long as it remained in place has been
extensively analyzed (Eichengreen 1992).
21. This was also a way for the Allies to increase their purchasing power in the
country (Graziani 1979). The nominal exchange rate underlying Figure 13.1 is
equal to about 20 units per US dollar in 1943 (Bordo et al. 2001), which is the rate
prevailing in the North of Italy (similarly, Fratianni and Spinelli [2001] report a
rate of 19 units per US dollar). Note that Fratianni and Spinelli (2001) report a
PPP rate of 39.31 that year. Hence, an exchange rate of 100 units per US dollar,
like the one established in the South of Italy, would have implied an undervalued
currency. However, an exchange rate of 20 units per dollar would have resulted in
an overvalued currency, as in Figure 13.1.
22. However, many authors agreed that the US dollar was overvalued after 1949
(Samuelson 1964).
23. Because of the difficulties in finding reliable data on the stock of physical capital
and its rental cost, Figure 13.2 focuses only on labor as the main production factor.
24. Within twenty years, this ratio was reversed.
25. The extent of bilateral overvaluation vis-à-vis the dollar is much larger (in the
order of 40 percent) mainly because from the 1990s the number of countries
covered by the PWT increases sharply, including many developing economies with
an undervalued currency. Because bilateral undervaluation is a relative measure,
calculated with respect to the cross-country average, adding a large number of
countries with undervalued currencies pushes down the resulting bilateral index
for Italy, without affecting much, however, the trade-weighted index.
26. This is more than just a technical point, because the PWT undergoes frequent and
often extensive revisions of PPP-adjusted rates (Johnson et al. 2009, for a critique).
Many authors, for instance, recommend using different versions of the PWT as
a robustness test (see the section General Discussion of Rodrik 2008). The two
most recent releases (version 6.3 and 7.0), in particular, entail strong revisions
for those very countries, such as China, experiencing the highest rates of growth
and degrees of undervaluation (partly leading to the result that undervaluation
is positively related to growth). For example, in the period 1950–2004 (the one
common to Rodrik’s and our data set), the new data suggest that China’s average
rate of growth of real GDP per capita is 4.6 percent, as opposed to 5.5 percent in
the version 6.2. The initial 1950 level of the same variable is 70 percent larger in
the newer than in the older release.
27. Unlike rerrnPWT
,t , both rerrnCPI
P
,t and rerrnWPI
,t
P
are only index numbers and describe the
behavior over time of the RER, but do not provide information about its level.
These variables can still be included into a specification like equation (1) to derive
corrected measures of undervaluation so long as we account for level-differences
in the base year by including fixed or random effects. In particular, we chose a
random-effect model, which is not rejected by a Hausman test, when we estimate
equation (1) with rerrnCPI
P
,t and rerrnWPI
,t
P
as dependent variables.
28. In our sample, the Sargan test tended to accept the null that the error term is
uncorrelated with the instruments when we estimated the model using Difference
GMM and to reject it when we used System GMM. For an extensive set of
estimates using post-1980 data with System GMM, however, see MacDonald and
Vieira (2010). All their estimates confirm the main result that the relationship
between undervaluation and growth is positive and the direction of causality runs
from the former to the latter.
29. For the earlier periods (1862–1939), we cross-checked the consistency of the
aggregate data with those reported in other sources (Stringher 1911; Ercolani 1975).
30. These countries are Argentina, Austria, Belgium, France, Germany, Netherlands,
Russia, Switzerland, United Kingdom, and United States. For Russia, however, data
on exchange rates and consumer or wholesale prices only start in 1990, so this
country is actually excluded from the pre-World War II subsample.
31. Nominal GDP in US dollars is from the IMF for the post-World War II period
and from Bordo et al. (2001), complemented with national sources, for the
pre-World War II period.
32. When we plug unCPI P WPI
,t and un ,t
P
into our regressions, we include two additional
sets of country fixed effects in the specification (for the pre-World War II and the
interwar period). These fixed effects account for the fact that CPIs and WPIs are
price indices with three different base years (1900, 1929, and 2000). They capture
the different effect of undervaluation on the dependent variable in the base year.
33. The two elasticities, however, are not completely comparable because in equation
(5) GDP growth is referred to a panel of countries, whereas in equation (6) export
growth is referred only to Italy.
34. The long time span of our sample, during which industry growth has been
heterogeneous, is likely to bias our estimates. For example, heterogeneous sectoral
growth may affect GDP growth in countries with different specialization. In this
case, we would be omitting a variable correlated with other independent variables,
biasing the estimates of all the coefficients.
35. This transformation may generate heteroskedasticity in the error term. However,
because of the large number of countries, this is likely to be a second-order issue
(recall that heteroskedasticity does not bias the estimates and only affects standard
errors). In some robustness tests, we have addressed this issue by performing
estimates in which we cluster the error term and by estimating a random-effect
model using GLS. Results from these models confirm the empirical findings: the
main coefficients preserve their sign and statistical significance.
36. The Hausman test strongly rejects the null that unobserved country-sector factors
can be considered random and selects the fixed-effects model.
37. The third measure, unWPI P
,t , provides insignificant estimates. Because the PWT is
available for the period 1950–2009 and, for that period, trade data are available
only from 1962, when we use unPWT ,t the sample years are only from 1962 to 2009.
38. Primary sectors are food and live animals; beverages and tobacco; crude materials,
inedible, except fuels; mineral fuels, lubricants, and related materials; and
animal and vegetable oils, fats, and waxes. Nonprimary sectors are chemicals
and related products, manufactured goods classified by material, machinery and
transport equipment, miscellaneous manufactured articles, and commodities and
transactions N.E.S.
39. More precisely, the interaction term that we add is δd prim (un,t
PWT
u.PWT
,t ), where
d prim is the dummy for the primary goods. The specification (9) comes from the
gravity equation (8), after demeaning all the variables and including country-good
fixed effects and time dummies (and d primu.,PWT t , unlike other variables, would
not simplify away). If we use the measure unCPI P
,t
with the interaction term,
unfortunately the estimates do not converge.
40. Di Nino, Eichengreen, and Sbracia (2012a) show that undervaluation of the lira/
euro also raised the variety of goods exported, as measured by the index of
extensive margin proposed by Hummels and Klenow (2005). This index of variety,
however, can be computed only for the period 1962–2009.
41. In 1862–1863, silk products and olive oil alone represented 50 percent of the
value of Italy’s exports. France, still in 1870s, was the destination of half of Italy’s
exports.
Chapter 14
INNOVATION
AND FOREIGN
TECHNOLOGY
Federico Barbiellini Amidei, John

Cantwell, and Anna Spadavecchia
Introduction
This chapter explores the long-run evolution of Italy’s performance in techno-
logic innovation as a function of international technology transfer. Italy has not
emerged as an original contributor to the technology frontier, as measured by
traditional indicators, such as research and development (R&D) activity or pat-
ents (Malerba and Orsenigo 1995). R&D expenditure is still much lower than in
other major Organization for Economic Cooperation and Development (OECD)
countries; international patenting activity in recent decades has been below the
country’s economic weight (Cantwell 1991). This can be partly explained by
Italy’s persistent production and technologic specialization in traditional indus-
tries where innovation relies more on engineering and design than on R&D.
Moreover, for a significant part of the second half of the twentieth century,
Italian firms’ innovative ability seems to be based more on creative adoption of
foreign technologies and the systematic development of localized learning rather
than on formal research (Antonelli and Barbiellini Amidei 2011). Several stud-
ies on the period have highlighted some important innovation achievements in
longer-standing and in newer manufacturing fields, in terms of production pro-
cesses and organizational forms, product differentiation, and the development
innovation and foreign technology 379
and diffusion of innovative machinery and components, captured only to a lim-

ited extent by R&D and patent statistics (Malerba 1993).
This chapter reconstructs the evolution of Italy’s innovative effort, assess-
ing different phases and dimensions of Italy’s technologic catch-up, tracking
the transfer of foreign technologic knowledge, and analyzing its impact on the
country’s innovation activity. Section two provides a conceptual discussion of
the importance of innovation and technology transfer in economic growth.
A historical overview of innovation and technology transfer in Italy in the
past 150 years follows in section three. Sections four, five, and six analyze the
three main building blocks of the original dataset developed for this chapter:
(1) Italian innovative activity, (2) foreign technology imports, and (3) domestic
absorptive capability. These sections provide a first assessment of the magni-
tude and relevance of foreign technology transfer to Italy in different historical
phases and in an international context. Section seven presents an econometric
analysis of the impact of foreign technology on Italian innovation activity. The
last section concludes.
Innovation, Growth, and International

Technology Transfer
The major role of innovation, whether technologic or associated organizational
change, in economic growth and rising living standards is unanimously recog-
nized (Scherer 1999). Schumpeter (1911) argued that innovation—the introduc-
tion of new products, new processes, new final markets, and new methods of
organizing firms, and using new intermediate inputs—necessarily provides the
foundation for economic growth because it consists of building new domains of
value creation. Furthermore, the conditions of access to external knowledge (to
the firm, the sector, the geographic area, the country) were crucial for innova-
tion (Schumpeter 1947).
A postwar Schumpeterian perspective contends that innovation relies
on the localized development of technologic or social capability, through
problem-solving or learning activities principally within (and between) firms
(Arrow 1962; Pavitt 1999). The development of new products and processes
is the outcome of a path-dependent building on established capabilities and
achievements. Hence, innovation is a continuous learning process in firms sup-
ported by other institutions and not a discrete event (Dosi 2000). This perspec-
tive builds on and amalgamates the conclusions of the work of Usher (1954) and
Rosenberg (1976, 1982, 1994) on the history of technology; Nelson and Winter
(1982) on the evolutionary theory of economic change, and Penrose’s (1959) the-
ory of the growth of the firm.
380 international competiveness
In an international context, technologic differences have been stud-

ied as prime causes of differences in gross domestic product (GDP) per cap-
ita across countries (Ames and Rosemberg 1963; Dosi, Pavitt and Soete 1990).
Gerschenkron (1962a) pointed out that “backward countries” have an oppor-
tunity for great “industrial upswing” gaining access to more advanced tech-
nologies from existing leaders (Pasinetti, 1981). However, backwardness has to
confront major limiting factors: institutional, financial, and socioeconomic.
Therefore, in Gerschenkron’s interpretation of the industrialization of European
countries (among which Italy received considerable attention) reducing the gap
is far from automatic (Fagerberg 1994). The milestone work by Abramovitz
(1986) pointed out that differences between productivity levels across countries
create potential for convergence, if there is “social capability” to absorb more
advanced technologies, where “social capability” refers to the extent of techni-
cal competence (for which education might be a rough proxy) and to political,
commercial, and financial institutions (Ohkawa and Rosovsky 1973). Yet another
obstacle to the absorption of technology is limited “technological congruence”
(Abramovitz 1993, 1994), for instance economic conditions, such as market size,
scale of production, or factor endowment, in which new technology is generated
and embodied (Fagerberg 1987; Abramovitz and David 2001).
The internationalization of innovation relies on the accumulation of tech-
nology within the international networks of multinational corporations as a
path-dependent corporate learning process (Nelson and Winter 1982; Cantwell
1989, 1991). Two components can be identified. First is the potentially public
knowledge element of technology, encompassing codifiable items that may be
exchanged between knowledgeable scientists, engineers, or managers (Nelson
1982a). However, this element of technology is only potentially public, because
such devices as patents or secrecy or the specificity of the codes in which it is
expressed may delay its actual entry into the public domain.
The second element of technology is tacit and specific to particular firms. It
is embodied in the organizational routines and expertise of teams and organi-
zations, and in the way organizations combine their activities, sometimes across
national boundaries in the form of international business relationships (Nelson
and Winter 1982; North and Wallis 1994; Nelson and Sampat 2001).
The transmission of technology across countries takes a wide variety of orga-
nizational or administrative forms, evolving over time. Foreign technology can
be embodied in imported intermediate inputs, capital goods, or skilled migra-
tion. It can be channelled through Foreign Direct Investment (FDI), through
patents registered in the host country by foreigners. It can be purchased in dis-
embodied form or it can spread by imitation and reverse engineering (Maskus
2004; Arora, Fosfuri, and Gambardella 2008).
In the catch-up experience of countries the importance of international
business connections has been observed repeatedly (Dunning and Narula 1996;
Cantwell, Dunning, and Lundan 2010). Yet, although international business link-
ages are part of every successful technologic and economic catch-up, the form
of these international relationships has varied considerably (Cantwell and Zhang

2009). FDI provided a primary vehicle for international technology transfer in
the United States before 1914 (from Europe); in interwar Japan and postwar
Europe (from the United States); and more recently most notably in Singapore
and China. Conversely, in the interwar United States or Germany, and in post-
war Japan and Korea, international trade, licensing and subcontracting were the
more important mechanisms for international business connections.
Over the longer term, changes in the international environment influence
the form of international business connections used for technology transfer, and
within any given period, there is considerable cross-country variation, reflect-
ing differences in national levels of capabilities of indigenous firms, and local
institutional conventions and structures.
Innovation and Technology

Transfer in Italy
The innovation activity undertaken by Italian firms in the first long period
of economic growth, 1900–1913, was mainly fed by inward FDI, investment in
foreign-made equipment, and foreign patent applications and licensing agree-
ments (Vasta 1999a). Although foreign capital had flown into Italy before its
unification, the 1880s and 1890s saw the first wave of foreign investment. By
the end of the nineteenth century Belgian, French, Swiss, and British capital
concentrated mainly in public utilities and transport (railways and urban tram-
ways), whereas German, French, and Austrian-Hungarian capital concentrated
mainly in insurance and banking (Colli 2009; Scott 1960). Notable foreign firms
investing in Italy in the 1900–1913 Giolittian years included Brown Boveri and
Westinghouse Electric, respectively Swiss and US manufacturers of electrical
components; Ciba-Geigy in the chemical industry; and Royal Dutch/Shell in
the oil industry (Colli 2009).
The military-industrial complex, a major contributor to industrialization
and, in most countries a primary source of technical progress, did not play
the latter role in the Italian case and imported most of the modern technology
(Federico 1996; Hertner 1984). Italy depended on foreign innovation also in the
electro-technical industry. Equipment and material characterized by high techno-
logic content was of foreign origin, particularly from Germany, until World War
I, and increasingly from Switzerland. Three out of the top five patenting firms
in Italy were German (Siemens & Halske, Siemens-Schukert, and AEG). Only
between 1909 and 1914 did two Italian corporations, CGS and Richard-Ginori,
appear in the top eight patenting firms; however, these firms manufactured
less technologically advanced products, such as electricity meters and insulators
(Vasta 1990; Hertner 1986). A similar international division of labor took place in
the chemical industry, where Germany spearheaded technical progress through
the application of scientific research, whereas the Italian counterpart was locked
in a vicious circle of lower technology, quality, and demand.
Indigenous technologic development suffered from various constraints.
For instance, the engineering industry suffered from a lack of adequate raw
materials and limited demand for its products because neither agriculture nor
the food-processing industries created any significant demand for equipment
requiring new technologies. This also impeded the specialization of engineering
firms needing to produce a range of different products to continue their trading
life (Davis 1991, 98–99). An exception was Italy’s undisputed technologic lead-
ership in the most “traditional” textile industry of silk reeling (Federico 1997,
104–109). The weaknesses of the Italian machine tool industry were such that
the industry could not provide for the expanding textile sector, which depended
on foreign machinery. This also meant textile firms built their own repair
shops or relied on foreign suppliers and technicians. Alessandro Rossi, of the
Lanificio Rossi in Schio, declared in 1881 that Italian textile manufacturers had
little choice but to buy abroad, because foreign machines were technically supe-
rior and cheaper (Maiocchi 1980, 887–888). Even the construction of the railway
network, which accelerated between 1861 and 1876, did not promote a domestic
engineering industry at first. Rails, engines, carriages, and trucks continued to
be supplied from abroad. Iron for bridges was also of foreign origin because the
Italian iron and steel industry was handicapped by the lack of domestic pit coal
(Cafagna 1973, 287–288).
The first major breakthrough for the Italian engineering industry occurred
with the railway law of 1885, which gave preference to national products, and
further extensions of the railway network. A number of specialist works were
established, such as Franco Tosi and Co. (1881) and Ernesto Breda and Co.
(1886), whereas others, such as Ansaldo, were modernized. This meant impor-
tant investment in machinery imported from the United States. Moreover, as a
result of the preferential policy for Italian-produced goods, foreign companies,
German in particular, established works in Italy (Davis 1991, 102–103).
Italian firms were quite proficient in adapting foreign machinery and
in combining machines of different provenance and vintage; this skill was
less developed in heavy industries, where plants were mostly bought turnkey
(Federico 1996; Giannetti 1994). Italian engineers played an important role in
this respect. They were able to deal with a variety of technologies and use them
creatively because of a strong broad education in engineering rather than a spe-
cialized one (Giannetti 1991). However, the slow pace of technologic develop-
ment provided weak demand for technical skills, thus impeding the start of
virtuous circle on a large scale (Maiocchi 1980, 882).
Recent work has provided an articulated picture concerning the introduc-
tion of new technologies in industry in the interwar years. Overall, Italian
industry seems heavily dependent on foreign technology. However, it had the
ability to adapt it to the Italian market. Import and imitation of technologies

from abroad characterized the textile and steel industries, whereas mechani-
cal engineering and chemical sectors saw significant investment in autonomous
domestic innovation activities (Federico and Toninelli 2006; Giannetti 1999).
Some technologic trajectories that had begun at the end of the nineteenth
century and before World War I came to be exploited by Italian industry in the
interwar years. The availability of hydroelectric energy made possible various
instances of process innovation, such as the production of high-quality iron and
steel from scrap iron, aluminium from bauxite, and fertilizers from acetylene.
Systematic research and the establishment of laboratories, albeit on a limited
scale, in the chemical industry began only in the 1930s. Imports of foreign tech-
nology remained important, through foreigners’ patenting, licenses, and joint
ventures. The Italian oil industry, with government-sponsored Agip, benefited
from research by IG Farben and Standard Oil. In turn, Montecatini and Fauser
agreed to transfer to the German-American cartel existing and future patents.
A notable case of joint venture in the chemical industry was Litopane, involv-
ing Montecatini, IG Farben, and Sachtleben, for the production of dyestuffs and
explosives. The import of foreign technology was also very important in the elec-
trotechnical sector where Italian firms purchased licenses and patents from for-
eign firms: this was the case with Cemsa and Westinghouse, and Galileo Ferraris
and Tecnomasio and Brown-Boveri (Giannetti 1998, 102–103 and 112–114).
The short period between the introduction of the autarky (1935) and the
beginning of World War II witnessed the establishment of laboratories and
research facilities particularly in the chemical and rubber industry, such as at
Montecatini, Snia, and Pirelli. Developing new technologies was considered a
matter of national interest. However, the cooperation between facilities was far
less significant than in Germany, the United States, and Japan. A weak con-
nection between science and industry was considered a major weakness of the
Italian industrial system.
FDI played a significant role in the economy of the 1920s. By the end of
the decade the most attractive sectors were textiles, chemicals, and electrome-
chanics (e.g., Compagnia Generale di Elettricità, the Italian branch of General
Electric). The 1930s saw a sharp decline in FDI, with “coke and petroleum,”
“electrical equipment,” and “chemicals” being the industries with the highest
share of foreign capital. Therefore, the interwar period saw a further shift of FDI
from utilities and transport to manufacturing, technology, and capital-intensive
industries (Colli 2010, 93–101).
In the 1950s Italy had the opportunity to reduce the gap, which had widened
during the Fascist autarky, and engage in the process of technologic catch-up
with the United States (Abramovitz 1956, 1989; Toniolo 1980; Zamagni 2003).
The European Recovery Program (ERP), or Marshall Plan, was an important
channel for transferring American technology to Italy.1
Grants and loans made available under the ERP in 1948–1952 were to be
used to import goods and services, procured in the United States, which would
be sold in the country of destination. The funds raised by selling the products
would constitute the counterpart fund. The Italian imports of machinery (and
vehicles) financed through ERP grants and loans surged since 1950 (US$211 mil-
lion and 29 percent of all funds in 1950–1952; US Department of Commerce
1948–1952) with “metal working machinery” and “machine tools” representing
the most important component (30 percent; Fauri 2010).
The Technical Assistance and Productivity Program was introduced within
the context of the ERP in 1949 as the productivity gap between the United States
and Western Europe was perceived as widening. Italy was the third major benefi-
ciary, receiving almost as much (US$26 million) as France and Germany (Comin
and Hobijn 2010; Tiratsoo 2000). The Technical Assistance and Productivity
Program involved the lending of US specialists to Europe and study visits to
the United States of European teams. During 1949–1969 the average number of
industrial trainees per year visiting the United States from Italy was 63, less than
half those sent by France and Germany (Comin and Hobijn 2010).
Italy used a relevant share of its counterpart funds (more than 15 percent,
equal to US$80 million in 1948–1952), much more than other countries, to
promote domestic production of machinery. A significant sum, more than in
Germany and France, was also devoted to sustaining Technical Assistance pro-
grams (US$5.6 million, almost 1 percent of the total Italian funds; Brown and
Opie 1953).
The introduction of mass-production technologies in the 1950s and 1960s
was enabled by an expansion in internal demand and depended on the con-
siderable increase in investment and the development of the Italian engineer-
ing industry, in particular the machine tools industry. Imported machinery as
a percentage of investment increased significantly from 1950, with particularly
high growth rates in the Italian economic boom of 1959–1961. Moreover, the
impact of international technology transfer was enhanced by Italian industry’s
ability to acquire and diffuse foreign technologic knowledge through imitation,
reverse engineering, and adaptation (Antonelli and Barbiellini Amidei 2007, 5
and 172–173).
FDI increased sharply from the mid-1950s throughout the 1960s because of
investments mainly by American multinationals (as in all Western European
countries) but also by French, Swiss, and British firms (Colli 2010). Particularly
relevant were foreign investments in petroleum, electrical equipment, and chem-
ical industries. Moreover, licenses obtained from foreign firms were an impor-
tant channel of foreign technology from the 1950s to the 1970s and an important
source of technical change for Italian firms (Malerba 1993).
From the mid-1980s till 2003 the relative importance (in terms of employ-
ment) of foreign affiliates increased in scale-intensive industries, but decreased
in science- and technology-based industries. This trend suggests a diminishing
attractiveness of Italian high-technology industries, in turn related to decreasing
investment in R&D, technologic infrastructures, and higher education (Balcet
and Evangelista 2005).
The Evolution of Italian Innovative

Activity Performance
This section provides a quantitative analysis of the evolution of the (visible)
production of technologic knowledge in Italy over the past 150 years in an inter-
national comparative perspective. The section is based on a newly constructed
dataset, drawing on a number of sources, which includes and cross-checks var-
ious indicators of innovation activity, in turn reflecting the evolving range of
facets of innovation.2 This dataset enables us to assess Italy’s relative perfor-
mance in different subperiods, and to identify phases of technologic catch-up
and relative lagging behind. This section and the following two discuss the
time series used in the econometric assessment and provide an initial assess-
ment of the extent to which data support the established understanding and
knowledge discussed in the second section and the historical evidence recalled
in the third section.
Patenting Activity
Our dataset includes information on Italian domestic and international patents
(i.e., in France, Germany, Spain, the United Kingdom, the United States, and
Switzerland) and at the European Patent Office (EPO) for more recent years.
Statistics regarding international patents, if not a comprehensive and impar-
tial indicator, can be considered a useful measure of the flow of prevalently sci-
entific innovations developed by bigger firms (along with, particularly in the
past, professional individual inventors). Firm size significantly influences the
propensity to patent and in patent count statistics the innovative activity output
of smaller firms is underestimated. Moreover, patents highlight product innova-
tion, which can be copied easily, and do not adequately represent process inno-
vations protected by their complexity and compactness (Griliches 1990; Pavitt
1984). Foreign patenting other than in the United States has not been explored
frequently over such a long period and, to the best of our knowledge, never in
the Italian case. Indeed, we did find different dynamics in Italian patenting in
the United States and in the European countries in diverse historical phases,
related to Italy’s trade orientation, light outward FDI, migrations destinations,
and also to different host countries’ patenting systems, with the particularly
distant and highly competitive US market not being the natural first reference
for smaller, only export internationalized Italian firms.
Italian patenting performance (expressed as patents granted to Italian
residents as a share of total patents granted to foreigners) across the different
European countries surveyed, seems better than in the United States in the long
run (Figures 14.1–14.3).
12
Italian patents in France Italian patents in Germany Italian patents in Switzerland
Italian patents in USA Italian patents in Spain* Italian patents in UK*
Italian patents applied at EPO Italian patents granted at EPO Italian patents in Europe**
10
0
1875 1885 1895 1905 1915 1925 1935 1945 1955 1965 1975 1985 1995 2005
Figure 14.1 Italian residents’ patents granted abroad as a share of total foreign
patents (percentages).
Our elaborations; data sources in the text. Three terms centred moving averages.
* Applied. ** France, Germany, Switzerland.
Italy’s patenting performance in Europe, albeit far from main industrial-

ized competitors, seems more successful in the Giolittian catch-up phase rela-
tive to other periods and to Italian industrial development at the time. In the
1920s–1930s, the Italian gap in patenting in European countries remains mostly
stable. In the United States instead, the level and growth of Italian patents were
lower throughout the first half of the twentieth century.
50.0
Italian patents in France German patents in France
45.0 Swiss patents in France Spanish patents in France

English patents in France US patents in France
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
Figure 14.2 Selected countries’ patents granted in France as a share of total foreign
patents (percentages).
Swiss patents in USA German patents in USA

50 Spanish patents in USA French patents in USA
English patents in USA Italian patents in USA
40
30
20
10
0
1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990
Figure 14.3 Selected countries’ patents granted in the United States as a share of
total foreign patents (percentages).
Our elaborations; data sources in the text.
In the early 1950s Italian patenting abroad, in Europe and in the United
States, was modest compared with major industrialized countries. The Italian
catch-up in international patenting activity resumed in the 1950s, but it regis-
tered a step back in various patenting locations in the mid-1960s, in the middle
of the so-called Golden Age (Figure 14.4). In the 1970s–1980s Italian patenting
activity in European patent offices seems to be back on a moderately growing
track (or on an effective defensive one relative to the relentless Japanese new
champion), whereas Italian firms continue to lose ground among US Patent and
Trademark Office (USPTO) foreign patentees. It is worthwhile recalling that the
statistics regarding patents granted by the USPTO capture in particular more
formalized, laboratory-based technologic innovation activities mostly developed
by the (few) Italian large corporations.
Moreover, Italian patenting in Europe in the past 150 years encountered rel-
atively fewer difficulties in France, Spain, and Switzerland than in Germany,
especially over the post–World War II period, perhaps because of less strict
“Latin” patenting systems and to those countries being the destination for
Italian technologically intermediate products.
Italy displays lower than average levels of patenting activity throughout
the entire period (although with a catch-up trend that still leaves a significant
gap) even when using the alternative proxy of the number of domestic pat-
ents granted to residents per unit of GDP International GK Dollars; Maddison
2010), notwithstanding their (usually) lower technologic grade. However, it is
confirmed both the sustained growth in patenting in the long Giolittian phase
and the flat patenting dynamics in the Golden Age, when the Italian economy
50
PANEL A
45
40 Japan UK Switzerland
35
30
25
20
15
10
0
1950 1960 1970 1980 1990 2000 2010
10
South Korea Finland Italy PANEL B
9 Netherlands Spain Sweden
1
0
1950 1960 1970 1980 1990 2000 2010
Figure 14.4 Selected countries’ patents granted in the United States as a share of total
foreign patents 1950–2008 (percentages).
was able to grow faster than average, “saving” more than average on domestic
patenting and on international patenting.
The comparisons between Italian patents and other foreign patents issued
in the United States show the limited number and share of Italian patents in
the early 1950s; the relatively vivid growth of the Italian share during the “eco-
nomic miracle years” up to the historical maximum of 4.1 percent in 1963 (much
closer to the shares of Italian patents in Europe), and a limited catch-up with
respect to the main industrialized countries, with the significant exception of
Germany; and the decline of Italy’s patent share during the subsequent four
decades. Certainly Italy did not experience, even during its economic boom
period, any “take-off” in foreign patent activity similar to those of Japan and
South Korea (since the mid-1960s and early 1990s, respectively). Excluding Japan
(the big winner of the post–World War II phase), however, until the early 1990s
the gap with respect to the other industrialized countries narrowed. In the last
two decades, instead, the dynamic of Italy’s patent activity in the United States
does not allow any further catch-up, even against mature competitors.
Since the early 1990s the relative underperformance of Italian foreign patent-
ing occurs on both sides of the Atlantic; in this phase the Italian performance
suffers from old and new internal difficulties and structural weaknesses, and
new successful patenting countries (the Far East tigers and Northern Europe
bouncing back).3 The Italian share of patents applied to and granted by the EPO
(including foreign patents of any nationality, hence the United States), however,
remains higher than the USPTO ones, because they decreased less significantly
in the 1990s and increased in the past 10 years, suggesting a better relative per-
formance of small- and medium-sized Italian firms in the “easier,” less alien
European patenting environment. Yet, the overall share of patents granted to
Italian residents remains rather modest, at odds with the country’s economic
weight, at USPTO (where Italy ranks tenth among foreign countries and totals
one-seventh of German patents in 2010) and EPO (where Italy ranks sixth,
including the United States, and totals one-fifth of German patents in 2010).
We have also collected patent data for sectors and technologic classes to be
able to break down by level of technologic content the Italian patents granted
by the USPTO over the entire period and by the EPO for the last decade. We
calculated the share of Italian sectors’ patents over foreign ones and a revealed
technologic advantage index, a patents specialization index, to identify the rel-
ative strengths and weaknesses of Italian technologic innovative performance
over 120 years (Table 14.1).4
Looking at the first catch-up phase (i.e., the Giolittian phase), Italian USPTO
patents gained ground (vis-à-vis other foreigners) across several sectors, but in
particular in the more advanced ones: rubber, transportation equipment, and elec-
trical equipment and supplies. In the whole interwar period, whereas total Italian
patents increased their share, they retrenched in crucial advanced chemical and
electrical sectors; the autarchic phase performance was particularly disappointing,
because Italian patents lost ground in all modern sectors except rubber. In the
crucial post–World War II catch-up phase, Italian USPTO patents gained ground
across all sectors and more toward traditional and technologically intermediate
sectors: Italian patents increased their share in textile, machinery, and chemicals
in particular, prefiguring the pattern that finally prevailed in recent decades. This
phase induced a shift further away from the initial technologic specialization in
electrical equipment (notwithstanding some transient 1960s–1970s progress in
electronics) and in transportation industry (worsened by a drastic retrenchment
of aircraft, imposed by post–World War II peace treaties).
Some light and some preeminent dark areas emerge over the long run: (1)
specialization in the machinery sector progressed significantly, crossing the
critical level of one after World War II and overcoming the 1.5 value in recent
years (also at EPO); (2) the process of technologic specialization in the chemical,
Table 14.1 Share of Italian patents on total patents granted to foreigners at the USPTO and index of revealed technologic advantage
USPTO Product Field 1890–1919 1920–1949 1950–1973 1974–1988 1989–2000 2001–2008
 RTA  RTA  RTA  RTA  RTA  RTA
Food 1 0.79 1.3 0.78 2.7 0.89 2.6 0.88 2.8 1.09 3.5 1.80
Textile 0.2 0.19 1.2 0.73 3.9 1.36 2.2 0.72 2.6 1.03 4.2 2.17
Chemicals 1 0.79 0.9 0.54 4.2 1.23 4 1.33 4 1.57 3 1.56
Petroleum extraction and refining 0.8 0.63 0.7 0.40 1.8 0.56 1 0.34 2.3 0.89 2.5 1.29
Rubber and plastics 1 0.83 2.8 1.69 5 1.96 3.2 1.07 3 1.19 3.2 1.64
Stone, glass, and concrete 1.1 0.89 1.3 0.79 2.6 0.83 2.3 0.78 2 0.79 1.9 0.97
Primary metals 1.5 1.22 1.3 0.76 2.3 0.72 2.3 0.77 1.6 0.62 1.8 0.92
Fabricated metal products 0.9 0.69 1.6 0.97 3 1.01 2.7 0.91 2.8 1.10 2.8 1.46
Machinery, except electrical 1 0.79 1.6 0.98 3.4 1.08 3.7 1.22 3.3 1.28 3 1.53
Electrical and electronic equipment 1.8 1.44 1.5 0.89 2.3 0.69 2.2 0.74 1.6 0.63 1.1 0.59
Transportation equipment 2.7 2.15 3.5 2.09 3.1 1.07 2.4 0.81 1.9 0.76 1.9 0.97
Professional and scientific instruments 1.3 1.04 1.9 1.12 2.3 0.76 1.9 0.62 1.5 0.61 1.8 0.93
All other SIC’s 1.4 1.13 2.5 1.48 3.7 1.17 3.6 1.19 3.3 1.29 2.4 1.26
Total 1.2 1.7 3.2 3 2.5 1.9
Note: RTA = index of revealed technologic advantage; SIC = standard industrial classification system.
Sources: Our elaboration on USPTO (2001, 2011), Cantwell (2002).
rubber, and plastic industry, after proceeding vigorously in the 1950s–1960s and
suffering problems in the three subsequent decades, approached relatively high
levels for a broader and more advanced set of fields in 2001–2008 (also at EPO);
(3) the Italian food and the textile industries reached levels of relative techno-
logic specialization after World War II, but became areas of high specialization
only in recent years, when these two product fields gained the highest (and
increasing) shares of USPTO patents (3.5 and 4.2 percent, respectively, in 2001–
2008), ahead of the chemicals and machinery fields (with a 3 percent each);
(4) started with significant levels of specialization, the transportation equip-
ment industry went through a process of relative technologic despecialization
after the 1950s, in particular as result of the nonautomotive disappointing per-
formance; and (5) in the sphere of electric and electronic a long run trend of
despecialization prevails with the index constantly well below one after World
War II, particularly the free-fall of the crucial information and communication
technology area (within a generalized retrenchment, except for household appli-
ances) in the past three decades.
Overall, the mechanical industry emerges as having faced the problem of
technology and made a more than average effort to equip itself with levels of
technologic skills and innovative capacity to be competitive on national and
international markets; industrial machinery, in particular, developed a well-
structured technologic base, establishing itself as an area of relative national
technologic strength. The rejuvenated traditional industries (largely in the area of
“made in Italy,” with the branches of textiles and clothing, leather and footwear,
wood products and furniture, ceramics, food, and so forth), although increas-
ing the quality of their output, also increased in recent years their involvement
in patent-rewarding innovation activity. The chemical industry, notwithstand-
ing an industry downsizing with important casualties, was able in the end to
broaden its technologic specialization over a higher number of product fields,
while sharpening its technologic participation in product niches. Instead, Italy’s
patenting profile remained seriously inadequate in the information and com-
munication technology field, where 46 percent of all patents granted by the
USPTO in the 2001–2008 period were concentrated and where Italy had only 19
percent of its USPTO patents. This suggests that Italian firms’ failed attempts to
make their mark in the high-technology electronics industry in the 1960s and
1980s generated an important and persistent weakness in the technologic strate-
gies of the Italian industry (Bussolati, Malerba, and Torris 1996; Antonelli 1999;
Barbiellini Amidei and Goldstein 2012).
Design and Models and Trademarks

Our dataset includes data on designs and models and trademarks, registered
domestically and abroad. This indicator captures less formalized innovative activ-
ities and should proxy investment in industrial design activities and light product
90.00
Italian designs & models in France
UK designs & models in France
80.00 US designs & models in France
German designs & models in France
70.00 Swiss designs & models in France
Spanish designs & models in France
60.00
50.00
40.00
30.00
20.00
10.00
0.00
1865 1870 1875 1880 1885 1890 1895 1900 1905 1910 1915 1920 1925 1930 1935 1970 1975 1980 1985 1990
Figure 14.5 Foreign countries industrial designs and models deposited in France as a
share of total foreign designs and models (percentages).
Our elaborations; data sources are in the text. For the period 1865–1940, three terms
centred moving averages; for 1965–1995, year data.
innovation. In the end Italian firms were better performing in relative terms in
these simpler innovative activities. However, from the late nineteenth century
until the 1930s, the Italian share of industrial designs and models deposited in
France seems modest in respect to other main foreign countries (Figure 14.5).
Since the 1960s the Italian shares of industrial designs in France and Germany
and the total number of Italian domestic design and models seem much closer
to those of industrialized competitors than the corresponding patent figures.
This result might also signal an increasing innovative contribution by Italian
small and medium-sized enterprises (SMEs), partly a substitute for a gradually
weakening more formalized and structured corporate-centered innovation.
In the same vein, trademarks, conveying information (to customers) about
new products and their qualities, can be a useful complementary indicator (an
underused one in economic history and in economics of innovation) especially
for analyzing product innovation by smaller firms in low-technology and inter-
mediate industries (Mendonca, Pereira, and Godinho 2004). Trademarks (and
design and models) command lower fees than patents and do not require a
technologic breakthrough. This indicator can capture innovation activities in
product differentiation and marketing, otherwise undetected. Italy’s share of
international trademarks remained for many decades rather low, one-tenth of
the main players’ ones (France and Germany), less than 4 percent of total trade-
marks recorded in Geneva until the 1930s (notwithstanding Italy’s first mover
joining of the International Trademarks agreement in 1883). It is otherwise true
that at the time legally backed trademarks, more often company names, were
“providing the basis” for the rise and establishment of the modern large inter-
national corporation (Wilkins 1992, 87), an area of structural weakness of the
0.2
German trademarks* French trademarks UK trademarks
0.18
US trademarks Italian trademarks**
0.16
0.14
0.12
0.1
0.08
0.06
0.04
0.02
0
1880 1900 1920 1940 1960 1980 2000
Figure 14.6 Trademarks recorded by residents in the reporting country, number on GDP.
Our elaborations; data sources in the text. Direct residents applications. *Registered until
1937. ** Registered until 1942.
Italian business environment. Italian trademarks revealed innovation activities

increased significantly during the post–World War II decades.
Italy’s relative positioning (vis-à-vis other main industrialized countries) was
destined to improve in particular since the 1970s, in domestic trademarks registered
by residents (on GDP), and in trademarks registered by Italians abroad (USPTO,
France, and European Community Trade Marks). Italian performance in terms of
trademarks is much closer in recent decades to that of its main competitors than
if measured in terms of patents (Figure 14.6). In 2003–2008 in particular, Italy’s
European Community Trade Marks applications ranked fourth, after the United
States, Germany (one fourth of), and the United Kingdom (at the USPTO Italy ranks
fifth among foreigners and totals one-half of Germany’s trademarks). Interestingly,
although the correlation between the two time series of trademarks and patents
(registered at home and abroad, expressed as absolute values and shares) was posi-
tive for most of the past century, in recent years it turned negative.
The Import of Foreign Technologies
Imports of Capital Goods

Investment in new machinery represented one of the main channels of intro-
duction of new technologies in industrialized countries in the twentieth century
(Rosenberg 1982; Rosenberg and Mowery 1998). This was especially the case for
Italy, which invested in foreign-produced machinery for much of its 150 years
30
Machinery imports (71-74 SITC) on machinery and equipment investments
Machinery import (71-74 SITC) on imports of manufactured goods
Imports of manufactured goods on GDP
25
20
15
10
0
1860 1880 1900 1920 1940 1960 1980 2000
Figure 14.7 Machinery imports on investment in machinery and on manufactured goods
imports (percentages)—Italy.
since unification. Our new time series show that machinery imports had a higher
and increasing weight as a ratio on national investments in machinery (and on
GDP and industry value-added) during the Giolittian phase, compared with the
1920s–1930s and, mutatis mutandis, to the post–World War II era, when taking
into account the 1950s opening of the domestic market with European integration
and international commercial liberalizations, and the new scale of intraindustry
trade characterizing the second half of the twentieth century (Figure 14.7).5
The increasing share of machinery imports on total manufactured product
imports since the 1890s, peaking at 18 percent in 1908, highlights Italian firms’
investment effort in foreign machinery during the Giolittian era. The imports
of specialized machinery, other than agricultural machines, reached significant
levels in terms of absolute values and as a share of total machinery imports
since the late nineteenth century. Interestingly the imports of machine tools, the
machines needed to make machines, started to grow since the 1920s, reaching
almost 30 percent of machinery imports at the end of 1930s.6 In the mid-1930s,
the capital equipment share of total imports was for Italy much larger than
for other industrialized countries (a multiple of 7, 3, 1.6, and 1.3 of the United
States, United Kingdom, France, and Belgium ratios, respectively).7
Even in the second catch-up phase the ability to adopt external foreign knowl-
edge depended initially on imports of foreign machinery. Even in the early 1950s,
the machinery share of total manufactured goods imports for Italy was significantly
larger than in other advanced countries (a multiple of 5, 3, 2, and 1.5 of the United
States, Germany, United Kingdom, and Belgium ratios, respectively). However, the
quantitative and qualitative development of the rising Italian machinery industry was
underway as a result of the tremendous increase of foreign capital goods purchases
50
FDI inward in France FDI inward in Italy
45 FDI inward in Germany FDI inward in Spain
FDI inward in UK
40
35
30
25
20
15
10
0
1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Figure 14.8 FDI inward (stock) as a share of GDP for Italy and other main advanced
countries (percentages).
in the early 1950s (also thanks to the Marshall Plan) and 1960s, when machinery
accounted for a historically high 25 percent of all Italian manufactured goods imports.
In subsequent years this percentage fell markedly; already in 1973 the Italian figure
was equal or lower to the one of its main trading partners, and in recent years the
machinery share of total Italian manufactured goods imports fell to only 10 percent.
Italian machinery exports grew strongly in the long run and the balance of specific
commercial trade in capital goods was positive from 1965 onward.
Inward Foreign Direct Investments and Foreigners’

Patents in Italy
The historical work reviewed in the third section considered inward FDI as
a primary vehicle for foreign technology transfer throughout the whole epoch
since unification. Our new estimates only partially confirm this finding:8 (1)
inward FDI (stock, nonfinancial) on GDP was highest for a long period before
and during the Giolittian years, whereas the 1920s’ recovery did not attain pre-
war levels; (2) after World War II, on top of the historically low levels reached
by the end of the Fascist period, the FDI/GDP ratio increased (as a result mainly
of American multinational investments in Western European countries) for a
shorter period only until 1970; and (3) since the 1990s with the new globalized
environment inward FDI shifts to (higher but) comparatively lower levels, rela-
tive to Italy’s main European trading partners (Figure 14.8).
Foreign technology was also historically channelled through patents regis-
tered in Italy by foreigners, often multinationals from technologically advanced
0.40 60.0
TBP receipts
TBP payments
0.35 TBP payments on R&D*
50.0
0.30
40.0
0.25
0.20 30.0
0.15
20.0
0.10
10.0
0.05
0.00 0.0
1955 1965 1975 1985 1995 2005
Figure 14.9 Technologic balance of payments as a share of GDP (percentages)—Italy.
Our elaborations; data sources in the text. * Right hand scale.
countries. Our index of the number of patents applied for by foreigners at the
Ufficio dei brevetti per unit of GDP shows that the importance of this chan-
nel increased since the 1880s to reach its historically and comparatively high-
est values at the end of the Giolittian phase (Barbiellini Amidei, Cantwell, and
Spadavecchia 2011). It is notable that the Italian ratio has been mostly higher
than that of other countries (United States, France, Germany, and Spain) for
much of the period until the 1930s. It was again high in the 1950s–1960s, but
decreased to lower than average levels in the 1970s. Interestingly, although the
correlation between the two time series of inward FDI and foreigners’ patents in
Italy was positive over the whole period, it decreases progressively.
The Purchase of Foreign Disembodied Technology

After the technical assistance supplied by the United States through the Marshall
Plan in the early 1950s, purchases of not-incorporated foreign technology, such as
patents, trademarks, designs, and technical assistance, registered in the Technology
Balance of Payments (TBP) progressed significantly in the decade and experienced
a dramatic expansion during the economic boom of the early 1960s (Figure 14.9).9
Italy’s effort to purchase technology abroad in the 1960s–1970s stands out
among OECD countries, and Italy reaches Germany as main importer in 1978,
ahead of Japan, the United Kingdom, and the United States (Barbiellini Amidei,
Cantwell, and Spadavecchia 2011). Until the mid-1980s, Italian acquisition of tech-
nologic knowledge experienced a sustained growth, reaching a value equal to 0.35
percent of GDP. When we consider that the national R&D/GDP ratio was below
1 percent for most of the period, it is then clear that the disembodied technology
imported was a crucial input of Italian innovative activity over the second half of
the twentieth century, during the Golden Age and beyond. Since the beginning
of the new millennium, the investment in disembodied foreign technology as a
share of GDP dropped to the levels of the early 1960s, without signs of any sig-
nificant “technologic emancipation” on the receipts side of the TBP.
Absorptive Capability and Domestic

Innovative Capacity
Technical Human Capital

To illustrate the building process of the national absorptive capacity (i.e., the capa-
bility to adapt and adopt foreign technologies) and the development of a domestic
innovative system, we first collected data on technical human capital. We built time
series of the number of engineers enrolled in Italian universities so as to proxy the
accumulation of higher technical skills. Three main results emerge (Figure 14.10):10
(1) the remarkable growth and weight reached by engineers’ share of total university
students during the Giolittian phase until 1920; (2) the subsequent dramatic decline,
after Gentile’s reform of the Fascist era (see Chapter 9); and (3) the less impressive
growth in the post–World War II period after subtracting, as is never done, the
students enrolled in engineering universities but following architectural studies.
Only before and during the first Italian catch-up, the Italian educational
system made significant selective investment in science-based technical human
capital (Lacaita 1973; Zamagni 1978b; Vasta 1999a). Yet, by the middle of the
twentieth century Italy had accumulated an adequate stock of high techni-
cal human capital as a result of its postunification investments in engineering
graduate studies. The mild growth of investment in engineering education of
the Golden Age and the relative retrenching of the 1970s and 1990s have prob-
ably had a negative impact in recent years.11
We then looked at the evolution of intermediate technical skills as prox-
ied by the number of technicians educated in Italian schools (Figure 14.11).
Interesting results emerge.12
First, the early and significant growth of the share of students enrolled in
industrial lower secondary schools was not matched by a similar investment
in intermediate technical education. The students enrolled in technical high
schools lagged behind and started to grow significantly only during the first
decade of the twentieth century, when the Giolittian catch-up was already well
underway, becoming a relevant share of secondary education only in the 1920s
and only for a brief period. Moreover, technical high schools in the Giolittian
30 2,5
Students enrolled in engineering courses
Students enrolled in engineering courses including architectural studies
Students enrolled in university as a share of Italian population*
25
2
20
1,5
15
1
10
0,5
5
0 0
1860 1880 1900 1920 1940 1960 1980 2000
Figure 14.10 Students enrolled in engineering as a share of university students
(percentages)—Italy.
phase were more focused on commercial education than on industrial pro-

duction needs (Genovesi 1998). Interestingly, a small but qualified number of
industrial lower secondary schools, often sponsored by local firms and busi-
ness institutions, were a key element in the development of local endowments
of manufacturing skills in scattered areas of North and Central Italy (Zamagni
1996; Moroni 2002; Lacaita 2009). Second, after the establishment of Gentile’s
30 6
Students enrolled in industrial and commercial lower secondary schools
Students enrolled in technical high schools
Students enrolled in industrial technical high schools^
25 Total students enrolled in higher secondary schools as a share of population*
5
20 4
15 3
10 2
5 1
0 0
1860 1880 1900 1920 1940 1960 1980 2000
Figure 14.11 Students enrolled in technical schools as a share of total secondary schools
students (percentages)—Italy.
Our elaborations; data sources in the text. ^ As a share of total students in higher
secondary education. * Right hand scale.
new educational system, a decline of all kinds of technical education prevailed

in the Fascist era. Third, strong and continuous growth of a new technical high
school education (Istituti tecnici superiori), with a broader and deeper epistemic
base and more focused on production needs, marked the second half of the
twentieth century (Vasta 1999b; Zamagni 2002a).
After World War II, structural change in Italy was accompanied on a much
lesser scale by a general increase in investment in human capital compared with
other industrialized countries, and relative to the investment in physical capital.
In the early 1950s, the Italian workforce had low levels of human capital acquired
by means of formal training and education, not only compared with the United
States, but also many European countries and Japan (Maddison 1995). Italy had
engineers and an on-the-job trained workforce of a high standard. The average
level of education rose dramatically during the fifty years after World War II,
but the most significant quantitative progress took place since the mid-1950s for
high school education, only since the late 1960s in terms of university education
(see Figures 14.10 and 14.11). Despite improvements, large gaps remained in the
area of formal education: even in the late 1970s little more than 40 percent of
those employed had finished middle school (a gap finally filled) and the percent-
age of graduates in the working population is still today comparatively low.
The relevant investment done in intermediate technical human capital before
and during the second Italian catch-up was important for the development of the
national absorptive capacity; Italian industry, and the mechanical sector in par-
ticular, experienced a new relative abundance of technicians of the Istituti tecnici
industriali, as witnessed by an increasing ratio of industrial high school students on
industry’s employees.13 This educated human capital, endowed with good structured
technical skills with some epistemic base, fruitfully matched the industry’s inter-
nal development of skilled labor, and was pivotal to the adaptation of technologies
being adopted from abroad, the development and successful exploitation of innova-
tions along vertical manufacturing filieres (Antonelli and Barbiellini Amidei 2011,
126–127, 174–175). However, by the mid-1960s, after two decades of dramatic growth,
the industrial technical high schools (the driving force and core component of the
new technical education) stopped gaining weight within total technical education;
the decline of the share of industrial technical high schools students, evident since
the mid-1970s, combined with an increasingly damaging quality loss, meant indus-
trial technical education progressively lost its leading role. The need for a new tech-
nical high school was recognized since the 1970s, but for decades the institutional
answer was unable to go beyond the project stage. In the 1990s the ratio of indus-
trial high schools students on industry’s employees started to retrench.
Research and Development Investment

The R&D expenditures statistics confirm that in post–World War II Italy the
public sector and above all the business sector invested few resources in research
activities.
0.25 1.4
0.2 1.2
0.15
1
0.1
0.8
0.05
0.6
0
19631965196719691971197319751977197919811983198519871989199119931995199719992001200320052007
0.4
-0.05
-0.1 0.2
GERD rate of growth ° BERD rate of growth ° GERD as a share of GDP (%) *
-0.15 0
Figure 14.12 R&D expenditures—Italy.
Keys: GERD = gross domestic expenditure on R&D; BERD =Business
expenditure on R&D.
Our elaborations; data sources in the text. * Right hand scale. °At 1990 constant prices.
The overall volume of Italian R&D expenditure (gross domestic expenditure

on R&D), starting from a rather modest figure in the mid-1950s (0.2 percent of
GDP, estimate), increased in absolute terms and relative to GDP in the 1960s
(doubling in the 1959–1963 economic boom) and 1980s in particular, because of
higher R&D activity taking place in the business enterprise and the public sec-
tor (Figures 14.12 and 14.13).14
4
USA
3.5
Japan
3
Germany
2.5
France
2
UK
1.5
Italy
1
Spain
0.5
Korea
0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Figure 14.13 R&D expenditures as a share of GDP in selected countries (percentages).
R&D rose from 0.6 percent of GDP in 1963, compared with an average 1.9
percent for the other six main OECD countries, to 0.8 percent in the mid-1970s
and a record 1.3 percent in the early 1990s, compared with average international
values of 2 percent and 2.3 percent, respectively.
Since the 1990s instead the gap between Italy and the other major OECD
countries widened with Italy down to 1.2 percent in 2008, when the international
counterpart recorded 2.4 percent. The distance behind the other main industri-
alized countries is considerable and the R&D/GDP ratio remains anchored at
rather low levels, incompatible with Italy’s economic position on the interna-
tional scene.
These figures suggest that in Italy R&D expenditures cover only a limited
part of the production of technologic knowledge useful for industrial inno-
vation. Such expenditures reflect a kind of behavior and operational criteria
typical of large firms active in sectors with a strong scientific base, with labora-
tories and scientific staff, quite rare in the Italian industrial landscape. Most of
Italian industry is characterized—increasingly since the 1970s—by a completely
different kind of firm, more often small to medium, active in traditional and
technologically intermediate sectors. The particular dimensional structure of
the Italian industrial system is the main determinant of the low involvement in
R&D activity, the original specialization model biased toward traditional sec-
tors being the second (Antonelli and Barbiellini Amidei 2007).
The investment effort of Italian private enterprises has a crucial part in
explaining the long-run evolution of Italian R&D. The weight of business sector
R&D expenditure, notwithstanding the initial long upward trend, remained rel-
atively modest in comparison with the other industrialized countries (53 percent
of gross domestic expenditure on R&D for Italy vis-à-vis 69 percent average for
the five main industrialized countries in 2008, down from an Italian record of
59 percent vis-à-vis 64 percent for other main countries in 1979, starting from 51
percent for Italy vis-à-vis 60 percent for others in 1965). For as long as the gap
was closing, the corporate system acted as the driving force of R&D growth,
with a particularly relevant role of state owned enterprises (SOEs) in the 1980s,
and the reopening of the gap since the early 1990s had much to do with the
weakening of R&D investment of Italy’s private and privatized business sector,
and with the shrinking of its corporate part.15
The evolution of the pattern of R&D expenditure by sector reveals some
interesting trends: the 1960s and 1970s were characterized by R&D growth in
sectors at the technologic frontier (in the fields of electronics, chemicals, and
nuclear power); since the 1980s there has been a relative fall in research activity
in high-technology industries and an intensification in intermediate technologic
industries (automotive industry, machinery, and electrical appliances; Antonelli
and Barbiellini Amidei 2011, 93, 99). In the long run, the mechanical industry,
in particular, gained ground and machine tools and robotics were among the
very few Italian industries showing R&D/turnover ratios in line with foreign
competitors (Onida and Malerba 1990; Parolini 1991).
1.5 15.0
Specialized, metalworking and industrial machinery (SITC 71-74)
1.4
Gross investment in machinery and equipment on GDP * 13.0
1.3
1.2 11.0
1.1
9.0
1
7.0
0.9
0.8 5.0
0.7
3.0
0.6
0.5 1.0
1860 1880 1900 1920 1940 1960 1980 2000
Figure 14.14 Ratio of domestic production of machinery and internal gross investment
in machinery—Italy.
Our elaborations; data sources in the text. * Right hand scale, percentage.
Domestic Machinery Industry

After 80 years in which Italian industry depended decisively on machinery
imported from abroad, innovation and structural change after World War II
fulfilled the opportunity to develop a domestic machinery industry, crucial in
the emerging Italian innovation system: since the mid-1950s domestic production
started to overcome internal investment in plants and equipment (Figure 14.14).
In the first phase of Italian post–World War II catch-up a significant part of
investment consisted of the purchase of foreign capital goods. This allowed access
to external foreign knowledge, provided an important impulse and input to the
process of imitation, creative adoption, and technologic innovation for investing
firms and domestic producers of capital goods. Significant foreign direct invest-
ments in the machinery and equipment sector in the 1950s probably played a part
in this (Colli 2010, 106). Increasingly, investing industrial firms targeted domes-
tically produced machines. It was with the economic boom of early 1960s that
internal demand for capital goods exerted decisive pressure on domestic industry:
the strong growth of investment, although initially finding the domestic produc-
tive structure unprepared and inadequate, set off significant up-grading, innova-
tion, and development of the sector. As can be seen from the data, since 1965
domestic production of capital goods exceeded significantly internal absorption
and the balance of specific commercial trade in capital goods turned structurally
positive. Exports grew strongly in the long run and Italy gained in this sector a
new significant and long-lasting competitive advantage (Figure 14.15).16
Machinery industry has become one of the main contributors of Italian
trade surplus: its weight on total manufactured goods exports passed from 3
24
23 Machinery and electrical machinery (SITC 71-74 and 77), 1893–1943
22 Machinery, electrical machinery, business & telecom. machines (SITC 71-74, 77, 75 and 76), 1893–1943
21 Machinery and electrical machinery (SITC 71-74 and 77), 1948–2009 *
20 Machinery, electrical machinery, business & telecom. machines (SITC 71-74, 77, 75 and 76), 1948–2009 * 2
19
18
17
16
15 1.5
14
13
12
11
10 1
9
8
7
6
5 0.5
4
3
2
1
0 0
1890 1910 1930 1950 1970 1990 2010
Figure 14.15 Ratio of machinery imports and machinery exports—Italy.
percent at the eve of the World War II, to 15 percent in the 1950s, and to more
than 30 percent in the 2000s (Figure 14.16).
The emergence of a domestic machinery industry competitive in developing
specialized machinery, tailored to the needs of the users, was a crucial com-
petitive factor for Italian industry in the second half of the twentieth century
(Antonelli and Barbiellini Amidei 2011). Through creative adoption, increasingly
reshaping foreign technologies so as to enhance their technologic congruence
with respect to the industrial domestic users, the development of the Italian
40
Imports machinery and electrical machinery (SITC 71-74 and 77) on manuf. goods
35 Exports machinery and electrical machinery (SITC 71-74 and 77) on manuf. goods
30
25
20
15
10
0
1860 1880 1900 1920 1940 1960 1980 2000
Figure 14.16 Machinery imports and exports as a share of manufactured goods imports
and exports (percentages)—Italy.
capital goods industry resulted in a reduction in the price of capital goods,

feeding capital deepening, in a decisive boost to the diffusion of technologic
innovation and to productivity growth in important domestic manufacturing
sectors (Antonelli 2006).
Starting in the 1960s, domestic demand for investment goods increasingly
concerned more specialized and technologically sophisticated machinery, stim-
ulating and feeding innovations by national suppliers, shaped through inter-
action with the industrial users. The impulse of the demand of the growing
Italian consumer durables industries (white goods, cars, motorcycles, type-
writers, in particular), was important, stimulating more formalized innovative
activity, through the purchase of licences abroad and the formation of joint
research centers. In the 1970s, the Italian machine tool industry entered a new
and important phase of growth, with the production of automated numerically
controlled machines (Antonelli and Garofalo 1978).17 Access to new foreign tech-
nology and incremental localized innovations increased the spectrum of manu-
facturing processes where the use of numerically controlled machine tools was
efficient. In particular, automated machines became attractive for small and
differentiated production batches, helping the search for productive flexibility
and favoring the spread of decentralization and articulation of manufacturing
industry’s productive processes across different production units (Carlsson and
Jacobsson 1991). During the 1980s, Italian producers were increasingly competi-
tive in adapting and applying the new technology to their typically specialized
and customized machinery for traditional industries, thanks to the relation-
ships linking capital good producers and users, and suppliers of components.
Also, since the 1970s the reliance of mechanical industry on foreign licences
decreased and sales of know-how and technical assistance increased; at the end
of the 1990s, the machinery sector accounted for a significant share of Italian
international patenting activity and R&D.
The innovations incorporated in machinery contributed significantly to
increase productivity, improve quality, and widen the variety of products in the
downstream manufacturing sectors. In particular, the innovative capacity of the
Italian machinery industry made a significant contribution to the competitive-
ness of the country’s traditional rejuvenated manufacturing sectors (Antonelli
and Barbiellini Amidei 2011, 162–174). As a result, the machinery sector played
a central role in post–World War II Italian industry innovative dynamics, as a
growing advanced branch of Italy’s productive system, a supplier of goods, a vec-
tor of technologic change, and a lever for technologic and organizational inno-
vation in end-user industries, becoming crucial for the diffusion of foreign and
indigenous technologic innovation through the domestic industrial fabric. Most
recent globalization trends may have weakened machinery-centered innovation
and diffusion processes, because the small size of firms makes it difficult to rec-
reate at an international level, in a global production structure, those mecha-
nisms of virtuous interaction between users and producers, and does not allow
substantial increases in investment in formal research and human capital.
Exports of Disembodied Technology and

Technologic Recombination
Tracking exports of disembodied technology and the TBP since the 1950s, we
are able to study the evolution of Italy’s relative degree of “technologic depen-
dence” and the process of technology recombination.
The TBP was constantly negative until 2005 as imports exceeded exports
throughout the whole second half of the twentieth century. Yet, since the
mid-1970s Italy was increasingly integrated within the system of international
technologic exchange also as a supplier. The TBP deficit decreased partly
because of an increase in exports and partly because of a slowdown in the
purchase of foreign technology. Italian exports almost matched disembodied
technology imports and a value of 0.3 percent of GDP in the second half of
1990s, starting from less than 0.07 percent in 1972 (see Figure 14.9). The balance
turned positive for the first time in recent years more as a result of a weaken-
ing of Italy’s transactions—in a dramatically enlarging international market for
technologies—than of a truly increased role as provider of technology, because
receipts of TBP were again down to 0.2 percent of GDP.
If we compare the two sides of the TBP, a marked difference in the way
not-incorporated technology was purchased and transferred emerges: 75 per-
cent of total expenses for patents and licences vis-à-vis 48 percent of total
receipts from technical assistance and designs on average in 1972–1988. This
contrast reflected, together with the weakness of domestic research activ-
ity and industry’s peculiar specialization, the original post–World War II
emergent Italian innovation system: the relevance of technical assistance
and know-how as a form of transfer of technology signalled the country’s
strength in intermediate technologies (mechanics in particular), in rejuve-
nated traditional technologies (“made in Italy”), and the importance of spe-
cific and localized learning in industrial innovation processes. The weakness
of Italian industry in exporting codified not-incorporated knowledge was
evident, and ancillary to the limited multinational growth of Italian firms,
notwithstanding the huge internationalization efforts and remarkable accom-
plishments reflected in export flows (Barbiellini Amidei and Goldstein 2010;
Chapter 15).
Also, the TBP geographic pattern prevailing until the early 1990s revealed
Italy’s positioning as an economy that made a heavy and systematic use of
recombination (on the basis of the creative adoption of foreign technology) as
the main process to generate new technologic knowledge. Italy bought codi-
fied technology from the more industrialized countries (63 percent of total pay-
ments in 1972–1988) in the form of greater relative value (patents and licenses)
and sold specific and tacit relationship-based technologic knowledge (technical
assistance, know-how, and designs) to less developed countries (45 percent of
receipts).
Since the mid-1990s a different and still forming phase opened: the geo-
graphic and technical pattern of the two sides of the TBP converged. In
recent years Italian technologic exchanges appear much more concentrated on
European Union and industrialized countries than in the previous decades
for payments and for receipts (62 and 65 percent, respectively with European
Union partners in 2009, 84 and 76 percent considering also the other more
advanced countries). Even the differences of the technical pattern of the two
sides of the TBP lessened (with a lower 18 percent of expenses for patents
vis-à-vis an increased 12 percent of receipts, a lower 54 percent of receipts
from technologic services vis-à-vis 35 percent of expenses on average in
1996–2009).
Looking at TBP sectoral distribution after the Golden Age a marked
concentration of technology purchases emerges in the field of electronics
(29 percent in the 1972–1988 period) and of sales in the field of chemicals
(25 percent) and mechanics (13 percent). Since the end of the 1980s the tra-
ditional sectors of “made in Italy” and since the mid-1990s transportation
equipment also gained ground as sellers of technology. During the first
decade of the new millennium mechanics became—alongside the trans-
portation equipment industry—the main contributor of the receipts side of
the TBP (around 15 percent), exhibiting a steady positive balance, machin-
ery performance being particularly relevant. Chemicals, instead, since the
mid-1990s dropped markedly as an exporter (below 10 percent), joining
information and communication technology as a main net buyer of foreign
technology. As a result, while mechanics in its many forms has become the
keystone of Italian technologic system, and the chemical industry represents
the challenge partly won but partly abandoned, electronics remains the
Italian technology’s Achilles heel.
Finally, to gauge the evolving degree of Italian reliance on foreign tech-
nologic sources in the last fifty years, we look at the ratio of TBP payments
on R&D expenditures (see Figure 14.9). The relatively high values of the ratio
until the end of the 1990s (more than 30 percent and far more than other
advanced countries) recall that the import of foreign disembodied technolo-
gies was in the post–World War II era and until recent years, an integral
and crucial part of the national innovative effort, a complementary factor
to R&D, an important input of Italian industry innovation processes. At the
same time, they point to a hard-won tendency to balance domestic and for-
eign sources of technologic knowledge, suggesting that the Italian process
of “technologic emancipation” and the formation of autonomous innovative
capacity were incomplete. Even the drastic decrease showed by the ratio in
the past decade, mostly explained by the retrenchment of Italian expenses for
foreign technologies and marginally by the modest increase in domestic R&D
investment, signals a less encouraging tendency toward a weaker investment
in the production at home and acquisition from abroad of codified science-
based technologic knowledge.
Impact of Foreign Technology on

Innovation: An Empirical Analysis
In this section we test the relationship between the three sets of variables com-
posing our original dataset (innovation activity output, technology import, and
domestic absorptive capability) so as to understand the contribution of foreign
technologic knowledge to Italian technologic innovative activity (inspired by
the approach of Athreye and Cantwell 2007). We examine the determinants
of Italian technologic innovation in the following regression equation (Nelson
1982b; Weitzman 1996, 1998):
Innovationactivity performance t = a+b1 Machinery imports t-1

+b2 Inward FDItt-55 b3 Engineers t-1
(1)
+b4 Technical students t-1 +b5 t-1 b6 Technological Gapt-5
+b7 Industry share tt-11 +ε t
The dependent variable is a simple (unweighted) average of the share of

Italian residents patents in total foreign patents in various host countries (the
United States, Germany, France, and Switzerland historically, and the USPTO
and the EPO since 1996); we appreciate that this measure especially reflects
innovative activities associated with large industrial firms. All explicative vari-
ables are lagged (one or more years) and log-transformed.
In the estimation of equation (1) over the 1889–2008 period (Table 14.2,
Column 1), we find positive and statistically significant coefficients for machin-
ery imports (relative to industry value-added) and high technical human cap-
ital (share of university students in engineering).18 The import of technology
embodied in plants and equipment supported and complemented the domestic
innovation processes, thanks to the accumulation of indigenous technical skills.
Meanwhile, the share of manufacturing industry in total Italian output has had
a positive (and statistically significant) influence on indigenous technologic
activities, which is consistent with a reading of this variable as an indicator of
modernization and a key driver of economic growth (Kaldor 1957, 1958, 1966).
Inward FDI (ratio on GDP with a five-year lag) has a negative effect on
Italian innovation, where a positive effect might have been expected if FDI is
thought of as an alternative means of importing technology. Indeed, it is known
that FDI did contribute to the establishment of some of the most innovative
industries in Italy that were most dependent on large-firm R&D. However, tak-
ing the period as a whole, and bearing in mind that patenting abroad reflects
best the innovative efforts of large firms, three observations about these firms
in the Italian case help provide an explanation for our finding. First, the largest
firms were the ones most likely to have been in competition with the inward
investments of large foreign-owned enterprises. Second, in Italy for a significant
Table 14.2 Innovation activity and foreign technology, Italy 1889–2008:

regression analysis (OLS); eq. (1).
(1) (2) (3) (4) (5) (6)
Variables 1889–2008 1889–1919 1920–1948 1949–1980 1981–2008 1981–2008
Machinery imp. 0.138*** 0.445*** −0.0300
(0.0444) (0.0743) (0.0312)
Inward FDI −0.202*** 0.752** 0.0303 −0.157*** 0.105 −0.0342
(0.0534) (0.356) (0.0695) (0.0432) (0.108) (0.0903)
Technologic gap 0.0869*
(0.0442)
Engineers 0.182** 0.815*** 0.288***
(0.0803) (0.166) (0.0546)
Technicians 0.497*** 1.021*** 0.796*
(0.174) (0.327) (0.431)
R&D 1.052***
(0.236)
Industry share 0.865*** −0.832 0.304** −0.148 1.528*** 1.666***
(0.157) (0.844) (0.131) (0.277) (0.490) (0.343)
Constant −1.989** −.534 −0.467 0.464 −6.944*** −6.484***
(0.601) (2.264) (0.448) (0.800) (1.873) (1.806)
Observations 118 29 27 32 29 29
Adj. R 2 0.526 0.805 0.520 0.159 0.606 0.854
F test 0 5.75e-09 2.82e-05 0.0101 2.44e-08 0
Note: Dependent variable: share of Italian patents abroad.

Robust standard errors in parentheses; * significant at 10%, ** significant at 5%, *** significant at 1%.
part of the period, the largest firms were to a great extent oriented to the domes-
tic rather than international market, and in this context they have operated in a
relatively closed or protected environment in which they have come to depend
on various kinds of government support but R&D public support. Third, and
crucially, in the research-intensive sectors in which inward FDI in Italy grew
most rapidly, the technologic capability base of large indigenous firms was on
average weak by international standards.
In examining the varying effects of US FDI in Europe across different
host countries and industries in the post–World War II period, Cantwell (1989)
showed how the local technologic impact depended on the extent of absorptive
capacity in indigenous firms. It was when the local industry in a host European
country had inherited a strong technologic tradition from the past (e.g., in the
case of the German chemical industry) that inward FDI precipitated an indige-
nous revival and a closing of the postwar technology gap with the United States,
because of a virtuous cycle of cumulative causation, in which the incoming FDI
provided a competitive stimulus that reawakened indigenous firms from their
relative slumber in what had been a cartelized environment. Instead, vicious
cycles may result where local companies have a certain technologic standing
but are significantly behind the leading foreign multinationals in their sector
(Cantwell 1987), because indigenous corporations’ innovative activity is eroded
by the more direct competitive presence of foreign-owned subsidiaries, relying
on best practice technologies derived from the innovation of their parent com-
panies in their respective home countries.
This scope for vicious cycles, and the domestic policy reaction of further
closing and protecting the domestic large firm segment of the economy, seems
to be a reasonable description of the average Italian case when looking at the
120-year period as a whole.
Interestingly, a preliminary econometric analysis of the relationship
between import of foreign technology and productivity growth over the same
period—using as dependent variable the Italian economy total factor productiv-
ity growth (see Chapter 7)—returns a positive significant contribution of inward
FDI to productivity growth (Barbiellini Amidei, Cantwell and Spadavecchia
2011). Although inward FDI may have had a dampening effect on domestic
technologic innovation (at least of larger Italian firms, as revealed by patents),
a direct productivity contribution of foreign controlled firms and the imitation
and adaptation by indigenous Italian firms of FDI-channelled foreign technolo-
gies, seem to have contributed positively to wider Italian economic growth in
presence of appropriate domestic absorptive capacity.
Turning now to the equivalent estimates for each of our subperiods, we
obtain, as for the 120-year period as a whole, positive and statistically significant
coefficients for the machinery imports and engineering students variables in the
first Giolittian phase (Table 14.2, Column 2). Interestingly, in this early phase of
Italian development, inward FDI had a positive and significant effect on indig-
enous innovation. This was the period in which German firms helped to develop
the Italian electrotechnical equipment industry, whereas as for Italian industries
patenting at the USPTO, we have recorded for this period a relative technologic
specialization in electrical and in transportation equipment. This phase thus
has some analogies with the experience of interwar Japan, in which local actors
learned from the direct presence of foreign-owned subsidiaries through inward
FDI in the earliest stages of industrial development, in some key sectors in which
there was indigenous potential for development (Cantwell and Zhang 2009).
Instead, in the Fascist period (Table 14.2, Column 3) we find positive and
statistically significant coefficients on the high technical skills and manufactur-
ing industry share variables. This was a phase of increasingly inward-looking
development, in which the continued building of local technical skills and the
commitment to industrialization were what mattered for innovation. In con-
trast, the imports of machinery and FDI did not play a significant role, although
some other international connections may have come through the movement
of people and commercial and technical contacts abroad, joint ventures, and
licence agreements.
In the Golden Age and its immediate aftermath (Table 14.2, Column 4), we
find a positive and significant effect of intermediate technical education (share
of technical high school students on total secondary education) but a negative
effect from inward FDI. So, local technical skills of a different character contin-
ued to matter, but regarding the impact of FDI this is the one phase that matches
our finding for the 120-year period as a whole, thereby demonstrating a vicious
cycle relationship between foreign-owned multinational presence and local large
firm innovation. During these years the innovativeness of the Italian economy
depended far more than previously on smaller new entrepreneurial ventures
developing their own export networks and often associated with medium sized
internationalized and small firm clusters, as in the archetypal case of the indus-
trial districts, which areas tended to be characterized by the limited presence
of foreign-owned multinationals. Yet, in the large scale domestic industry, in
which indigenous corporations carried forward some technologic capabilities
inherited from the interwar years, once exposed to a more internationally com-
petitive environment through inward FDI (in this phase particularly relevant
in the electrical equipment and chemicals industries) these capabilities were
adversely affected and further investment in them was discouraged.
In an earlier cross-country model depicting how the innovation outputs
of countries depend on their international relationships (Athreye and Cantwell
2007), we have distinguished between simpler forms of development associated
with basic technologic capabilities and intellectual property creation that rely on
arms-length trade relationships, as might be illustrated by machinery imports,
and more sophisticated forms of development associated with advanced tech-
nologic capabilities and R&D, relying on the more complex kinds of interna-
tional connections for knowledge development that are provided by FDI (and
TBP exchanges). This distinction between two types of innovation or techno-
logic learning offers a good representation of the characteristics of two different
phases of development that have been commonly observed (especially in recent
decades in East Asian countries). However, the association of these two types of
development path with an apparent sequence that runs first from an early stage
of less R&D-intensive development, and then to a later more mature stage of
more R&D-intensive development does not correspond with the Italian experi-
ence (Antonelli and Barbiellini Amidei 2011). Italian technologic development
has progressed successfully over the course of these decades, but it did not fol-
low the path to more R&D-driven forms of innovation. In the long post–World
War II catch-up Italy, innovation was relatively concentrated in intermediate
technology industries, and in terms of business functions it was much more
incremental, process- and design-based rather than R&D-based. Therefore, the

Italian innovation system came to rely mainly on intermediate technologic capa-
bilities fostered through trade relationships, often by entrepreneurial exporting
firms (many small, some large, increasingly medium sized) rather than by big
managerial corporations centered on sizeable R&D departments. Consequently,
because the first simpler incremental type of innovative development rather
than the second complex type characterized Italy since the 1950s, FDI was not
the driver of that development.
Another significant feature of post–World War II Italy is the different char-
acter of relevant human capital: technical high school education (more than
university engineering studies) became the best expression of local skill accu-
mulation, being pivotal in particular to the development of innovations pro-
cesses along vertical manufacturing filieres.
With respect to the most recent period of renewed globalization since 1980s
(Table 14.2, Columns 5 and 6), inward FDI was no longer significant (suggesting
that any vicious cycle of competitive erosion of indigenous large corporations
technical capabilities had mainly occurred already by that time), whereas the
intermediate human capital and the share of manufacturing industry were posi-
tive and significant. Because this formulation somewhat surprisingly is very sim-
ilar to the results of the increasingly closed interwar period, we introduced two
additional variables (either not available or less relevant for earlier years): R&D
domestic effort (as expressed by intramural R&D expenditures on GDP) and
an index of high-technology gap vis-à-vis the United States, in terms of inter-
national patents (i.e., the ratio of US patents granted in Europe, in France and
Switzerland, at EPO since 1996, over US population and Italian patents granted
abroad in Europe over Italian population, with a five-year lag). The positive and
significant coefficients obtained for both show that in the era of new globaliza-
tion the investment in local formalized innovative activity has become vital to
capture and integrate with foreign sources of technologic knowledge. Unlike
in the interwar increasingly closed period, the waning capacity to benefit from
international knowledge flows, as represented here through the combination of
our R&D and technologic gap variables, is a critical part of the last decades
Italian (underperforming) innovation.
Conclusions
This chapter has explored the long-run evolution of Italy’s performance in techno-
logic innovation as a function of international technology transfers, reconstruct-
ing the different phases and dimensions of Italian innovative activity, tracking
the transfer of foreign technologic knowledge through a number of channels. The
study has assessed a significant impact of foreign technology on Italian innovation
activity relying on a new dataset on innovation activity performance, foreign

technology transfer, and domestic absorptive capability on the 1861–2011 period.
For what concerns Italian innovation activity, the information referring to
inventions patented abroad—index of more formalized, laboratory-based tech-
nologic innovation activities, developed mostly by the few Italian large corpora-
tions—reveals that Italian patenting performance progressed over the twentieth
century, in particular in the Giolittian and in the post–World War II catch-up
phases, but remained modest in international comparison, at odds with the
country’s economic weight. Italian patent shares over the long run resulted
higher in European patent offices than in the United States, possibly signalling
a better relative performance of small- and medium-sized Italian firms in the
“easier” European environment. Since the early 1990s a relative stepping-back
of Italian patents seems shared by the two sides of the Atlantic. While the
Giolittian phase progresses were registered in the more advanced sectors, in the
crucial post–World War II catch-up, Italian patents abroad gained ground more
in traditional and technologically intermediate sectors, prefiguring the pattern
that finally prevailed in recent decades. Looking at designs and models and
trademarks deposited abroad and at home (proxy of light product, incremen-
tal, and less formalized innovation) a much better Italian relative performance
since 1960s–1970s until present day emerged.
Turning to the import of foreign technology, our new empirical evidence
showed that investment in foreign-produced machinery represented for Italian
firms the main channel for the introduction of new technologies for a relevant
part of the past 150 years. This was especially true in the Giolittian era and
at the beginning of the post–World War II catch-up phase, also thanks to the
Marshal Plan, whereas since the 1960s a process of quantitative and qualita-
tive development of the rising Italian machinery industry was set in motion.
Inward FDI as a form of technology transfer was especially important for a
long period before and during the Giolittian years, whereas after World War
II it was already retrenching in 1970 and since the 1990s was comparatively (to
main European trading partners) low. Interestingly, patents registered in Italy
by foreigners, often multinationals from technologically advanced countries,
while higher than in other countries until the 1930s, decreased to lower than
average levels since the 1970s. The imports of disembodied technologic knowl-
edge as registered by the TBP were instead particularly relevant all over the
second half of the twentieth century, also relative to other OECD countries;
not-incorporated foreign technology resulted in a crucial input of Italian firms’
innovative activity during the Golden Age era and beyond. Since the beginning
of the new millennium instead, the investment in disembodied foreign technol-
ogy as a share of GDP dropped markedly.
Looking at the building process of the national absorptive capacity, our
dataset showed that only prior to and during the first Italian catch-up did Italy
do a significant selective investment in science-based technical human capi-
tal, as expressed by university educated engineers; if this was capable to supply
an adequate stock at the start of the post–World War II phase, in subsequent

decades a weakening trend prevailed. However, prior to and during the second
Italian catch-up a relevant investment was done in secondary technical educa-
tion; the increased intermediate technical human capital was important for the
development of the national capability to adapt the technologies being adopted
from abroad. Since the 1960s the opportunity to develop a domestic machin-
ery industry, crucial in the emerging Italian innovation system, was fulfilled:
domestic production of capital goods exceeded significantly internal absorp-
tion, exports grew strongly, and Italy gained in this sector a new significant
and long-lasting competitive advantage. The emergence of a domestic machin-
ery industry competitive in developing specialized machinery tailored to the
needs of users resulted in a reduction in the price of capital goods, feeding
capital deepening, in a decisive boost to the diffusion of technologic innovation
and to productivity growth, in a crucial competitive factor for many Italian
manufacturing sectors. The statistical data on R&D expenditures instead con-
firm that in the second half of the twentieth century the public sector and above
all the business sector invested few resources in research activities. After three
decades of mild catch-up, since the 1990s the still considerable gap between
Italy and the other main industrialized countries widened. Moreover, since the
beginning of the new millennium, the retrenchment of Italian imports of dis-
embodied technology signals a not so encouraging tendency toward a weaker
investment in the production at home and acquisition from abroad of codified,
science-based technologic knowledge.
The econometric analysis confirms the significant contribution of foreign
technology to innovation activity results, and to productivity growth in prelimi-
nary estimates. Differences across channels of technology transfer and historical
phases emerge, also in connection with the evolution of human capital endow-
ment and domestic absorptive capability. The import of technology embodied
in plants and equipment supported and complemented the domestic innovation
processes, thanks to the accumulation of indigenous technical skills.
The accumulation of technical human capital significantly fuelled innova-
tion all over the period under analysis: in the first half of the twentieth cen-
tury, science-based technical human capital, as expressed by engineers, mostly
matters; after World War II, technical high school education became the best
expression of local skill accumulation, being pivotal in particular to the devel-
opment of innovations processes along vertical manufacturing filieres.
FDI was positively associated with formalized innovation activity results
only in the Giolittian period, whereas the association is negative and significant
for the overall period. Because our innovation measure reflects more accurately
innovation taking place within large firms, our results suggest that a vicious
cycle relationship between foreign-owned multinational presence and local large
firm innovation prevailed: in the second half of the twentieth century in par-
ticular, the technologic capabilities of indigenous corporations, once exposed
to a more internationally competitive environment through inward FDI, were
adversely affected and further investment in them was discouraged. This scope
for vicious cycles, and the domestic policy reaction of further closing and pro-
tecting the domestic large firm segment of the economy, seems to be a reason-
able description of the average Italian case when looking at the 120-year period
as a whole. Interestingly, preliminary econometric estimates show that inward
FDI did instead contribute positively to wider Italian economic growth, in the
presence of appropriate domestic absorptive capacity.
In the long post–World War II catch-up phase in particular, Italian indus-
try was able to develop a productivity-enhancing match of imported technology
and domestically generated technologic innovation in the form of formalized
innovation activity and indigenous machinery-embodied innovation, enjoin-
ing a virtuous cycle of imitation, adaptation, and localized innovation, in par-
ticular through the relationship between the upstream domestic machinery
industry and the downstream industrial users (medium- and low-technology
consumption good producers). Innovation was relatively concentrated in
intermediate-technology industries, and in terms of business functions it was
much more incremental, process and design-based rather than R&D-based.
Therefore, the Italian innovation system came to rely mainly on intermediate
technologic capabilities fostered through trade relationships, often by entrepre-
neurial exporting firms rather than by big managerial corporations centered on
sizeable R&D departments and FDI.
Within the last two decades instead, innovation activity underperformance
(more dependent than in the previous phases on the lower level of R&D invest-
ment) and the reduced imports of disembodied foreign technology (result of a
weaker Italian participation in the dramatically enlarging international market
for technologic knowledge) seem to have been directly associated with the dis-
mal productivity growth. In the era of new globalization the investment in local
formalized innovative activity has become vital to capture and integrate with
foreign sources of technologic knowledge, and the waning capacity to benefit
from international knowledge flows has a critical role in the last decades Italian
(underperforming) innovation.
Moreover, the new direction of technologic change, based on digital tech-
nology favoring the intensive use of highly educated human capital (relatively
scant in Italy), may have played a part in the recent decades’ innovative decay,
dampening Italian firms’ absorptive capacity and slowing down their processes
of creative adoption.
Acknowledgment
The authors thank discussants Nicholas Crafts and Giovanni Dosi, and Cristiano
Antonelli, Giovanni Federico, Claire Giordano, Matteo Gomellini, Fabrizio
Onida, Francesca Sanna Randaccio, Gianni Toniolo, and Vera Zamagni for their
comments on earlier drafts; the participants at the mid-term conference Banca
d’Italia, “Italy’s International Economic Position, 1861–2011,” Perugia December
10–11, 2010; the participants at the conference Banca d’Italia, “Italy in the World
Economy, 1861–2011,” Rome October 12–15, 2011; Joerg Baten, Albert Carreras,
Diego Comin, Elisabetta Merlo, Sandra Natoli, Patricio Sáiz, Jochen Streb and
Ivan Triglia for generously providing data or help in various forms; and the staff
of the British Library for their help and assistance. Any errors are our own.
Notes
1. For the main factors behind the launch of the ERP see the landmark work by
Milward (1984) and Killick (1997).
2. The major sources of our innovation activity output dataset are La Propriété
Industrielle: Organe Officiel du Bureau International de l’Union pour la Protection
de la Propriété Industrielle for the pre–World War II years; the Journal of the
Patent Office Society (see The Patent Office Society 1964); various publications by
the World Intellectual Property Organization (WIPO), in particular WIPO (1983);
publications by the Italian National Institute of Statistics (Istat); and Saiz (2005).
For recent years we accessed the online resources of the United States Patent and
Trademark Office (USPTO), the European Patent Office (EPO), and WIPO. For
references to data not displayed in this chapter, see Barbiellini Amidei, Cantwell,
and Spadavecchia (2011).
3. For the last fifteen years the reference for continental Europe patents is EPO.
4. The index is the ratio of the relative patents share—to foreign patents (to
all patents)—of the single industries and of the Italian national share at the
USPTO (at the EPO); an index bigger (smaller) than one denotes specialization
(despecialization). For the 1890–1962 period we rely on the US patent database
developed by John Cantwell at Rutgers University, with the support of the USPTO
(Cantwell 2002); for later periods we rely on USPTO (2001, 2009).
5. Our major sources for trade in and production of machinery are Federico et al.
(2011); Istat (1946–1954, 1949–2010, 1953, 1953–1987); Istat e Ice (2000–2009); OEEC
(1951–1958, 1959–1961); and OECD (1997, 2011a). For data on investments, industry
value-added, and GDP, see Data Appendix at the end of this book.
6. See Barbiellini Amidei, Cantwell, and Spadavecchia (2011). The machine tool
industry has been seen in economic history analyses as a crucial mechanism in the
diffusion of technologic innovation, at the beginning of the twentieth century for
the advent of methods of mass production (Rosenberg 1963).
7. Our calculations on Annuaire statistiques de la Société des Nations (1938–1939).
8. Our major sources for FDI are Direzione Generale di Statistica (1884–1925); Colli
(2010); Ufficio Italiano dei Cambi (1995); International Monetary Fund (1948–2010);
and UNCTAD (1991–2009).
9. Our major sources for TBP are Antonelli and Barbiellini Amidei (2007, 132–134)
for the 1956–1991 period, and Ufficio Italiano dei Cambi (1996) and Banca d’Italia
(1997–2009) for subsequent years.
10. Our major sources for engineering university students are Direzione Generale di
Statistica (1884–1925); Istituto Centrale di Statistica del Regno d’Italia (1926–1944);
and Istat (1949–2010, 1950–1972, 1973–1990, 1987–1998).
11. Net of the architecture and building field, in 2009 the share of students enrolled
in engineering on total university students was lower (and decreasing) in Italy (9
percent) relative to France and Germany (10.5 and 11.9 percent, respectively, both
increasing in recent years), and the European Union (10.1 percent; Eurostat 2010).
12. Our major sources for technical schools students are Direzione Generale di
Statistica (1884–1925); Istituto Centrale di Statistica del Regno d’Italia (1926–1944);
and Istat (1949–2010, 1950–1972, 1973–1990, 1989–1998).
13. See Barbiellini Amidei, Cantwell, and Spadavecchia (2011). The Istituto Tecnico
Industriale was developed in the post–World War II educational system as a
five-year secondary school teaching technical-scientific subjects relevant for
industry (mechanical and electrical engineering, measures, fluid dynamic,
automation, materials, and so forth). The number of Istituti Tecnici Industriali
increased from 89 in 1949, to 434 in 1969. During the 1950s Italian firms
developed the tendency to use educated technicians—in addition to skilled heads
of units rising from the ranks—to perform the role of chief-technician in the
production lines.
14. Our major sources for R&D are Antonelli and Barbiellini Amidei (2007); Istat
(2011c); and OECD (2011b).
15. The State enterprises were a real tool of public research policy and played a
central role in the (failed) building process of a corporate-centered national
innovation system. In Italy, State action to support research carried out by
(private) firms began instead only at the end of the 1960s and progressed very
weakly. See Antonelli (1989); Giannetti and Pastorelli (2007); Antonelli and
Barbiellini Amidei (2009); and Antonelli, Barbiellini Amidei, and Fassio (2012).
16. For sources see the section on imports of capital goods. The Italian share of
world exports of machine tools in particular doubled in 1955–1965 (from 2.5 to 5.4
percent) and increased in the subsequent decades (from 7.4 percent in 1975 to 9.1
percent in 1990 ahead of the United States, whereas Japanese exports managed to
gain a quarter of the world market, matching the German share; Mazzoleni 1999).
17. It is estimated that numerically controlled machinery accounted for 10 percent of
total Italian production of machine tools in 1978 compared with a slightly higher
share for Germany and double that percentage for the United States and Japan; it
rose to 38 percent in 1988, compared with a similar share for the United States, 50
percent for Germany, and 60 percent for Japan.
18. In the first column of Table 14.2 we have all the relevant variables available for
the whole period as determinants. For the subperiod estimates, also to increase
degrees of freedom, the least significant variables have been dropped, and the
estimates have been replicated without such variables.
Chapter 15
OLD AND
NEW ITALIAN
MANUFACTURING
MULTINATIONAL
FIRMS
Fabrizio Onida, Giuseppe Berta,

and Mario Perugini
Introduction
This chapter is a peculiar mix of short business histories and a survey of avail-
able data on Italian direct investment abroad. Our protagonists are strictly
defined as multinationals or transnationals, groups that decide to go beyond the
pure export strategy (i.e., producing domestically in single or multiple plants
and selling to foreign commercial intermediaries or direct foreign clients) by
undertaking direct investments abroad, with domestic housequarters keep-
ing majority or full control of production units, or at least commercial units
(distribution and after-sale) located outside the domestic boundaries. A rather
consolidated body of economic theories explains the decision to “go multina-
tional” rather than simply “selling abroad.” This theoretical framework applies
to manufacturing and service activities. In a nutshell, the determinants of this
decision of a national exporting firm to become a multinational firm can be
summarized in the following way. The home country firm’s “ownership advan-
tages” (knowledge, experience, technologic, and other invisible assets) become
more profitable and growth-enhancing in the medium and long run either by
(1) achieving a better proximity to local customers, making faster adaptations to
the standards of local demand (“market seeking” strategy, looking for a crucial
source of market power in pricing and distribution channels, so-called hori-
zontal foreign direct investments (FDIs)); (2) exploiting input cost differentials
(“cost-saving” strategy, so-called vertical FDIs), given the role played by econo-
mies of scale (multiple plants located in different countries rather than a single
domestic plant) and taking distance and related transport costs into account;
or (3) gaining new knowledge from the economic and technologic environment
of the host country (“invisible resource seeking”). A large body of empirical
evidence, through direct opinion surveys and econometric tests, leads to the
conclusion that “market seeking” is by far the major determinant of foreign
direct investments, compared with the more popular “cost saving” (delocaliza-
tion) and with the rather episodic “knowledge resource seeking.”
The choice between undertaking direct investment abroad or just opting
for a nonequity investment, such as licensing blueprints to an independent
or majority local partner, depends on the degree of risk aversion, managerial
resources, financial strength, and ultimate growth targets of the domestic firm.
Thus, “ownership advantages” combined with “locational advantages” and with
“internalization advantages” are the basic ingredients of FDIs (Dunning 1983;
Cantwell 1989; Markusen 1998).1
We divide the twentieth century into five periods: (1) until World War I,
(2) the interwar period, (3) 1945–1969, (4) 1970–1992, and (5) after 1992. Although
1914 and 1939 are obvious milestones, a bit of explanation is in order for the
other dates. The so-called “hot autumn” of 1969, a wave of massive strikes and
social unrest, which combined with the later 1973 oil crisis, put an abrupt end to
the post–World War II prolonged period of fast and steady growth of the Italian
economy (the so-called miracolo economico). The year 1992 was another cut-off
point, as the year in which the Italian lira was last devalued and authorities
launched a far-reaching, albeit still unfinished, program of economic reforms
that radically changed the environment in which corporations acted.
The following sections contain the historical profile of Italian multinational
growth along these five periods, and address the question of why Italian multi-
nationals can be seen as latecomers in the world scenario.
From the 1880s to World War I

Multinational growth of Italian companies lagged behind the historical record
of other European countries, where the first internationalization phase for the
old and new italian manufacturing multinational firms 419
manufacturing industry started in 1880 (Dunning 1983). Based on data from the
only available study of investments by Italian multinationals from 1900 to 1981
(Sanna Randaccio, 1985, in Acocella 1985), the first isolated cases of foreign pro-
duction expansion date back to the first decade of the 1900s (Table 15.1). This
source shows that in 1880–1914, despite a late start and a limited weight, Italian
industry did participate in the first wave of intense economic internationaliza-
tion. Italian investments were mainly directed toward less-advanced countries,
especially toward Latin America and Argentina in primis. The complementa-
rities between migration and investment flows are a distinguishing feature of
Italian participation in the first globalization (Barbero 1991).
In the first fifteen years of the twentieth century, foreign subsidiaries
included textile and food producers (in particular vermouth and alcoholic bev-
erages), yet there were also firms operating in more modern sectors of the sec-
ond industrial revolution.
A case in point is rubber. Pirelli’s production facilities or subsidiaries are
spread over several countries, and it has had an extensive export business since
the first decade of the 1900s.2 Pirelli opened its first commercial subsidiary in
1901 in Spain, thanks to valuable contacts that the company had established
with this country in previous years.3 At the turn of the century, after a decision
taken by the Spanish government to raise customs duties on certain products,
including electrical conductors, Pirelli had to rethink its penetration strategy for
that country. To bypass the costly new import tariffs, and to ensure a greater
scope of operations in Spain, the Milanese parent company opted to open a fac-
tory near Barcelona, in Villanueva y Geltrù (Bezza 1987, 411).
In Great Britain the company first established a trading partnership, Pirelli
Ltd. of London in 1909, and later built a factory for producing rubber goods
in Burton-on-Trent in 1929. Before this, Pirelli had already constructed two
manufacturing plants for cable production located in Southampton (in 1913) and
in Eastleigh (in 1927), partnering with General Electric Co. of London. In the
same way, Pirelli founded commercial subsidiaries in Austria, Belgium, France,
and Argentina in the first decade of 1900; these subsidiaries were quickly trans-
formed into local companies.
The aggressive commercial strategy, which characterized the group’s
entire initial internationalization phase, came to an end with the conclusion
of World War I. Until that point the company’s leading products were linked
to the electrotechnical sector (as we also saw in the development of foreign
subsidiaries). However, from the mid-1910s, starting around the time of the
crisis of 1907, tires took on greater importance. Tire production had actually
begun at the end of the 1800s, with the first bicycle tires produced in the
early 1890s. However, it was only with the new century and the advent of the
automobile that tires began to have a sizeable impact on the company’s rev-
enues. For example, in 1907, tires accounted for only 8.3 percent of Pirelli &
Company’s turnover, but in 1912 this quota rose to 23.7 percent of total sales
(Bigazzi 1981).
Table 15.1 Breakdown by sector of foreign subsidiaries founded by Italian firms (1900–1981)
1900– 1915– 1920– 1930– 1940– 1945– 1950– 1955– 1960– 1965– 1970– 1975– 1980–
1914 1919 1929 1939 1944 1949 1954 1959 1964 1969 1974 1979 1981
Mineral processing — — — — — — — — 5 4 4 10 1
Chemicals — — 2 1 — 2 2 7 7 2 9 5 1
Rubber 4 — 1 3 — — 1 2 4 7 12 7 2
Mechanical engineering — — — — — 1 — 3 7 7 12 9 7
(nonelectric)
Electromechanical engineering — — 1 1 — 3 5 4 6 6 9 10 15
Transport equipment — — 1 1 — — 4 1 3 4 10 10 5
Food 2 — — 4 1 1 2 4 5 4 7 8 2
TAPCC (fashion industries) — — — — — — — — — 4 2 8 2
Wood — — — — — — — — 1 1 2 3 —
Paper — — 1 — — — — — — — 2 0 1
Total 6 0 6 10 1 7 14 21 38 39 69 70 36
Source: N. Acocella, editor. 1985. Le Multinazionali Italiane. Bologna: Il Mulino, p. 39.

The Italian automobile sector, within the broader context of Italian industry,
was the second notable exception to the development model based on import
substitution. Italian companies succeeded in acquiring new product and process
technologies in a timely fashion and in so doing could compete with the most
industrially advanced countries in the world, in domestic and foreign markets.
Fiat, founded in Turin in 1899, rose to prominence for having based its initial
development phase on an export strategy (Bigazzi 1986, 209–264; Bigazzi 1991,
77–168). The company’s expansion from 1905 to 1907, for example, was fuelled
by foreign sales, which accounted for around two-thirds of turnover.
As regards foreign production, before the war Fiat had acquired minority
shares in two licensees in Austria (1907) and the United States (1909). This was
a step toward direct investment strategy in production. However, implementa-
tion of this strategy was slowed by the inconsistent results attained from these
initial production agreements with foreign companies, which were profoundly
shaped by political issues and market instability involving various countries in
question.4
The Interwar Period

After World War I, international expansion of Italian manufacturing enterprises
gained renewed momentum, in particular between the late 1920s and the early
1930, in reaction to deflationary policies implemented since 1926 by the Fascist
regime. This reaction by those companies more oriented toward foreign mar-
kets was intended to compensate for fluctuations in domestic demand and to
reinforce exports, despite the new unfavorable conditions (Paradisi 1976).
In the case of Fiat, after opening a Spanish subsidiary in 1919, the company
founded other subsidiaries in almost all the countries in Europe and some oth-
ers outside the continent.5 The transition from assembly to production in some
of the main sales markets coincided with an increasingly difficult export cli-
mate, caused by the revaluation of the lira, an increase in customs duties, pro-
tectionist measures implemented on all markets, and the war against imports
waged in several countries by local producers (Castronovo 1971). As a result, at
the end of 1928, Fiat began experimenting with assembly lines. In Germany, the
company partnered with NSU to buy a factory in Heilbronn, and in England
and France Fiat opened plants in collaboration with local companies. In 1930–
1931, it was Spain’s turn, where Fiat entered the market with a majority share in
the Fabrica nacional de automòviles of Barcelona and Hispano of Guadalajara,
retooling the latter’s factories to assemble cars locally.
Until the start of World War II, the foreign market remained vitally impor-
tant to Fiat’s growth, in particular throughout the 1930s. During this period,
exports proved necessary to guarantee the plants in Turin a sufficient scale of
production, because of the crisis and the monetary restrictions implemented

along with the autarchic policies in Italy. Nonetheless, export represented an
activity capable of ensuring acceptable profit margins only in markets that
were large in size and easy to reach, geographically and in terms of demand
segmentation.
Fiat found these conditions on the French market. In 1926, a subsidiary was
created called Société Anonyme Française des Automobiles Fiat, entirely con-
trolled by Fiat. The new organization quickly achieved impressive results. In
1930, the transition from an ad valorem tariff to a weight-based tariff, more
costly for imports, prompted Fiat to make a substantial increase in assembly
activity in France, and finally in 1934 the company founded Société Industrielle
de Mécanique et Carosserie Automobile (Simca), with the aim of further boost-
ing the share of value-added realized in France. Sales topped seven thousand
units in 1936 and peaked at 20,935 units in 1938 (Volpato 1993, 190). With this
exploit Simca became the fourth largest car manufacturer in France.
The geographic distribution of Italian investments abroad also reveals a
number of remarkably new phenomena. Before World War I, Italian companies
had invested primarily in Latin America (particularly Argentina), whereas for-
eign subsidiaries founded in developed countries accounted for only a third of
Italy’s total compared with two-thirds for continental European countries. On
the contrary, approximately 70 percent of the new Italian subsidiaries in the
interwar period were located in developed countries with a medium to high level
of industrialization. In addition, FDIs encompassed a wider variety of sectors
with higher levels of specialization. From 1920 to 1939, the more technologically
advanced sectors made the greatest contribution to the expansion of Italian man-
ufacturers beyond national borders, including rubber and tire, transport equip-
ment, chemicals and artificial fibers, paper, electromechanical engineering, and
office machines. Some new companies entered the international market, such
as Società di Navigazione Italo-Americana (SNIA, artificial textiles); Montecatini
(chemical products); and Olivetti (office machines). We define these three firms
as “one season protagonists,” because their international success only lasted a
few decades, largely coinciding with the so-called Italian economic miracle.
SNIA, for instance, was the first Italian chemical company to attain extensive
international reach. Founded by entrepreneur Riccardo Gualino in Turin in July
1917, SNIA’s original business was transporting coal to the United States (Spadoni
2003). In 1920, a serious crisis in the shipping business prompted top manage-
ment to convert the company’s production to artificial textile fibers derived
from cellulose, in particular rayon (or viscose). To reflect this new development,
the company’s original name was changed to SNIA Società di Navigazione
Industria e Commercio, and again in 1922 to SNIA Viscosa (Società Nazionale
Industria Applicazioni Viscosa). In the years to follow, SNIA Viscosa continued
its expansion, taking over other Italian companies specialized in rayon produc-
tion (Unione Italiane Fabbriche Viscosa, Viscosa di Pavia, and Società Italiana
Seta Artificiale). At the same time, the company achieved vertical integration
by buying a majority stake in Rumianca, a producer of chemical compounds

that were indispensable for manufacturing artificial threads, and SILM, a sup-
plier of plant machinery and equipment needed to produce rayon.
These investments enabled SNIA Viscosa to participate fully in the interna-
tional expansion phase of new technology in artificial cellulose fibers. In 1925,
the quantity of artificial fibers produced by SNIA totalled 43,000 quintals a day,
equalling 70.3 percent of Italian production, 16.6 percent of European produc-
tion, and 11.3 percent of world production. Along with these results came other
important accomplishments: SNIA became the Italian company with the larg-
est share capital (one billion lire), and was also the first to be listed on foreign
stock exchanges (London and New York).
The Turinese group also sought to extend its field of action internation-
ally, not only through exports, but also by direct penetration in foreign mar-
kets through the establishment of commercial and production branches. By the
end of 1920, SNIA Viscosa had created two companies in the United States,
the Commercial Fibre Corporation and the Industrial Fibre Corporation of
America; the latter launched rayon production in a factory built in Cleveland,
Ohio (Wilkins 1989, 152).
In 1925, thanks to intermediation by the Banca Commerciale Italiana, SNIA
acquired majority shares in the Polish company Tomaszowska Fabrika. This
investment gave SNIA two distinct advantages: first, the company was able
to extend its market share in Poland while avoiding high customs duties; sec-
ond, it could exploit the factory’s strategic position in close proximity to the
Russian market. Over the years, SNIA also opened business firms abroad, and
owned as many as six in 1931 (Spadoni 2000, 107). However, SNIA’s golden age
came quickly to an end. Mussolini’s monetary revaluation, which took effect
in August of 1926 (“Quota 90”), dealt a heavy blow to the company, which
exported 80 percent of its turnover and imported only a minimal portion of
raw materials (from 7 to 11 percent of the cost of production).
The company did not recover completely until the second half of the
1930s when the autarchic policies implemented by the Fascist regime not only
spurred domestic consumption of artificial textile fibers, but also drove exports.
To boost foreign sales of goods made of artificial fibers, a sizeable increase in
export bonuses took effect in February 1934. SNIA diversified production when
it began making viscose staple, a short fiber that could be used as a cotton sub-
stitute; in 1934–1935 the company became the world’s number one producer of
this fiber (Castronovo and Falchero 2008). SNIA Viscosa also launched domes-
tic production of cellulose, most of which had previously been imported.6 As
regards the group’s foreign business, exploiting the political affinity with the
Franco regime in Spain, in the late 1930s SNIACE was founded, a company
headquartered in Madrid with production facilities in Torrelavega (Santander)
(Spadoni 2003, 140).
Nevertheless the most important Italian foreign direct investment in the
chemical sector during the interwar period was made by Montecatini. The
company, founded in 1888 to mine a copper deposit in Tuscany, had entered

the chemicals sector with a series of acquisitions undertaken from 1913 to 1920.
The most significant industrial initiative involved the field of nitrogen-based
fertilizers, with the creation in 1921 of a company that would exploit a process
for production of synthetic nitrogen invented by Giacomo Fauser. This move,
enabling Montecatini to bypass the technologic monopoly created in this sector
by the German company Basf, marked the start of a large-scale development
plan that led to the construction of five nitrogen fertilizer plants in Italy from
1925 to 1927.
In 1926, building began on the first foreign factory (in Willebroek, Belgium)
managed directly by Montecatini through the Belgian company SA Ammoniaque
Synthétique et Dérivés. In January 1929, Montecatini founded the Compagnie
Neerlandaise de l’Azote, headquartered in Brussels, with the aim of building
a large synthetic ammonia and fertilizer plant in Sluiskil, a small village in
the Dutch Flanders. The objective this time was not only to enter the promis-
ing Dutch market, but also to access world export markets thanks to the low
production costs available in Holland. The Sluiskil plant began operations in
November 1930, and until June 30, 1931 production was restricted by quotas set
by an international nitrogen cartel, which Montecatini joined in summer 1930,
in the interests of the Neerlandaise. In June 1932 a new international nitrogen
cartel took over, lasting two years, and counting almost all the world’s producer
countries as members. This cartel established a series of agreements setting
prices and curtailing production. One of the key accords addressed compen-
sating producers who agreed to limit production. The highest compensation
was to be paid to Neerlandaise: 4.5 million gold marks per year in exchange
for restricting Sluiskil annual production to fifteen thousand tons of nitrogen,
30 percent of the actual production capacity (Devos 1992). For Montecatini,
faced with a difficult financial situation in Italy because of the global crisis,
the agreement also guaranteed protection of the Italian market by preventing
other cartel members from exporting to this country. The agreements with the
International Nitrogen Cartel remained in effect until the outbreak of World
War II, and marked the end of Montecatini’s internationalization process, for
all intents and purposes.
1945–1969: Italian Multinationals

during the Economic Miracle
Foreign expansion of Italian firms accelerated during the 1950s and early 1960s,
a period coinciding with the strongest Italian economic growth performance in
the postwar period, pulled by a record expansion of domestic demand, domestic
saving, and export in a rapidly integrating European market (the so-called eco-
nomic miracle). In the two decades 1950–1971 Italy managed to achieve a 4.9
percent annual growth of per capita income, well above the 3.8 percent for the
European average. In 1950, the Italian per capita income was one-third that of
the United States, and in 1970 it had become two-thirds (Toniolo 2004). In 1963
the investment/gross domestic product ratio reached a record 25 percent. The
Italian saving propensity in those two decades was second only to the Japanese,
well above 20 percent. Until the 1969 “hot autumn,” which was a turning point
in industrial relations, in those two decades Italy went through a record growth
of output and productivity (pulled by rising capital/labor ratio and younger
stock of capital) with a prolonged wage moderation. At the same time an excel-
lent profit performance was a powerful incentive to new investments, which in
their turn induced rapid shifts of labor force from traditional to more modern
and faster innovating sectors (see among others Rossi and Toniolo 1996; Rey
1982). Thus, investing abroad was not a clear priority for business reaping the
benefits of a lively domestic expansion.
In the 1950s, thirty-five new manufacturing subsidiaries were opened, more
than the total number for the entire first half of the century. Direct investment
was no longer an exception, but rather it was becoming a common growth path
for major companies already more or less strongly export-oriented. In particu-
lar, from 1945 to 1954 Italian firms were most active in electromechanical engi-
neering and the office machines sector, with eight international subsidiaries
(Table 15.1), mainly reflecting Olivetti’s internationalization strategy.
The company founded in 1908 by Camillo Olivetti, for the purpose of
designing and producing typewriters, had already made some FDIs before 1945,
for instance opening its first subsidiaries with their own production facilities
in Spain (Barcelona) and Argentina (Buenos Aires). The company’s postwar
recovery was led by Adriano Olivetti, son of the founder, and was underpinned
by a deep transformation of the production structure and commercial strat-
egy. Advances in terms of efficiency and cost cutting were considerable, and
made production diversification possible in the direction of the first calculat-
ing machines, a market segment that promised significant opportunities for
international expansion. By the mid-1950s more than half of Olivetti’s pro-
duction was exported; from 1950 to 1961 Olivetti’s export of typewriters grew
seven times and export of calculating machines grew an amazing twenty-three
times.
Olivetti expanded its business in Latin American by creating commercial
branches in Mexico and Colombia, and by opening a new factory in Argentina.
In Europe, instead the company founded British Olivetti Ltd and Olivetti
Buromaschinen AG in Austria. By 1958, three more foreign production facilities
opened in Scotland, Brazil, and South Africa (Caizzi 1962, 234). Olivetti shored
up its commercial network in the years that followed by opening new subsidiar-
ies in Europe (Demark, Sweden, Netherland, Greece, and Finland) and in South
America (Venezuela, Peru, Uruguay, and Chile).
By the end of the 1960s, Olivetti had fully achieved multinational status,
with operations in the biggest markets in Europe, North and South America,
and thirty foreign commercial subsidiaries. In 1968, the group’s Italian turnover
accounted for less than 20 percent of the total, lower than United States turn-
over (27.3 percent). The company had 33,255 foreign employees, compared with
27,426 in Italy. Again in 1968, around 35 percent of Olivetti’s production was
realized outside of Italy. In 1969, the group’s industrial plants numbered eleven
in Italy and ten abroad, counting assembly plants (Johannesburg, Toronto,
Bogotá, and Santiago in Chile) and integrated works (Barcelona, Glasgow,
Buenos Aires, San Paolo, Mexico City, and Harrisburg in Pennsylvania) (de
Witt 2005).
The most important internationalization experience for the company had
begun in 1950 when Olivetti embarked on its commercial penetration of the
enormous American market, founding the Olivetti Corporation of America in
New York. Finding a low level of competition in the calculator segment (with
Remington Rand representing the only real competitor), Olivetti was able to
base its growth strategy on product quality and innovation, rather than price
leadership. By 1958, America had become Olivetti’s main export market, with
more than 20 percent of total export.
In October 1959, after brief negotiations, Olivetti signed an agreement to
pay $8.7 million for 35 percent of Underwood stock, a company with an exten-
sive sales network and a prestigious name in American industry. The aim of the
acquisition was to create a solid direct presence on the American market, which
was considered crucial to achieving growth. However, there was an underes-
timation of the serious obsolescence of Underwood’s factory in Hartford,
Connecticut, because of lack of investments in previous years. Olivetti man-
agement then carried out a deep reorganization of Underwood at a produc-
tion and organizational level; in 1960 the daily output of the Hartford factory
nearly tripled, while production costs dropped by 30 percent. Nonetheless,
results were very disappointing. The financial commitment required to turn
the American company around was particularly burdensome; additional losses
were discovered, previously concealed in Underwood’s balance sheets, factories
were dilapidated, and reorganizations proved more costly than anticipated. A
few years later, Olivetti claimed that it had spent $48 million from 1959 to 1964
to acquire and reorganize Underwood, but according to a Harvard study the
actual amount was closer to $100 million (Barbiellini Amidei, Goldstein, and
Spadoni 2010; Soria 1979, 15–25).
By early 1963, the costs of the Underwood deal, combined with enormous
investments in electronics made by the company beginning in the mid-1950s,7
had sunk Olivetti into a severe financial crisis, further aggravated by a drop in
demand on international markets. In May 1964, a rescue consortium made up
of industrial concerns (Fiat and Pirelli) and financial institutions (Mediobanca,
IMI, and La Centrale) intervened by acquiring 25 percent of the group’s share
capital, and effectively taking over control from the Olivetti family.
In 1964, to restore the company to financial health, the new own-

ers decided to sell a 75 percent stake in the Electronics Division to a new
joint-venture—Olivetti-General Electric—created with the participation of the
American colossus General Electric, which bought the remaining 25 percent in
1968. With this deal Olivetti left the sector of medium and large electronic cal-
culators, but kept designing and producing terminals and small systems.8 The
technologic transition from electromechanics to electronics and computers ini-
tiated in the 1950s came to a standstill. Thus, an historical opportunity was lost:
to move into the new world of computers with a head start on many interna-
tional competitors.
In the chemicals sector, mainly because of Montecatini and SNIA, between
the second half of the 1950s and the first half of the 1960s there was a remark-
able surge of FDIs. After World War II, SNIA continued its foreign activi-
ties with direct investments concentrated in third world countries, mainly in
Latin America. During the 1950s and 1960s, SNIA’s foreign production arm
extended to other countries, India and Russia among them (SNIA 1970), a strat-
egy aimed at offsetting diminishing exports in European markets with larger
“tariff jumping” market shares in developing countries implementing hard
import-substitution policies. SNIA’s technology gaps accruing in this area were
becoming more and more serious.9
The Turinese group made its fortune from rayon, but by the late 1950s this
material had reached the apex of its commercial success, and was on the verge
of a rapid decline because of the increasing popularity of synthetic fibers, whose
worldwide production kept growing until 1973, matching a decrease of cellulose
production in most industrialized Western countries. The 1973–1974 oil crisis
triggered a similarly critical situation in the sector, exacerbated by a sizeable
accumulation of excess capacity. From 1973 to 1975, SNIA’s sales plummeted by
more than 40 percent, and the subsequent financial crisis ultimately moved the
company into the orbit of Montedison, which acquired 30 percent stock in the
Turinese group in 1974. In the years that followed, SNIA gradually began spin-
ning off its activities in the fiber sector, including participation in foreign com-
panies, and started diversifying its business in the sectors of chemical products,
explosives, and arms. By the late 1970s, turnover in the fiber sector accounted
for only 40 percent of the total, and on a downward trend.
The path of Montecatini in this period was more complex. In the early
1950s, Montecatini successfully led the way into the new era of petrochemi-
cals by financing research led by Giulio Natta, whose discovery in 1953 of a
new thermoplastic polymer, isotactic polypropylene, launched production on
an industrial scale in 1957 in the Ferrara plant. Natta’s discovery gave rise to
opportunities for the company to develop new initiatives in the field of plastic
materials and synthetic fibers, based on owned technology and not depend-
ing exclusively on buying licenses or patents (Saviotti 1990). In the second half
of 1950 Montecatini decided to explore again the possibility of multinational
expansion with the aim of fully exploiting the technical capabilities and know
how gleaned from industrial processes patented by Fauser and from Natta’s
more recent discoveries.
In 1955, after having explored the opportunities of the domestic markets,
Montecatini management opted to build a chemical plant in the United States
for the production of polyvinyl chloride and eventually production of plastic
materials with the technology being developed by Natta’s research team. Besides
a little economic motivation to invest in the United States, the most sophisti-
cated market in the world, building a direct production hub in America was a
prerequisite for listing Montecatini on the New York Stock Exchange, and facil-
itating the extension of the company’s patents to encompass the United States
(Bezza 1990, 346–349).
Despite the modest size, the new company Novamont had a turbulent exis-
tence from the outset. In 1959, after putting the investment plan on hold for two
years, Montecatini issued a 20-year bond worth $10 million on the US market,
in view of building a plant for isotactic polypropylene production and other pet-
rochemical products in Neal, West Virginia, while abandoning the original pro-
ject of producing polyvinyl chloride. However, almost immediately Novamont
began to encounter serious difficulties in commercializing polypropylene, stem-
ming from a series of industrial problems, such as the failed attempt to secure
patents, and the consequent bitter competition from local companies, such as
Hercules and Standard Oil, which were able to introduce process innovations
that seriously damaged Montecatini’s position on the American market (Saviotti
1990, 393–394).
The establishment of Novamont, therefore, proved tantamount to “beating
a hasty advance.” Despite the unquestionable capacity for innovation, demon-
strated with the development of propylene, the company was fundamentally
ill-prepared to move forward on its own with a direct investment strategy in
intensely competitive markets. It was burdened by indecision regarding pro-
duction options, financial difficulties, and an inadequate commercial network
(Amatori 1990).
The strategy for expanding into petrochemicals, initiated after World War
II, called for major investments, which gradually pushed Montecatini beyond
the limits of its managerial and financial capabilities to the point where in
the mid-1960s the company was forced to tap external resources, industrial
and financial (Saviotti 1990, 395). In doing so, Montecatini embarked on two
major initiatives in 1964: absorbing the former electric company Sade, which
brought in large sums of fresh capital from the nationalization of the electric
sector; and setting up a joint venture with Shell. Monteshell took over the
Ferrara and Brindisi petrochemicals plants. The Anglo-Dutch group contrib-
uted technologic know-how, market expertise, capital, and new management
techniques, but soon it was clear that the two companies had managerial and
technical routines far too different to allow them to work together. After this
initiative failed, Montecatini’s new goal was to merge with Edison, as it hap-
pened in 1966.
Unfortunately the merger of Montecatini and Edison, which was sup-

posed to resolve the “chemical war” at home and create an internationally
competitive Italian champion, did not live up to expectations.10 The impres-
sive size of the new company, which in 1969 took the name Montedison,
made it the tenth largest group in the world in terms of turnover in the
chemicals industry. Thus, the company enjoyed a fairly prominent position in
international rankings, but only in basic chemicals and derivatives, because
the company had little or no business in the sectors of fine chemicals and
special chemicals,
Another serious weakness of the Italian company was a much lower level of
internationalization, compared with key competitors, and consequently a greater
dependence on the domestic market. Despite an established commercial pres-
ence in twenty countries, in 1968 the company’s foreign turnover accounted for
36.3 percent of the total (88 percent of this was realized in Europe); of this per-
centage, 81 percent was exported from Italy and 19 percent was produced by for-
eign subsidiaries. This last figure, therefore, corresponded in absolute terms to
only 6.8 percent of the group’s global turnover, little more than half the average
value compared with the major German companies (Basf, Bayer, and Hoechst)
and a great deal less than the 32.5 percent of the British ICI and the 33.6 percent
of the French Rhône Poulenc (Marchi and Marchionatti 1992, 40–41). Moreover,
the new company had been founded without any clear internationalization
strategy, merging two companies with serious financial and industrial problems
(Barca and Trento 1997, 533–559).
In the transportation equipment sector, the second half of the 1950s saw a
temporary slowdown in the growth of foreign subsidiaries, caused by a strong
focus of Fiat’s growth strategy toward the booming domestic automobile mar-
ket. In Italy, as reconstruction gradually made headway, a strong latent demand
for private automobiles emerged. What the market needed was a small-size car
that, thanks to its low running costs, could satisfy a clientele with limited buy-
ing power; this car was to be produced in large volumes to exploit the econo-
mies of scale made possible by new technologies. In 1955, Fiat presented the first
authentic Italian people’s car—the 600—followed by a further consolidation in
1957 with launch of the Nuova 500. The surge in production was spectacular: in
1950 for the first time more than one hundred thousand vehicles were produced
in a year, in 1960 production topped five hundred thousand units, and in 1966
it exceeded 1.5 million mark.
As regards the internationalization process, these strong quantitative
dynamics should have had a powerful impact on export opportunities for Fiat.
However, the main focus was on serving the domestic market, characterized by
a strong preference for vehicles that, on average, were much smaller in size than
the prevailing demand in other major industrialized countries. Fiat’s forced
specialization on small cars not only meant a limited foreign market, but also
fewer research and development opportunities capable of generating sophisti-
cated technologic innovations in car design. Even the impact on Fiat’s image
was not insignificant, because outside Italy the company became known as a
carmaker specialized in small vehicles.
1970–1992: From the Oil Shocks to

the Disappearance of “One Season
Protagonists”
The overall economic scenario changed dramatically during the 1970s and early
1980s: dwindling profit margins under the pressure of rising wages and slowing
productivity growth (labor unrest), inflationary impact and rapidly deteriorating
trade balance from the first oil shock, accompanied by marked depreciation of
the lira after the breakdown of the Bretton Woods exchange rates regime. The
slowdown in domestic demand spurred major efforts to expand exports, while
attempts by the Bank of Italy to put credit ceilings and penalties on short-term
capital exports created a domestic macroeconomic environment relatively unfa-
vorable to long-term planning of business multinational expansion.
The 1970s were also a time of major divestments, in particular in automo-
tive, electric machines and office machines, and in the chemicals industry. As
regards the first two sectors, this was primarily the result of reorganizations by
Fiat involving its foreign operations, and by Olivetti preparing for a new inter-
nationalization phase that would begin in the early 1980s. Divestures recorded
in the chemicals industry were attributable to a sector crisis rather than foreign
portfolio reorganization.11
In the case of Fiat, by the mid-1960s, it was clear to owners and top man-
agers that the only solution to the weakened international reach of the group
was an alliance with another European producer. In 1967, Fiat decided to sell
its shares in Simca to Chrysler, in light of an imminent opportunity to buy
into Citröen share capital with a sizeable quota. This plan went in effect in
October 1968 through a cooperation agreement and the purchase of 15 percent
stock in the French group by Fiat, which consequently became the number two
shareholder after Michelin. The next step was taken in 1970, when after a capi-
tal increase by Citröen, Italian participation rose to 26.9 percent. At this point,
however, opposition from French shareholders began to grow. What Fiat had in
mind was to gradually integrate the two product ranges and to rationalize the
production capacity to pave the way for a marked increase in productivity and
competitiveness of the two brands. For Citröen, instead, the primary intention
was to safeguard the identity of the French manufacturer by keeping the two
brands quite distinct.
In addition, opposition from French government circles and from other
European carmakers played no small role. The former objected to the merger
on the grounds of national prestige, and the latter was against Fiat strengthen-
ing its position on the French market. Finally, the partnership was dissolved
in 1973. In 1976, Michelin sold to Peugeot its controlling stake in Citröen,
with the approval of the political powers, who preferred an all-French solu-
tion. The failure of the Citröen agreement coincided with the start of a dras-
tic decline in car demand in the European market, the first after a period of
unprecedented, uninterrupted growth since the end of World War II. After
the recessionary impact of the first oil crisis 1973–1975 and a longer down-
slide from 1980 to 1984, when signs of market recovery—and more impor-
tantly Fiat’s competitiveness—were in sight, the company started to envisage
striking a deal with another car maker, specifically Ford. A merger between
these two industrial concerns appeared particularly attractive in terms of pro-
duction economies, given the extensive overlap in the product ranges of the
two brands.
The simple merger would have made it possible to create a formidable
industrial concern with a production capacity of more than three million cars
per year, a quarter of the European market share (Volpato 1999). However,
despite the impressive potential of profitable synergies, the very size of the deal
emphatically underscored the issue of control of the joint venture that would
come into play with the merger. The rift between the two partners on questions
of control and governance of the new group led to a breakdown in negotiations
in the fall of 1985.
This setback forced Fiat to realize that partnerships were only feasible if
decision-making power was clearly allotted to the respective parties from the
outset. Consequently, as the group resumed its internationalization process dur-
ing the second half of the 1980s, Fiat gave priority to projects involving foreign
partners who were financially and industrially weak. The strategy Fiat adopted
was therefore to expand and consolidate the group’s presence in Eastern Europe
and in emerging economies.
Failed attempts to carry out alliances or mergers with other foreign large
and medium-large competitors characterize the path of Pirelli, Olivetti, and
Montedison during the 1970s and 1980s. In the mid-1960s, after an unsuccess-
ful attempt to form a partnership with Europe’s leading group Michelin, Pirelli
began lengthy negotiations with the English company Dunlop in the spring of
1970, with an eye to a merger between the two companies. Weakness in the
tire sector was a serious problem for both groups. Dunlop’s market share was
negatively affected by growing international competition (West 1984, 289).
Likewise, Pirelli was facing competition of American companies—Firestone and
Goodyear above all—in Italy, and market penetration by Michelin, which had
opened a factory on the peninsula in the 1960s. Toward the end of the decade
Michelin signed an agreement with Fiat stipulating that the Italian car manu-
facturer would buy part of Michelin’s shares in Citroën, and more importantly,
that Fiat would abandon Pirelli as a supplier and put Michelin tires on its auto-
mobiles instead.
An agreement between Pirelli and Dunlop was signed in June 1971, with a
complex share swap. Pirelli’s Italian assets were concentrated in a new operat-
ing company: Industrie Pirelli SpA. All this resulted in the creation of a mul-
tinational group that ran 210 factories located on five different continents, and
employed 178,000 people. The new group—the Union Pirelli Dunlop—achieved
a global turnover in excess of $2 billion, which was third in the world rank-
ing of the tire industry, after Goodyear and Firestone. The Union had plenty
complementarities in terms of product supply and geographic distribution of its
business (at least on paper). If indeed Pirelli was predominantly in the European
and South American markets, Dunlop had substantial business in the United
States, Asia, and Africa. Overlap was negligible, limited only to a few European
countries: Great Britain, France, Germany, and Spain (Bolchini 1985).
Despite the high degree of complementarity, this entity created in the sum-
mer of 1971 was never conceived as a true merger. Instead, it was seen as a
“partnership between equals,” limited to the symmetric exchange of shares with
no real repercussions in terms of the financial or production synergies of the
two groups, which continued to run their respective industrial operations in
almost total autonomy. The performance of the Dunlop partnership was imme-
diately jeopardized by the rapid worsening of Pirelli’s position on the Italian
market, caused by a sharp increase in labor costs, a drop in the demand for
cars, and competition from Michelin. The heavy losses incurred by Industrie
Pirelli SpA (in 1972, more than $80 million, more than a third of total share
capital) prompted Dunlop to “freeze” its shares and to refrain from recapital-
izing the company. In subsequent years, Industrie Pirelli SpA underwent an
extensive series of reorganizations, but the company would not return to prof-
itability again until 1980. In the meantime, by the late 1970s the fallout from
the international crisis in the tire sector had impacted the English side of the
Union, creating additional friction between Dunlop and Pirelli, until the part-
nership was dissolved in April 1981.
With the dissolution of the Union, Pirelli found itself in the same situation
as ten years before, namely, the group’s activities were still undersized for the
tire sector. In a context of progressive market concentration, a global strategy
became more and more critical.
Pirelli stepped up its expansion strategy again in 1988, trying to carry out
two major acquisitions on the international market: Firestone and Armstrong,
respectively a big and a smaller American tire producer. The first was a defen-
sive move, intended to thwart a merger between Firestone and Bridgestone. By
acquiring the American company, Pirelli would have risen to the third place in
the world ranking, behind Goodyear and Michelin, with a turnover in the tire
sector of more than $5 billion. The move would also have solved another trou-
blesome problem: the lack of a direct presence on the US market. Nonetheless,
the deal was never finalized, because Bridgestone reacted to Pirelli’s takeover
bid by presenting a counteroffer that the Italian group’s executive management
considered disproportionately high. The takeover attempt was abandoned.
Pirelli had greater success in the Armstrong takeover, which took effect
in the spring of 1988. This last acquisition did not carry the same weight as
the Firestone deal would have done. Clearly, there is little comparison between
the two groups: one was a local producer, albeit a fair sized one; the other a
major international group, with the third highest turnover in the world. Pirelli
achieved its goal of initiating production activities directly in the United States,
but had to abandon its hope of dimensional growth, a key to success in the
globalized market that was coming into being.
The early 1990s marked a critical juncture for the Pirelli Group, with a
change of strategy that would significantly shape subsequent development. The
first decision was for the company to specialize in few production niches of high
value-added, giving up the search for an alliance with another major European
producer. This reversal followed the company’s latest major defeat in the field:
an attempt to make a merger with the German company Continental, which
took place between mid-1990 and the end of the following year. The merger
would have created a company with a global market share of approximately 16
percent, and a business volume of more than $9 billion, placing Pirelli on par
with Bridgestone-Firestone, behind only Michelin and Goodyear.
However, after prolonged negotiations, Continental’s corporate board fea-
turing the major German shareholders (Daimler-Benz, Volkswagen, BMW,
Deutsche Bank, and Dresdner Bank) in November 1991 rejected it as a hos-
tile takeover contrary to the interests of the company. The costs of this failure
were enormous: the Pirelli Group had agreed to indemnify the investors who
backed the Continental project by December 31, 1991, for loss of assets and costs
incurred if the tire businesses were not unified in a single company. This debt,
in addition to the devaluation and the expenses sustained directly by the group,
brought the total estimated cost of the Continental operation to more than $295
million in 1991 (Bagley, Dick, and Pai 1993).
The catastrophic impact of the deal on the group’s finances and the new
decline in global tire demand from 1990 to 1991 forced Pirelli to abandon the
strategy it had followed since the first decade of the twentieth century, namely
trying to become one of the major world players. Instead, the group decided to
downsize its production capacity and specialize in market segments with higher
value-added. This goal was achieved in the 1990s by decreasing the level of pro-
duction diversification and spinning off less profitable production lines (Sicca
and Izzo 1995, 77–126).
With regard to Olivetti the recovery strategy that management decided to
implement from the late 1960s to the early 1970s involved consolidating the
company’s position as world leader in “mature” office products: printing calcu-
lators (30 percent); portable and professional typewriters (25 percent); and add-
ing machines (20 percent). The company’s shares of the global market in these
products, in the late 1960s, seemed to be of utmost importance.
The first goal the company set for itself was to make the American
branch profitable again. The obsolete Hartford plant was closed in 1968 and its
typewriter production transferred to the Scottish factory in Glasgow. Olivetti’s

continuity on the American market was guaranteed by the construction of a
new factory in Harrisburg, Pennsylvania, in 1969.
In the short term, reorganizing the production structure around a line of
mature office products made recovery possible and also generated solid market
success. However, this decision reflected the absence of a strategic outlook, and
an inability to grasp the long-term implications of microelectronic innovation.
Olivetti’s subsequent reorientation toward computers and office automation,
after the early 1970s, was for the most part the result of an adaptation dictated
by the market and was implemented with difficulty and delays by the company
(Ciborra 1986).
The crisis that hit the company in the 1970s led to a change in the produc-
tion internationalization strategy. The strong development phase of the 1950s
and 1960s had been characterized by growth in protected markets, with pro-
duction based on multiproduct factories that could manufacture a wide prod-
uct range and low product volumes, gauged to the size of individual national
markets. In the late 1970s a new phase of rationalizing production sites began,
targeted to an industrial structure based on monoproduct factories. In 1978, a
new management team took over, led by Carlo De Benedetti, during a period
of corporate recapitalization and financial recovery. This marked the start of a
new season of internationalization for Olivetti, based on renewed decentraliza-
tion of the group’s multinational production (Berta and Michelson 1989). The
production lines for manual typewriters were transferred to San Paolo in 1979.
In 1980, a new factory was opened in Singapore to fill the demand for calcula-
tor production for the entire group. Global production of portable typewriters
was concentrated in the Mexico City factory from 1982 to 1984. In the mean-
time, the crisis in the American branch was becoming increasingly severe: the
American contribution to Olivetti’s sales had collapsed to less than 10 percent
of the total at the end of the 1970s. This led to the closing of the Harrisburg
plant in 1981 (de Witt 2005).
In addition, the strategy focused on a systematic search for commercial
penetration in European and North American countries, and the development
of technologic interdependencies with new innovative companies that emerged
in the international market subsequent to the microelectronic revolution. From
1980 to 1996, Olivetti made sixty-six venture investments, including nineteen
companies that then went public, generating a net internal rate of return above
18 percent.
In 1982, the attempt of solving the serious crisis of Olivetti Corporation of
America culminated in the merger of the latter with Docutel, a leading ATM
manufacturer. In 1984, the American telecommunications giant AT&T bought
a 25 percent stake in Olivetti. According to the agreement, Olivetti would dis-
tribute AT&T products in Europe, while the latter agreed to buy approximately
$250 million worth (in 1984) of Olivetti products to be resold in the United
States. The agreement also made provisions for collaborating on new product
development, trading manufacturing licences, and accessing research laborato-

ries. In these exchanges between the two companies, the new Olivetti personal
computer, the M24, took on a key role. This machine was sold in the United
States with the AT&T brand. By supplying its American partner more than
two hundred thousand units in 1986, Olivetti’s personal computer production
reached nearly half a million units per year. Remarkably, at that time the com-
pany became the third producer in the world, and number one in Europe.
Nonetheless, all this was Olivetti’s swan song in the international market.
Despite the positive sales results from the AT&T deal, the failure to integrate
production between the two companies and the inadequate cooperation on
new product development prevented Olivetti from competing in the informa-
tion technology sector at the same level as IBM and other market leaders. After
Olivetti’s management refused to relinquish control of the company, the part-
nership was dissolved in 1989 with AT&T pulling out of its share capital.
In the early 1990s, Olivetti sunk into a deep profitability crisis, with rapid
deterioration of its financial situation. Once again a profound group-wide reor-
ganization became necessary, leading to factory closures in Singapore, Spain,
and Brazil in 1996, and the sale of the personal computer business the following
year. The company’s center of gravity shifted toward the Italian telecommu-
nications market, with the creation of two new subsidiaries in the mid-1990s:
Omnitel, a mobile telephone provider; and Infostrada, active in landline tele-
phone service. In 1999, Olivetti took control of Telecom Italia by a mixed take-
over bid. The deal was financed with Olivetti selling its Omnitel and Infostrada
stock to the German company Mannesmann, and resorting to loans and capital
increases. In 2003, Olivetti merged with Telecom Italia and the new company
took the latter’s corporate name.
The crisis of Montedison intensified throughout the 1970s, accompanied by
further retreat from foreign markets. Only in the early 1980s did the financial
situation improve perceptibly, after completing the long painful reorganization
process started in the late 1960s.12 The most prominent casualties of this pro-
cess were the group’s major foreign subsidiaries (Novamont and Compagnie
Neerlandaise de l’Azote), sold in 1979. The sale of Novamont sealed Montedison’s
abandonment of its plan to win a significant share of the American market, pre-
cisely when this same market was attracting more and more investments from
the major European chemicals groups (Marchi and Marchionatti 1992, 137).
In the early 1980s, Montedison fielded a new internationalization strategy
based on alliance building with foreign firms. In 1983, Montedison set up a joint
venture with Hercules and founded Himont, the world leader in Europe and
the United States in the polypropylene sector.13 Himont was by far the group’s
most important foreign subsidiary, featuring one thousand employees and turn-
over of nearly $500 million. Collaboration with established foreign companies,
along with enormous investments in new technologic competencies, finally
seemed to open the door to internationalization for the Italian chemicals giant.
Montedison attempted a similar approach in the pharmaceutical sector and in
fine chemical products by creating a holding, Erbamont, listed on the New York
Stock Exchange in 1983. In this case, internationalization was promoted through
cross-licensing agreements with major international competitors, and the acqui-
sition of pharmaceutical research and development facilities, located primarily
in the United States (Viesti 1988).
In 1985, Ausimont, the Montedison subsidiary active in the production of special
plastics, merged with the American company Compo Industries, becoming one of
the largest international producers of fine chemical products. Montecatini achieved
a greater concentration in its core business, enabling the company to lay the founda-
tions for raising the level of group internationalization. Foreign turnover rose from
35 percent in 1983 to more than 40 percent in 1986, whereas the portion of produc-
tion realized abroad increased from around 7 percent to 16 percent in 1985.
In the mid-1980s, however, the group’s improved international reach was
not enough to enable it to rebalance its precarious financial situation, because
of chronic undercapitalization and the heavy investments of previous years.
Instead of reorganizing the chemicals business more extensively, the man-
agement pursued an aggressive growth strategy, backed by major leveraging
(Amatori and Brioschi 2010).
In 1986 Montedison was the target of a takeover bid by the agrochemical
group Ferruzzi; this move further exacerbated the company’s financial position.
To avoid bankruptcy, Montedison created a joint venture with Eni, merging
the basic chemicals production of the two companies. The new firm, initially
called Enimont, was renamed Enichem in 1991 after Eni bought the remaining
Montedison stock. During the 1990s, Montedison progressively abandoned the
chemicals industry and reconverted into an energy company. To finance this
transformation, in the late 1990s Himont was sold first to a joint venture with
Shell (Montell) and later to the newly established Basell (today Lyondell Basell),
which united the plastics production of Shell and Basf.
1993–2011: The Rise of New Players

Since the mid-1980s the process of “going abroad” to become multinational com-
panies has been on an upswing and a new phase began, marked by the entry
of new players and diffusion of new internationalization models (Cominotti and
Mariotti 1996). As shown in Figure 15.1, in the fifteen years from 1986 to 2001 the
number of foreign affiliates increased more than eight times and the number of
foreign employees more than quadrupled. A significant number of medium-sized
firms took the lead, replacing to some extent the large groups, which slowed down
their multinational growth. Underpinning this new phase was the development of
specialized medium-sized firms, characterized by high organizational flexibility.
These companies, often organized in multiplant groups, operated in sectors that
1000
900
800
Number of
700
firms
600
Number of
500
employees
400
300 Turnover
(2001 = 100)
200
100
0
1986 1991 1996 2001 2002 2003 2004 2005 2006 2007 2008 2009
Figure 15.1 Number, employees, and turnover of Italian-owned manufacturing firms
abroad, 1986–2009 (1986 = 100).
Source: Database Reprint, ICE—Polytechnic University of Milan.
previously had seen relatively little multinational growth, such as textiles, cloth-
ing, specialized mechanical engineering, household appliances, food, and steel
(Onida 1994). At the same time, new opportunities arose from the fuller integra-
tion of the single European market, the fast growth in China and other Asian
countries, and the opening of the economies in Central and Eastern Europe.
It must be emphasised that, given the three main determinants of outward
direct investment recalled in the Introduction (market seeking, cost saving, and
resource seeking), the growth of Italian multinationals was mainly pushed by
the first one (better market penetration of foreign markets, through purely com-
mercial affiliates and production facilities closer to final customers) than by the
other two. One should only add a peculiar propensity, mainly by small- and
medium-sized Italian companies, to undertake a softer approach to international
business, through minority joint ventures and a wide range of “nonequity invest-
ments” (licensing and other forms of technology transfer, commercial agree-
ments, production sharing, and the like), especially when entering the market of
newly developing countries (Oman 1984; Onida 1984; UNCTAD 2011).
Nevertheless, Italy being a latecomer in this respect, the Italian share of the
world stock of outward direct investment (3.06 percent) still today is between
one-half and one-third compared with the major European countries, even less
than Spain (Figure 15.2). The ratio of this stock to gross domestic product grew
very fast from 5.3 percent in 1990 to 27.4 percent in 2009, but this trend was
also shared by other European countries, so that in this respect in 2009 Italy
was much behind Germany, Spain, France, and United Kingdom (Figure 15.3).
According to the Istituto Nazionale di Statistica (Istat), in 200914 there
were more than twenty-one thousand foreign affiliates under control by Italian
residents in 165 countries, with almost 1.5 million employees and turnover of
€378 billion. In 2008, almost the same amount of foreign affiliates generated
an estimated local value-added of €93 billion (net of financial intermediation
45%
40%
35%
30%
25% Inward
20% Outward
15%
10%
5%
0%
EU
ly
in
SA
an
a
nd
nc
an
in
U
Ita
p
U
Ch
Sp
a
rm
rla
Ja
Fr
he
Ge
et
N
Figure 15.2 FDI inward and outward stock as percentage of world total, 2010.
Source: UNCTAD (2011).
activities). Manufacturing affiliates were less numerous than service affiliates

(31 percent of the total) but accounted for 50 percent of employees, 38 percent of
turnover, and 44 percent of local value-added. Employees in these foreign indus-
trial affiliates were 16.4 percent of Italian industrial employment. This “degree
of internationalization” was far lower in service sectors (trade, transport and
logistics, hotels-restaurants, real estate, and business services), except for banks
and financial intermediation, where it was almost 37 percent (Istat 2011e).
Another unofficial but very accurate and much more detailed source of infor-
mation concerning outward and inward Italian FDI is Reprint, a database collected
by Politecnico di Milano, which for many years was restricted to manufacturing
activities but has subsequently been covering main nonfinancial services.
120%
100%
80%
60% Inward
Outward
40%
20%
0%
EU
ly
a
ain
SA
an
nd
nc
an
in
U
Ita
p
U
Ch
Sp
a
rm
rla
Ja
Fr
he
Ge
et
N
Figure 15.3 FDI inward and outward stock as percentage of GDP, 2010.
Source: UNCTAD (2011).
Table 15.2 Italian shareholdings abroad at January 1, 2009, by sector

Investors Firms Employees Turnover
(€ mil.)
Total
Mining and quarrying 33 237 12,124 39,783
Manufacturing 2,784 6,378 883,285 204,438
Electricity, gas, and water supply 63 813 59,924 46,781
Construction 326 1,076 60,791 10,084
Wholesale trade 3,713 11,143 167,537 122,541
Transportation and storage 383 1,373 32,704 13,349
Information and communication 189 606 44,983 12,279
Other professional activities 482 1,089 90,722 11,258
Total 6,426 22,715 1,352,070 460,514
Fully controlled foreign subsidiaries
Manufacturing 2,327 5,052 688,764 146,794
Construction 243 695 43,983 7,144
Wholesale trade 3,183 9,605 147,950 109,428
Transportation and storage 329 1,082 23,405 9,714
Other professional activities 435 900 26,28 5,782
Total 5,699 18,692 1,011,254 366,807
Equal and minority shareholdings
Manufacturing 894 1,326 194,521 57,644
Construction 106 381 16,808 2,940
Wholesale trade 994 1,538 19,587 13,113
Transportation and storage 134 291 9,299 3,635
Other professional activities 103 189 64,194 5,476
Total 1,930 4,023 340,816 93,707
Source: Database Reprint, ICE—Polytechnic University of Milan.

According to the latest available report from Reprint (Mariotti and Mutinelli
2010) on January 1, 2009, there were 6,426 Italian direct investors with 22,715
affiliates abroad (82 percent under full control), accounting for 1,352,070 employ-
ees (75 percent in fully controlled affiliates) and a turnover of €460 billion (80
percent by fully controlled affiliates) (Table 15.2). Only 5,052 out of the 18,692
affiliates under control were operating manufacturing units (although account-
ing for more than two-thirds of the total employment abroad), whereas 9,605
were wholesale affiliates. The remaining 4,035 affiliates were classified within
energy, extractive and construction industries and transport, telecom, and other
professional services (Mariotti and Mutinelli 2010, Appendix, Table 2).15
The comparison with two decades earlier from the same Reprint database
can only be made for manufacturing groups. Since the mid-1980s, the num-
ber of manufacturing investors has grown more than tenfold (from 180 to
2,327), whereas the size of employees abroad has grown about 4.5 times (from
152,010 to 689,000), clear evidence of the rapidly increasing weight of small- and
medium-size investing companies (Figure 15.1).16
The trend of yearly flows (new affiliates) topped at the end of the 1990s,
before shrinking dramatically until 2003, then slightly recovering since 2004,
albeit more slowly compared with the prevailing trend in worldwide foreign
direct investments (UNCTAD 2010).
Looking at long-run trends in the percentage composition of investors and
their affiliates in terms of the four-fold Pavitt classification (Pavitt 1984), the
major change has been a substantial increase of “supplier dominated” or “tra-
ditional sectors” (food, textile and clothing, leather and shoes, furniture, eye-
wear, and other miscellaneous manufacturing) in the first period from 1986 to
2001, reaching a share of 33 percent of investors and 23 percent of affiliates,
followed by a slight decline, basically at expense of the share of “scale intensive
sectors” (fallen from 75 percent of employees in 1986 to 53 percent today).17
The last two decades have seen a remarkable turnover of major protagonists,
as it seems when comparing today’s situation with the list of 263 Italian mul-
tinational manufacturing investors on January 1, 1992 published by Reprint.18
Almost two decades later, not only (as just noticed) did the small and medium
investors greatly increase their participation, but half of large and very large size
groups and about one-third of the medium-large groups have disappeared, have
been replaced, or have undergone profound restructuring. However, one-third
of the top fifteen Italian multinationals today includes major groups operat-
ing in nonmanufacturing activities, such as banking and insurance (Unicredit,
Intesa SanPaolo, and Generali) and extractive-energy-telecom services (ENEL,
Ente Nazionale Idrocarbur [ENI], and Telecom Italia).
The two surviving “old protagonists” (Fiat and Pirelli) have known in the
last two decades many deceptions, when not failures. The reorganization of
Pirelli group after the failed Continental takeover succeeded in regaining finan-
cial equilibrium by the mid-1990s, and set in motion a slow transformation of
the group. Pirelli gradually abandoned some of its traditional sectors to diversify
in new areas: real estate and telecommunications (Sicca and Izzo 1995). From
1999 to 2001, the optical systems and optical components businesses were sold
to the American companies Cisco and Corning, respectively, for approximately
€4 billion. In 2001, this liquidity was used to buy controlling interest in Telecom
Italia, previously the public telephone monopoly. Only four years later, after the
heavy debt incurred to finalize this buyout, Pirelli was forced to sell its his-
torical Cables Division along with Energy Systems and Telecommunications, to
Goldman Sachs. With the sale of the Cables Division, Pirelli lost one of its his-
torical production lines, which in the first years of business had enabled the
company to perform as an international player in a high-technology segment,
and later to survive the crises of the 1970s and the reorganizations of the 1980s.
In April 2007, after several months of tension (also at a political level), Pirelli
sold its shares in Telecom Italia to Telco, a new finance company created for the
purpose of allowing the Spanish firm Telefónica to buy into Telecom Italia’s
share capital. Thus, Pirelli abandoned the telecommunications sector to focus
once again on tires, with investments in new factories in Romania, Russia, and
China. However, the Group’s industrial component, after the divestments of the
1990s and 2000s, proved to be irreversibly weakened, against the predominant
financial and real estate businesses.
Fiat was definitively overtaken by Volkswagen in the ranking of European
car maker in the early 1990s. A strategic expansion into emerging markets was
implemented beginning in 1993 with the development of global production of
a family of world cars19 called Project 178. These would be adaptable to a wide
range of uses and a number of different emerging markets. These new models
were produced first in Brazil in 1996, and later in Argentina in 1996–1997. In 1997
production started in Poland and in 1998 in Turkey. Again in 1997 an assembly
plant opened in Morocco, followed by others in India and South Africa (1999),
Egypt (2000), and China (2002). Unfortunately, actual sales of world cars were
much lower than anticipated, peaking at 442,180 vehicles in 1997, and falling in
the following years (Enrietti e Lanzetti 2002).
From 1990 to 2001, Fiat’s share of the Italian and European market dropped
from 52.8 to 34.7 percent and from 14.3 to 9.6 percent, respectively, only to suf-
fer even more drastic contractions from 2002 onward, as the company was hit
by an extremely severe crisis. In 2001, the Fiat Group as a whole incurred losses
of €4.2 billion, with an overall debt exceeding €6 billion. In 2002, losses in the
automobile sector alone totalled €2.7 billion. A rigorous cost containment plan
and an industrial relaunch enabled the group to return to profitability in 2005,
but because of the crisis, foreign direct investments were curbed. The critical
situation facing Fiat brought about a strategic transformation, because partner-
ships with other big manufacturers became unavoidable.
Fiat’s search for another carmaker as a potential partner to survive the cri-
sis in the automobile market seemed to have reached a successful conclusion in
2000 through an exchange of share capital and a cooperation agreement with
General Motors in the field of engine and platform production. However, the
General Motors partnership, which was to lead in the long term to Fiat Auto’s
incorporation in the American group, was dissolved in 2005. This was mainly
caused by the precarious financial health of the American group, which was
forced to pay Fiat $2 billion after a smart put option by Fiat Auto included in
the 2000 agreement.
At the outbreak of the financial crisis of 2008, Fiat envisaged the necessity
of a new alliance, perceiving the risks deriving from its insufficient volumes of
production and from the limits of its international presence. When the Obama
administration was looking for a foreign partner as a savior for the smaller of
the US carmakers, Chrysler-Fiat emerged as the only candidate for this role.
The alliance, which in perspective was due to evolve in a real merger, so far
has worked rather well. At the end of 2011 Chrysler returned to profit, selling
about two million cars in a year (like Fiat, which suffered a serious fall in its
sales in Europe, especially in its domestic market) (Berta 2011).
Let us now focus on the still small but recently fast growing group of
medium-size companies that in the last decades made the transition from purely
exporters to new multinationals. Some of the new players were founded back in the
nineteenth century (Marzotto, Italcementi, and Piaggio), others in the first half of
the twentieth century (Zegna, Indesit, Danieli, GD-Coesia, Sacmi, Recordati, and
Bracco), but their true multinational expansion took place much later in the last
decades of the twentieth century. This is why we have included them among “new
protagonists.” They all share some characteristics that are typical of the Italian
“fourth capitalism” of medium-small and medium-large firms.
The size of their turnover covers a full range: (1) three hundred to one thou-
sand m€ for many specialized suppliers of mechanical equipment and components
(Carraro, IMA, Coesia, Brembo, SACMI, Interpump, Manuli, SCM, Datalogic,
Esaote, and Prima Industrie), a few fashion producers (Zegna, Marzotto,
Miroglio, and Geox), and medium-high technology pharmaceutical producers
(Menarini, Recordati, Zambon, Bracco, Dompé, and Chiesi); (2) about one thou-
sand to two thousand m€ for a few producers of motorvehicles and components
(Piaggio), construction materials (Mapei, Marazzi, and Permasteelisa), and plas-
tics (Mossi&Ghisolfi); (3) from two thousand m€ up to around ten thousand m€
for several groups supplying large-scale intermediate products (steel and cement),
specialized engineering, and appliances (Riva, Danieli, Tenaris, Buzzi Unicem,
Italcementi, and Indesit), and fashion and food producers selling in the mass
market (Luxottica, Benetton, Ferrero, Parmalat, Barilla, Perfetti, and Lavazza).
On average their size is far below their major American and European competi-
tors, which implies less ability to enter and steadily position themselves in dis-
tant large fast-growing markets, such as China, India, or Brazil.
They are all family firms with a strong external managerial involvement.
There are examples of cooperative organizations that have grown multination-
als in recent years (SACMI and CMC). Their business is focused on relatively
small market niches, with a high diversification within the same medium and
high consumer market segments and a genuine propensity and ability to cus-
tomize their product for sophisticated users (in all equipment and components
for producer durable goods).
Their motivation to become multinationals (not only strong exporters) is

predominantly “market seeking”; only occasionally “cost saving” (Benetton,
Miroglio, Italcementi, Buzzi Unicem, Riva, and De Longhi); and some-
times “knowledge resource seeking” (Recordati, Dompé, Bracco, Datalogic,
STMicroelectronis, and Mapei). Their mode of multinational expansion is pre-
dominantly based on greenfields, although mergers and acquisitions (M&A)
strategies have often played an increasing role in more recent years, after their
consolidation as multinational players.
Manufacturing abroad is a central feature, sometimes aimed at being in
the physical proximity to large downstream customers (Brembo, Sacmi, and
Carraro), but a crucial element of their multinational growth almost always is a
strong investment in the downstream phases of the supply chain. This holds for
proprietary distributive networks of retail shops (for fashion companies, such as
Zegna, Armani, Bulgari, Ferragamo, Benetton, Marzotto, Luxottica, and Geox)
and for the extended network of affiliates for sale and after-sale assistance
(for all producers of consumer durables, equipment, and components, such as
Indesit, De Longhi, Danieli, Piaggio, Coesia, STMicroelecronics, and Datalogic).
In almost half of the cases these companies still keep solid roots in their orig-
inal “industrial district” area, although the range of their specialized suppliers
has expanded much beyond the district itself.
The most technology-oriented among them are quite keen on networking
with Italian and foreign politechnics and science research university depart-
ments, investing significant shares of their turnover (up to 5–10 percent) into
research and development. Their financial structure tends to be quite solid, as a
result of relatively small leverage and low dependence on bank credit.
Finally, we mention four very special cases of recent big protagonists of
Italian multinational growth that belong to the area of listed companies still
under State majority control: (1) Finmeccanica, (2) ENI, (3) Telecom Italia, and
(4) ENEL. The following is a glimpse at these representatives of Italian relatively
“big multinational business.”
Finmeccanica’s international activity has been characterized mainly by pro-
duction sharing agreements with American and European governments in the
field of defense (Alenia Aeronautica, Alenia Aermacchi, Oto Melara, Agusta
Westland, Selex Galileo, Selex System Integration, and Thales Alenia Space) and
rail transport and power generation (Ansaldo Breda, Ansaldo Sts, and Ansaldo
Energia). Through the recent acquisition of DRS Technologies, Finmeccanica
has gained a leading role in US defense and security business. In 2009, the
consolidated Finmeccanica turnover was €18.2 billion with 57,000 employees of
which 14,500 are abroad.20
ENI, born in 1953 under the strong guidance of Enrico Mattei who died
in an obscure air accident in 1962, was privatized in 1995–1997 for about 70
percent of equity capital but still operates under close control golden share by
the State through its 30 percent share (27 percent Cassa Depositi e Prestiti, in
its turn under 70 percent control of the Minister of Economy and Finance,
which formally holds the remaining 3 percent). ENI’s strongest multinational

presence in about seventy countries is pervasive in all its main five businesses:
(1) oil and gas exploration and production; (2) gas and power; (3) refining and
marketing; (4) petrochemicals (Polimeri Europa being today the largest Italian
chemical entity); and (5) engineering and construction (Snamprogetti integrated
into Saipem in 2006–2007). ENI is today the fifth largest world oil and gas
group after Exxon Mobil, BP, Shell, and Total, with a consolidated turnover in
2010 of €98.5 billion and about 80,000 employees (Mariotti and Mutinelli 2010,
169–172).
Since 1995, Telecom Italia, former Italian monopolist and today main
domestic operator for cable and mobile communication, has undertaken a
series of majority and minority acquisitions of foreign telecom operators in
Greece, France, Austria, Spain, Turkey, Serbia, Mexico, Brazil, Argentina, Chile,
Peru, and Bolivia. Most of them have been subsequently dismissed since 2002,
because of strategic operational refocusing. Today Telecom Italia is the second
mobile operator in Brazil (with TIM Brazil) and keeps a 50 percent partner-
ship with Telecom Argentina: both foreign activities generate about 35 percent
of the consolidated turnover, which has grown over €22 billion in the first three
quarters of 2011.
ENEL, until recently monopolistic supplier and distributor of electri-
cal energy in Italy, in the recent decade has undergone a strong international
expansion, starting with Enel North America in 2000 and soon branching
out in Latin America, Spain, Bulgaria, Romania, France (where it shares with
EdF the construction of the first new generation nuclear European Pressurized
Water Reactor), Greece, and Russia.
Why Latecomer Italian

Multinationals?
The main reasons for Italy being a latecomer as an outward investor in the
postwar period can be summarized as follows:
1. A much higher share of micro and small enterprises (about 55
percent of manufacturing employment), that face greater entry cost as
international producers:21 This remark symmetrically calls into question
the progressive disappearance of big business in Italian postwar history,
starting with nationalization of the electricity industry in 1964 and
going through the managerial failure of the big State holdings (IRI,
EFIM, and GEPI), but this issue is beyond the scope of this chapter;
2. The composition of manufacturing output, with a significantly larger
share of sectors producing traditional consumer goods and specialized
machinery: sectors with a high export propensity but typically less

oriented to FDIs, compared with scale-intensive and science-based
industries, which are structurally much more oriented to multinational
strategies (e.g., basic chemicals, big pharma, steel and nonferrous
metals, road vehicles, electronic components, and professional and
consumer electronics) (De Nardis and Traù 2005; Garonna and
Gros-Pietro 2004; Banca d’Italia 2007);
3. The macroeconomic environment, until the early 1980s rather unfavorable
to capital outflows: rising external deficit, foreign exchange controls,
credit tightening. In addition the prolonged weakness of the lira exchange
rate since the early 1970s throughout the 1990s contributed to increase
the entry cost for potential Italian investors abroad (symmetrically an
appreciation of the real exchange rate acts as an incentive to bear the cost
of foreign greenfields or takeovers) (Ciocca 2007);
4. The heavy share (until the early 1990s) of State-owned enterprises,
again in those scale-intensive and research-intensive sectors that are
more FDI-oriented: indeed, for political reasons State ownership (with
the obvious exception of ENI) has always been focused on investing
domestically, especially in the Mezzogiorno, much more than abroad
(Nardozzi 2004, 61–64).22 Even in recent years, Italian champions of
heavy industry, such as Ansaldo-Breda-Finmeccanica, have been rather
domestic oriented in their production strategy, unlike close competitors,
such as Siemens, Alstom, or Abb;
5. As a complementary additional explanation of Italy’s lagging propensity
to cost-saving FDIs in developing areas, compared with major
European countries and Japan, one must recall the strongly dualistic
pattern of development, which at least in the 1950s and 1960s implied
a relative availability of low-cost suppliers in most domestic Southern
regions. It is no wonder that in one of the earliest field studies on
strategies of seventy-five Italian multinationals (in-depth questionnaires
and interviews), performed in the mid-1980s, the “cost reduction”
motivation was far less important than “market penetration,” “reaction
to protectionism,” and even “acquisition of international experience”
(Onida and Viesti 1988, 76);23
6. Finally one must mention the peculiar background of the Italian
banking and financial system, which systematically failed to develop a
modern and efficient equity market, in itself an important trigger for
new and growing public companies willing to go multinational. After
the Bank Law of 1936 (separation of commercial from investment
banking), the postwar period saw a combination of legislative, fiscal,
and regulatory environment aimed at channelling private savings
toward bank deposits and securities issued by State-controlled special
credit institutions (IMI, ICIPU, and so forth) rather than to equity
financing. Despite successive legislation and privatization of the stock
exchange (Borsa Italiana 1998, eventually merged with London SE),

the size and composition of the Italian listed companies still today
remains far below major European standards. At the same time the
dominant merchant bank (Mediobanca) played the role of defending
a close intertwining of ownership controls within a small group
of large private companies, rather than fostering more transparent
competition and enlargement of the “capitalistic core” Even the latest
reforms, with the new bank Law of 1993 and the financial service
Law of 1998, aimed at implementing subsequent European Union
directives, were unable to modernize the so-called via finanziaria
allo sviluppo (Nardozzi-Piluso 2010, ch. VII). A stronger bank part
in promoting forward-looking and risk-taking strategies of firms’
multinational expansion was also hindered by the deeply rooted
propensity of Italian firms to rely on a multiple bank credit links
(multiaffidamento), which easily provides greater risk sharing on the
side of the lenders and diversified sources of short-term loans on the
side of the borrowers.
The relatively recent growth of Italian multinationals must be seen in

the context of a changing macroeconomic framework started since the early
1980s. A major reversal in labor relations, with more accommodative trade
unions and declining labor unrest, was triggered in Turin by strong reac-
tions of Fiat’s white collars against the overflow of pro-Communist union
leadership (the so called “march of 40,000” in October 1980), soon followed
by inflation abatement through wage deindexation (remember the potentially
explosive impact of the second oil shock in 1981–1982). Other major events
that contributed to a growing awareness by small and medium enterprises
(SMEs) of the opportunities linked to multinational expansion were the first
entry of the lira in the European Monetary System in 1979 (a sort of a dis-
guised crawling peg to the Deutsche Mark); the agreement by all European
Union members to start an ambitious project of a single European market
(1986) with strong commitments to gradual reduction of technical nontariff
barriers to intra-European trade and factor mobility; the crash of the Berlin
wall bringing about (after a first sharp downfall in output) a fast recovery of
the new Central Eastern Europe, rapidly followed by and eventual enlarge-
ment of the European Union; and the end of the Uruguay Round with the
newborn World Trade Organization (1995) accompanying rapidly expanding
international markets.
The dramatic crisis of the lira of 1992–1993, quickly followed by a sharp
fiscal consolidation and sizeable privatizations paving the way to entry of the
lira in the newborn Euro (1998), also contributed to a domestic economic envi-
ronment not particularly favorable to ambitious multinational expansion by
Italian manufacturing firms subject to some financial squeeze and organiza-
tional stress.
Concluding Remarks
Looking at the long-term multinational evolution of major “old protagonists”
and “one-season protagonists” of Italian industry, one may notice the repeated
failure in attempts to carry out durable and successful strategies of alliances
or mergers with other foreign large and medium-large competitors. The major
cases in point that have been recalled are the following:
1. Fiat with Citroen (1970–1973), Ford (1984–1985), and General Motors
(2000–2005)
2. Pirelli with Michelin (mid-1960s), Dunlop (1970–1981), and Continental
(1990–1991), not to speak of the failed attempt to buy the American
Firestone against the winning offer by the Japanese Bridgestone in 1988
3. Olivetti with Underwood and GE (1960–1968) and AT&T (1984–1989)
4. Montecatini with Shell (Monteshell 1964), Hercules (Himont 1983), and
Ausimont (1985 to late 1990s)
An explanation of the episodes and the consequent failure by major Italian
industrial groups to join and solidly keep position within the world oligop-
olistic core must be searched for first of all in the myopia and lack of com-
petence of private capitalism (Fiat, Pirelli, Olivetti, and Parmalat): a mixture
of weak shareowner vision and leadership, volatility in strategic decisions,
poor or ambiguous relations between family ownership and managerial con-
trol, ambiguities in governance rules following more ambitious international
operations, and excessive leverage. In addition, concerning the history of major
public-private Italian multinationals (Montedison, Enimont, Ansaldo-Breda,
and Finmeccanica), one must point to a stubborn perverse interference or
power sharing of the old-fashioned political parties’ arm with domestic big
business.
The reasons for Italy being a latecomer in the postwar period as an interna-
tional investor (“new protagonists”) have been pointed out as a mix of (1) sec-
toral specialization (traditional and specialized suppliers industries inherently
less induced to match export with FDI strategies); (2) the structural composi-
tion of industry (exceptionally high share of micro and small enterprises, far
less equipped to undertake the cost of entry in world markets as international
investors); (3) a macroeconomic environment up until the late 1980s unfavorable
to multinational strategies, including a weak and unstable lira exchange rate;
(4) the peculiar State-owned enterprise system, whose strategies have been typi-
cally oriented (with few exception, such as ENI and Finmeccanica) to domestic
investment (particularly in the Mezzogiorno) and to job creation within domes-
tic boundaries rather than implementing a fully fledged role as multinational
players; and (5) the lack of a banking and financial system willing to play the
role of merchant and investment banking deeply involved as supporter of their
clients’ strong multinational expansion.
On one side is the failure of large State-owned companies and their new
shareowners after privatization to conquer and maintain solid positions within
the big oligopolistic game of the world’s top multinationals (unlike many
European competitors). On the other side one may observe a rather robust
multinational growth by hundreds of medium and medium-large companies
well focused on their technologic and commercial niches, gradually expanding
their market penetration beyond the old and new European borders. These true
representatives of the Italian “fourth capitalism,” born inside and outside the
traditional industrial districts, include not only producers of final consumer
goods belonging to the well known “made in Italy,” but a sizeable number of
highly specialized suppliers of complex and often advanced products and com-
ponents. They are often well positioned as designers and sellers of sophisti-
cated machinery and equipment, and of advanced intermediate components
within the global supply chain of big players on the global market in a variety
of sectors, ranging from automotive to air transport, shipbuilding, construc-
tion, oil and gas, power generation and distribution, pharmaceuticals, specialty
chemicals, and engineering. Their competitive advantages are grounded not so
much on price-cost margins, but rather on fast technologic adaptation, innova-
tive design, quality control, and customer-oriented flexible supply.
Notes
1. For an in-depth survey of the literature see Barba Navaretti and Venables (2004).
A special section on new forms (nonequity forms) of multinational growth can be
found in UNCTAD (2011).
2. Pirelli was founded in 1872 and started production of insulated electrical conductors
in the last quarter of the nineteenth century. In this high-technology sector, it
established itself as the only Italian firm, and one of the few European ones, in the
field. In 1900, Pirelli mastered a conductor technology similar to the one exploited
by Anglo-American competitors and was probably superior in the field of high
tension cables (selling its patents on the US market). In the early 1910s, exports
amounted to more than 30 percent of total turnover, 15 percent of which were in
the United States. See Bezza (1987) and Montenegro (1985).
3. In fact, after successfully laying underwater cable in the Mediterranean for the
Italian government, the Milanese firm was awarded contracts for lines that would
connect the Balearic Islands with the Iberian Peninsula (see Pirelli 1946).
4. For more information on the Fiat experience in the American market in the years
before World War I see Volpato (1993).
5. Poland and Turkey (1920); Romania and Switzerland (1921); Yugoslavia and
Germany (1922); Argentina (1923); England (1924); West Germany, Bulgaria, Ireland,
Austria, and Czechoslovakia (1925); Greece and France (1926); Brazil (1927); Egypt
(1928); Portugal (1929); Denmark and Sweden (1930); see Bigazzi (1991).
6. To produce cellulose a 6,000-hectare plantation was created for a particular type

of cane, Arundo Donax, in Torre Zuino near Cervignano del Friuli, from which
substantial quantities of alpha-cellulose were extracted.
7. Olivetti made its first foray into the electronics sector in 1949, when the company
finalized an agreement with the French firm Compagnie des Machines Bull to
create a joint-venture, Olivetti-Bull, to commercialize punch card machines. It
was only in 1952 that Olivetti made a clear commitment to the new technology
by opening a dedicated US research center, in New Canaan (Connecticut). This
was followed in 1954 by collaboration with the University of Pisa to design an
electronic computer. In 1957, Olivetti partnered with Telettra and Fairchild to
establish a new company, SGS, the first European industrial initiative in the field
of semiconductors. In 1958, the Electronic Research Laboratory was founded in
Pisa, which in 1959 created the Elea 9003, the first electronic calculator entirely
designed and built in Italy. In 1962, the Electronic Research Laboratory and
Olivetti-Bull both became part of Olivetti’s Electronics Division.
8. In 1968, the company ended its initiatives in the field of electronic components,
selling SGS to Stet, from the IRI Group.
9. Synthetic and artificial fibers differ because while the latter derive exclusively
from cellulose extracted from plants, the former are obtained by transforming
organic polymers into threads, polymers obtained from a completely synthetic
process beginning with raw materials derived from hydrocarbons.
10. Despite the potential benefits accruing from the technologic complementarities
between the two entities (Montecatini had pursued excellence through an
indigenous effort, while Edison’s entry into chemicals had stemmed from
cooperation agreements with foreign partners) it was the Edison’s more modest
and finance-driven strategy that prevailed, leading to a radical downsizing of
Montecatini’s R&D activities; see Amatori (1990).
11. Sanna Randaccio (1985) and other chapters in Acocella (1985).
12. For more information on this process, see Onida-Viesti (1988).
13. Thanks to the new Spheripol technology, developed by Montedison, by the
mid-1980s Himont had succeeded in securing 20 percent of the world market;
Marchi and Marchionatti 1992.
14. Only in 2010 did Istat start to monitor the Italian outward FDI according to the
European standard definitions of FDI.
15. About 80 percent of investors, with the same proportion of affiliates and foreign
employees, are companies located in Northern regions. Lombardy’s weight alone
is 35 percent of the total, followed by Veneto and Emilia-Romagna, each with 14
percent of affiliates and around 11 percent of foreign employees (Mariotti and
Mutinelli 2010, Table 2.18).
16. After a careful classification of company size taking into account their belonging
to groups, at the beginning of 2009 even micro and small companies (up to
49 employees) were responsible for almost 30 percent of the total number of
investors, although for only 12.7 percent of the number of affiliates, 6.9 percent
of employees abroad, and 3.8 percent of foreign turnover. Almost 53 percent
of investors, with 38 percent of affiliates and less than 18 percent of foreign
employees, were medium-size groups (50–249 employees). Medium-large and large
Italian multinational groups (250 employees or more) were only 17 percent of the
total number of investors but were responsible for 49 percent of foreign affiliates,
75 percent of foreign employees, and 87 percent of foreign turnover. (Mariotti and

Mutinelli 2010, Table 2.13).
17. At a more disaggregated level, from 1992 to 2007 the sectoral composition
of employees abroad by Italian multinationals saw little changes in food and
beverages (around 8 percent); machinery and equipment (around 13 percent); ch
emicals-plastic-pharma-rubber-tires (around 16 percent); and metals (5 percent)
(Mariotti and Mutinelli 2010). Major changes were a big rise in the share of
textile-clothing-leather goods (from 5 percent to 19 percent), matched by a
substantial decline in the share of automotive from 23 percent to 12 percent
and of the information electronics-telecom (from almost 9 percent to about 4
percent). The ratio of employees in foreign affiliates under control and domestic
employment in Italy (“degree of outward internationalization”) ranges from about
30 percent in traditional consumer sectors (fashion and food) to 45–50 percent in
scale-intensive and technology-intensive sectors (Mariotti and Mutinelli 2010).
18. Drawing from the Reprint, which published a full list of 263, we could find (1)
six very-large-size investing groups (at least one affiliate under control with five
thousand or more employees), namely IFI-Fiat, Pirelli, STET-Italtel, Poligrafici
editoriali, IRI-Finmeccanica, IRI-Ilva (ENI being ruled out as an extractive and
service multinational); (2) ten large-size groups (at least one affiliate under control
with 1,000–4,999 employees), namely Bonomi-Saffa, CIR (Olivetti-Valeo-Sasib),
Cragnotti Partners, ENI, Fata, Ferrero, Ferruzzi (Montedison, Eridania, Farmitalia
Carlo Erba, Gardini Srl), GFT, GIM (Orlando), Marzotto, Perfetti, Ruggerini; and
(3) twenty-two medium-large groups with at least one affiliate with 500–999
employees), namely Alpi, Barilla, Belleli, Benetton, Beretta, Buzzi, Candy, Cartiere
Burgo, El.Fi (Ocean), Fochi, Findim (Star), GFT, Riva, IRI-Fincantieri, Lanificio
Zegna, Merloni Elettrodomestici, Fidenza Vetraria Spa, Parmalat, Piaggio, Redaelli
Tecna, Romalfa (Rifil Saninvesti), Rusconi Editore (Cominotti and Mariotti 1992).
19. This consisted of five models; a two-box, three-door car named Palio; a station wagon
called Palio Weekend; a three-box, four-door sedan called Siena; a van; and a pickup.
20. For an extensive treatment of the whole history of Finmeccanica see Zamagni
(2009). A short picture of recent acquisitions and agreements is in Mariotti and
Mutinelli (2010, 172–179).
21. In 2007 out of 510,000 manufacturing firms in Italy there were 430,000
micro-firms (one to nine employees), against 212,000 in France, 173,000 in Spain,
and 118,000 in Germany. These micro-firms accounted for more than 25 percent
of total manufacturing employees (about 1.2 million) against a EU average of
13.9 percent; reciprocally, the share of manufacturing employees in large firms
(more than 250 employees) was 22 percent versus the EU average of 40.6 percent
(Germany 53.2 percent, France 46.3 percent, Spain 26 percent) (ISTAT 2010, 52).
The anomalous size distribution of Italian firms compared with other major
countries is a recurrent theme in the literature on Italian economic development:
see among others Traù (1999), Onida (2004), Banca d’Italia (2007).
22. An extensive analysis of the role played by Italian SOEs (“Partecipazioni statali”)
is provided, among others, by Barca and Trento (1997). According to De Cecco
(2004) the political-economic crisis of the early 1970s in the aftermath of the “Hot
Autumn” has been a turning point in postwar Italian industrial development,
ultimately leading to a progressive competitive decline in absence of repeated
devaluation of the lira before the new euro regime.
23. With few exceptions the bulk of major operations by Italian multinationals in
that period were concentrated in Europe and the United States. At the time of
this study, aside from ENI-AGIP extractive investments in oil and gas producers
and a substantial presence of FIAT group in Brazil, Argentina, and Turkey, major
cost-saving investments by Italian multinationals in developing areas were GFT
in Mexico, Miroglio in Tunisia (both in textile and clothing), Farmitalia C. Erba
(Montedison group) in Latin America and Indonesia, and SGS Microelettronica in
Singapore and Malaysia (see Onida and Viesti 1988).
part iv
FIRMS, BANKS,
AND THE STATE
Chapter 16
TECHNOLOGY,
FIRM SIZE, AND
ENTREPRENEURSHIP
Franco Amatori, Matteo Bugamelli,

and Andrea Colli
Introduction
The economic performance of a country depends, among other things, on the
characteristics of and the strategies adopted by its firms and their entrepre-
neurs. This chapter revisits the evolution of the Italian productive system in the
last 150 years. Observing the nation’s firms over various long-term cycles of the
global economy, and with respect to different technological paradigms that have
emerged throughout, allows us to identify some structural features that may
explain successes and failures of the Italian economy.
When talking about firms (in particular industrial firms as we do), glob-
alization and technology are exogenous factors: they shape the competitive
environment, the comparative advantages, the level and the nature of market
demand, and productivity (aggregate, sectoral, and of firms). Technology also
plays a crucial role even when globalization retrenches.
Three technological revolutions have to be considered over the history of
unified Italy. The first one, dating back to the end of the eighteenth century, is
identifiable with a bulk of innovations that evolved around the general purpose
technology of the steam engine and boosted productivity in such industries as
textiles, metallurgy, and mining. The new technologies in transportation and
456 firms, banks, and the state
communication originated by the first industrial revolution were the premise

for the first globalization wave (from the last decades of the nineteenth century
to World War I), and for the advent of a second industrial revolution.
Developed around the last quarter of the nineteenth century, the second
industrial revolution focused on the application of mass-production techniques
(e.g., the machinery industry’s assembly lines) and the diffusion of a general
purpose form of energy, such as electricity. It invested such industries as metal-
lurgy, chemicals, pharmaceuticals, oil, and food processing.
The third technological revolution came about in the last three or four
decades: based on physics, it led to the emergence and diffusion of semicon-
ductors, computers and software, biotechnologies with significant advances in
many technology- and science-intensive industries (e.g., aerospace and pharma-
ceuticals). Favored by these technological advancements that have reduced the
“size of the world,” a second wave of globalization starting in the 1990s has
significantly changed the international competitive environment.
In the next section, we set the stage of our analysis by describing Italian
industry through the international cycles and the technological revolutions
from 1861 to 2011. Overall, it is not an exaggeration to claim that Italy’s indus-
trial sector performed comparatively well from the end of the nineteenth cen-
tury until 1970.
We observe a negative turn in the last (and most recent) technological revo-
lution and globalization episode. Despite the fact that Italy in the 1960s was in
the same position as other advanced nations to grab the opportunities offered by
information and communication technology (ICT), it did not happen. Indicators
of ICT diffusion in Italy signal a delay in adoption during the 1990s and still
a significant distance from the technological frontier. At the same time, and
especially since the mid-1990s, Italian firms have suffered relatively more than
their European rivals the increased competitive pressures from low-cost goods
and services produced in emerging and developing countries (Brandolini and
Bugamelli 2009).
There are many causes (political and economic, macroeconomic and micro-
economic, domestic and international) behind such a turnaround in Italy’s
(absolute and relative) economic performance but, if we have to isolate one
important structural feature of the Italian productive system, it is firm size. In
the third section we show that the size of a firm is indeed positively correlated
with innovation, internationalization, adoption of advanced technologies, and
ability to face new competitive challenges; through all these channels, larger
firms record higher productivity in levels and often in growth rates.
To accept firm size as a credible explanatory factor for Italy’s economic per-
formance since unification, we need to show that the distribution of firms in
terms of their dimension was somehow adequate until the 1970s, but defective
later on. This is the object of the fourth section.
Firm size is not a given. Instead, it is the endogenous choice of entrepre-
neurs. In the fifth section we review the stories of some of the key entrepreneurs
technology, firm size, and entrepreneurship 457
and managers (of private and State-owned enterprises), trying to identify the
main features of Italian entrepreneurship.
The concluding remarks provide answers to the following crucial questions:
what are the main causes behind the failure of large firms (private and public)
and the predominance of small and medium enterprises? How much does it
have to do with deep-rooted attitudes and the dominant entrepreneurial culture
in Italy? What has been the role of the State? What should policy-makers do
now to address these structural weaknesses?
Italy between Waves of Globalization

and Industrial Revolutions
1861–1914
On the eve of political unification, the Peninsula was already deeply embed-
ded in the international economy. The largest and more dynamic region-States,
such as Piedmont (formally part of the Kingdom of Sardinia), the Kingdom
of Lombardy, and the Venetian region (in the North), and the Kingdom of
two Sicilies (in the South) were in contact with fast growing European econo-
mies. Raw materials from the South were shipped to British and French ports,
whereas the North offered large quantities of raw silk produced in prealpine
areas to buyers in France and Germany (Federico 1994a). Very little integra-
tion, however, was at work among Italy’s regional economies (Cafagna 1989), in
part because of poor internal transportation networks. The country’s compet-
itive advantage was in agriculture. Raw silk (the ideal bridge between agricul-
ture and manufacturing) came from the countryside, produced by farmers who
raised silkworms to support the household’s income.
This pervasive primary sector imprinted the way in which Italy was part
of, and affected by, the first technological and globalization wave. Until the last
two decades of the nineteenth century, Italian manufacturing activities remained
marginal in terms of their contribution to gross domestic product (GDP) and
rudimental in their structure. Manufacturing was based on putting-out that used
the peasant labor force and small artisanal workshops. These manufacturing
activities were the successor of craft and guild traditions in urban centers and
the heritage of artisanal know-how in specialized areas. It was a promising seed-
bed, given also a certain diffusion of technical and apprenticeship schools. Unlike
Britain and Germany, these manufacturing activities (from textiles to metallurgy,
food processing, and nonorganic chemical fertilizers) had distinct ties with agri-
culture: the countryside was the source of raw materials and labor force, and the
main market for the products of small mills and craft shops (Colli 2002a).
Weak local competitors made it easy (and convenient) for foreign

entrepreneurs to invest in the Peninsula, before and after unification, in tex-
tiles (mainly cotton), mechanics, and metallurgy. Freestanding British, Belgian,
and French companies, with head offices in the home country and operations
in place from Lombardy to Sicily, invested capital gathered in European stock
markets into such sectors as mining, utilities (waterworks and gas networks), or
local transports as tramways and regional railways (Hertner 1998). In effect, the
first industrial revolution only superficially grabbed the Peninsula’s economy
during the first two decades after unification.
By the 1880s, however, a “first coat of industrial paint” was spread (Cafagna
1989), also caused by some initiatives of the State that needed to quickly build
necessary infrastructures (railways) while acquiring independence in strategic
industries as steel. The slow run-up lasted until the last decade of the nine-
teenth century when a new aspect of globalization occurred. Italian producers
were increasingly challenged by flows of cheap products from the vast estates of
Russia and the fields of the American Midwest into European continental mar-
kets. The ensuing protectionist reaction, extended to manufacturing, provided
the basis for more frequent and ambitious entrepreneurial initiatives.
Starting in the 1890s some industries (mechanics, metallurgy, steam engines,
electricity, and electromechanics) experienced double-digit expansion (Zamagni
1978a; Toniolo 1988). In this phase “first movers,” such as Fiat (automobiles),
Pirelli (caoutechouc natural rubber), Ansaldo (shipbuilding), and Falck, Terni,
and Piombino (mass-produced steel) established an enduring advantage in
capital-intensive industries thanks to their strategy of investments and growth
(Amatori and Colli 1999).1 The global economy was at work. To feed this fast
modernization process, technology came largely from abroad, also thanks to
foreign direct investments, embodied in machinery, plants, and energy (mainly
coal). The resulting trade deficit was counterbalanced by a large flow of remit-
tances from emigrants (Bonelli 1978; Cafagna 1989).
As confirmed by census data, at the eve of World War I (even though Italy
was still a peasant economy, characterized by a weak internal market) labor-
intensive industries, such as foodstuffs and tobacco, textiles, clothing, leather
goods, wood and furniture, paper, and metallurgy, absorbed more than three-
quarters of manufacturing employees (Table 16.1). Among capital-intensive sec-
tors, glass, steel (and metallurgy), and transportation equipment increased in
importance. Notwithstanding the achievements, some contradictions remained:
according to some estimates, in 1911 the total value of steel production was
almost equal to that of manufactured silk.
1915–1970
World War I was a good opportunity for existing leaders. Three examples are
particularly significant. In the hydroelectric industry, companies completed
Table 16.1 Share of employees by sector (percentages)
1911 1927 1937 1951 1961 1971 1981 1991 1996 2007
Foodstuffs 13.7 12.5 14.7 10.3 8.9 7.1 7.8 8.8 8.9 10.3
Tobacco 0.9 1 1.5 1.5 0.6 0.4 0.4 0.3 0.2 0
Textiles 22.5 25 18.5 18.8 13.7 10.1 8.9 7.7 7.1 4.8
Clothing 8.1 6.4 7.6 6.4 6.5 7.4 6.8 8 7.1 5
Leather goods 6.2 4.3 5.2 6.2 4.9 4.5 5.6 4.7 4.7 3.5
Wood 7.8 6.9 6.5 4.9 5.3 3.7 4.1 3.6 3.5 3.7
Paper 1.3 1.2 1.4 1.5 1.6 1.4 1.7 1.7 1.8 1.7
Publishing 2.2 2.2 1.9 2.1 2.5 2.7 3.2 3.7 3.6 3.5
Energy 0 0.3 0.5 0.5 0.4 0.5 0.6 0.6 0.5 0.4
Chemicals 3.3 2.9 3.4 5.1 5.9 5.4 5 4.6 4.3 4.2
Rubber and plastic 0 0.3 0.7 1 1.4 2.4 2.1 3.4 4.1 4.4
Glass, cement, and bricks 9.8 6.4 6.1 5.6 6.8 6.3 5.7 5.3 5.2 5.3
Basic metals 3.1 3.9 3 4.8 5.3 5 4.7 3.3 2.8 3
Metallurgy 5.9 5.8 3.4 6.3 6.2 7.1 9.6 11.8 12.8 15.8
Mechanical instruments 3.4 5.2 8.8 8.6 11.8 13.8 10.9 10.3 11.4 12.6
Office machinery 0.1 0.1 0.1 0.3 0.5 0.7 0.5 0.5 0.4 0.3
Electrical devices 0.2 0.4 1.1 1.6 2.6 3.8 4.4 4 4.2 4.2
Radios and televisions 0.1 0.5 1.5 1 1.7 2.5 2.3 2.7 2.1 1.7
Table 16.1 (cont.)
1911 1927 1937 1951 1961 1971 1981 1991 1996 2007
Precision instruments 0.6 1.7 1.5 1.7 1.5 1.1 1.7 2.3 2.7 2.9
Automotives 0.3 0.9 2 2.1 2.5 4.6 4.7 4.1 3.8 3.6
Other transp. equipment 5.4 5.3 5.9 4 3.1 2 2.4 2.6 2.1 2.5
Furniture and other 4.9 6.5 4.5 5.8 6.4 7.4 6.9 5.9 6.4 6.2
manufacturing
Recycled materials 0 0.3 0.1 0.1 0.1 — — 0.1 0.2 0.4
Manufacturing 100 100 100 100 100 100 100 100 100 100
1st industrial revolution 71.4 69.6 63.3 61.6 54 49.2 51.9 52.6 52.6 51.1
2nd industrial revolution 39.4 38.7 38.7 45.7 51.7 56.4 58 61 62.9 70.7
3rd industrial revolution 1 2.7 4.2 4.6 6.3 8.1 8.8 9.4 9.4 9.1
Source: Federico (2003b) for the years up to 1996, and Istat for 2007.
Note: Sectors in first industrial revolution: foodstuffs and tobacco, textile, clothing, leather goods, wood and furniture, paper, and metallurgy.
In second industrial revolution: energy, chemicals, rubber and plastics, glass, cement and bricks, basic metals, metallurgy, mechanical
instruments, automotives, and other transportation equipment.
In third industrial revolution: office machinery, electrical devices, radio and televisions, and precision instruments. Metallurgy is included in
the first and second revolutions because its products evolved with two different technologies.
their investments, functioning at full capacity and accumulating know-how

and competencies. Montecatini, a mining company, secured the resources
for an ambitious expansion strategy of downward integration, becoming the
leader in fertilizers. War profits allowed Fiat to become a powerfully inte-
grated engineering company and to inaugurate Lingotto, an exceptionally
modern automobile plant endowed with the most advanced techniques. New
players established themselves in other industries in which emerging technol-
ogies could deploy their potential, for instance in artificial fibers where, in
the 1920s, SNIA quickly became a European leader and member of a powerful
international cartel.
The outbreak of the war coincided with the end of the first globalization
wave, a situation worsened by the Great Depression and by autarchic policies
and protectionist attitudes everywhere in Europe. The protection granted by
the Fascist regime to domestic companies allowed them further consolidation,
as occurred with Montecatini and Fiat, but it was also a sort of “golden cage.”
Capital and scale-intensive industries were facing a small and relatively stag-
nating domestic market, nothing comparable with the continental-size market
enjoyed by US firms or the captive Central and Southern European markets that
German companies had before the war. Unlike in the pre–World War I period,
Italian firms did not benefit from international exposure, now precluded by
the worldwide economic depression and autarchic closures. Thus, although real
mass production remained in many cases unattainable, companies had to adapt
their market strategies to the existing demand: Montecatini, for instance, kept
fertilizer production as its core activity, with limited diversification in advanced
chemicals, whereas the iron and steel industry remained characterized by excess
capacity, by production overlaps, and by the scarce diffusion of modern tech-
nologies for steel mass production.2
Many of the previously mentioned constraints were removed in the sec-
ond half of the twentieth century. During the quarter century immediately
after World War II, the Italian economy enjoyed extremely high rates of growth
in GDP and manufacturing output, comparable only with those of the early
1900s. Endogenous and exogenous elements contributed to boost what is rightly
defined as the “economic miracle.” Endogenous were the steady rise of internal
demand accompanied by the social transformations that were at the basis of
the definitive advent of a consumer society and, since the 1950s, modernization
efforts of State-owned enterprises in capital-intensive industries and infrastruc-
tures. Also crucial were the exogenous forces connected to postwar attempts
to restore a global economy, as the process of European integration, opening a
market of continental dimensions to Italian companies, and at the same time a
consistent flow of international direct investments that filled technological gaps
in industries, such as pharmaceuticals, communication equipment, electronics,
and petrochemicals.
At the beginning of the 1960s the second industrial revolution was in full
swing in Italy. A large share of manufacturing employment was concentrated
in capital-intensive industries (mainly automotives, chemicals, rubber, heavy

mechanics, steel, and shipbuilding): their share over the total number of manu-
facturing employees increased from less than 40 percent in the interwar period
to 60 percent in 1971. Big businesses played a major role: the aggregate sales
of the top two hundred companies accounted for about one-third of Italian
GDP—a percentage similar to that of the United States, Germany, or Britain
(Battilossi 1999). However, significant backwardness persisted in their organiza-
tional and ownership structures (Pavan 1977).
In 1970 the effects of Italy’s catching-up were visible under many per-
spectives, ranging from the general modernization of society to the diffusion
of consumption habits and styles typical of an advanced economy. Perhaps
the best indicator is provided by the convergence of income levels towards
US standards: in 1950, Italian GDP per capita was 36.6 percent of America’s,
52.2 percent in 1960, 64.6 percent in 1970, reaching 70 percent by the early
1980s.
1970–2011
Italian per capita income levels, however, again started to diverge from those of
the United States after the 1980s. In 2000, GDP was back to 66 percent of that
of the United States. By the end of the decade it reached 63.8 percent, below
1970 levels. To explain this sudden reversal, it is worth turning once again to
the relationship among technology, globalization, and the domestic market.
In the 1970s, a new wave became progressively dominant. New technolo-
gies developed during World War II were at the origin of the semiconductor
industry, computer and software production, the production of new materi-
als, and the aerospace industry. Cutting-edge developments in pharmaceuti-
cals and biotechnologies coincided with the exploitation of the potentials of
nuclear energy. Basically, this technological watershed (which has been defined
as the third industrial revolution) was based on physics and a close interac-
tion between public and private institutions providing the necessary research
infrastructures and human capital. Often big, established firms diversified into
these new activities because they were research intensive (Amatori and Colli
2011). In some countries, such as the United States, the benefits of the new tech-
nological wave were felt at the maximum level: since the mid-1990s American
output and labor productivity growth far exceeded that recorded in the major
European countries, an acceleration largely caused by the introduction of ICT
(Jorgenson and Stiroh 2000; Oliner and Sichel 2000; OECD 2003; Visco 2004),
which enhanced productivity, promoted skilled human capital, and stimulated
organizational innovation (Timmer and van Ark 2005; David 1990; Basu and
Fernald 2008; Triplett and Bosworth 2004).
In the 1960s, Italy was well endowed with capital- and scale-intensive
industries, making it possible to enjoy the opportunities offered by the third
technological wave. In some cases it seemed so. Private and State-owned

enterprises crossed the new technological frontier at the beginning of the 1960s:
in electronics (Olivetti microcomputers) and microelectronics (SGS Ates and
Microlambda, both State-owned); in nuclear energy; and in telecommunications
(Alenia and Telespazio, both under State control). The network-based nature of
high-technology industries made the establishment of joint ventures in applied
research essential among State-owned and private groups and foreign multina-
tionals (Bussolati, Malerba, and Torrisi 1996). However, only a few of those ini-
tiatives survived (e.g., semiconductors) and always in marginal positions. Many
(computer production or nuclear energy) came to an end. Nothing happened in
biotechnology and pharmaceuticals, where Italy suffered from chronic depen-
dence of foreign capital and knowledge.
As a result, Italian manufacturing entered the new globalization wave
of the 1990s lacking in capabilities, investments, and entrepreneurship in
high-technology industries. At the dawn of the twenty-first century, Italy lagged
behind in terms of presence in ICT industries (Rossi 2003), as witnessed by the
constant deficits in its technological trade balance. The share of employees in
the manufacturing sectors most affected by ICT (office machinery, electrical
devices, radios and televisions, and precision instruments) has, over the past
three decades, remained stable around a negligible 7 percent (Table 16.1). This
backwardness would be even more evident if one adds in most of the chemical
and pharmaceutical industries and that of air transportation. ICT adoption was
also slow. In the 1990s, Italian firms trailed their US counterparts by an aver-
age of seven years (Bugamelli and Pagano 2004), a gap only partially bridged if
broadband penetration rate and average actual bandwidth are low in compara-
tive terms (Ciapanna and Sabbatini 2008) and Internet usage scarce in quantity
and quality (Banca d’Italia 2010a).
This new globalization wave profoundly altered the structure of compara-
tive advantages, adding further challenges. Since the 1990s, the total labor force
of the global market economy has doubled (Freeman 2006), resulting in greater
turbulence for economies like Italy’s, which is enormously unbalanced toward
labor-intensive industries such as textiles, clothing, and footwear (Table 16.1).
As a result of increased competitive pressures from low-wage countries (China
in particular), these sectors recorded the largest drop in employment (Federico
2010) and firms’ prices and profits (Bugamelli, Fabiani, and Sette 2011). Since
the mid-1990s, the global share of Italian exports has steadily declined, falling
more than that of the other major European economies (especially Germany).
Italy seems to be subject mainly to the negative effects of the new globalization
wave. In terms of outward investment activity, it lags behind other European
countries: according to Eurostat data, in 2007 the stock of outward invest-
ments amounted to 23 percent of GDP in Italy, against 35 percent in Germany,
38 percent in Spain, and 52 percent in France. In terms of inward investments,
it shares with Germany the last position among Organization for Economic
Cooperation and Development countries.3
During the latest globalization and technological wave, the backbone of the
Italian productive system has been a large mass of small and medium enter-
prises (SMEs), in part caused by the progressive disappearance of larger firms
in strategic sectors. Often organized within industrial districts where they can
exploit agglomeration externalities, back in the 1970s and 1980s these SMEs
guaranteed employment, exports, and in general a significant dynamism to the
Italian economy. Since the mid-1990s, however, they have entered a difficult
phase that coincides with the country’s prolonged and unsatisfactory economic
performance.
A Role for Firm Size?

In the previous section we were reminded of how big businesses have often
been the main actors of Italy’s industrial development and how the slow growth
of the last decades accompanied a productive system dominated by SMEs. Next
we give more substance to our thesis that firm size affects a country’s compet-
itiveness and growth.
Providing evidence in support of these claims along the 150 years of Italy’s
unification is not possible. The lack of detailed firm-level data for the earliest
years combined with equally detailed measures of firm- or sector-level perfor-
mance is an insurmountable obstacle to conducting reliable empirical exercises
for the entire period. However, data referred to the last twenty to thirty years
can be helpful, especially if we accept the hypothesis that the profound charac-
teristics that permit a firm to be close to the technological frontier and success-
ful in the global economy are invariantly the same across modern times.
Therefore, here we provide a survey of the recent empirical literature that
relates firms’ characteristics to indicators of performance, and conclude that
there is a positive correlation between firm size on one side and innovation,
exports, internationalization, and productivity on the other. In the next section
we use census data on the Italian manufacturing sector and firm-level data on
the main Italian firms (both available since the years immediately preceding
World War I) to argue that changes in the distribution of firm size can help
explain successes and failures of the Italian economy in the different interna-
tional cycles.
Recent data on research and development (R&D), patents, and the realiza-
tion of product and process innovations all consistently signal that Italy lags
behind with respect to the other main advanced economies (Bugamelli et al.
2011). For example, R&D expenditure in Italy amounted in 2008 to 1.2 percent
of GDP, below the European Union average (1.8 percent) and very far from
Germany (2.6 percent) and Scandinavian countries; the gap is almost entirely
caused by the private component.
Although important, Italy’s sector specialization in traditional low-technology

goods is not the main driving factor (Bugamelli et al. 2011). It is instead firm
size. According to Eurostat’s Community Innovation Survey data, in 2008 in all
main European countries the share of innovative firms increases with firm size:
in Italy it goes from 37 percent among firms with ten to forty-nine employees
to 58 percent among firms with 50 to 249 employees, to 74 percent for larger
firms. Again, similar indications emerge from data on R&D and patents.
At the macro level it is widely acknowledged that innovation has a direct
impact on firms’ productivity that in turn affects the rate of growth of a coun-
try. Pagano and Schivardi (2003) find that, controlling for sectoral differences,
in those countries where average firm size is smaller, the growth rate of labor
productivity is lower because of the greater difficulties smaller firms face to pay
for the high fixed costs related to innovation and R&D activities.4
As pointed out in the previous section, Italy has always lagged behind in
the adoption of ICT. According to Bugamelli and Pagano (2004), as of 1997
the delay was not so much because of production specialization skewed toward
more traditional sectors as much as by the scarcity of qualified workers and the
high costs associated with the introduction of ICT. Using firm-level data for
2001, Fabiani, Schivardi, and Trento (2005) came to similar conclusions, noting
that the size of a firm and the availability of qualified personnel were deter-
mining factors for ICT adoption. Local presence of big businesses also tended
to have a favorable impact on the likelihood of ICT investments.
The problem why a productive system based primarily on SMEs is not
able to stay abreast of the uses of ICT has reasons that are varied and inter-
connected. Given their specificity, these technologies are capable of changing
a firm’s internal organization. Empirical studies focusing on the United States
(Bresnahan, Brynjolfsson, and Hitt 2002; Black and Lynch 2001 and 2004) and
Italy (Bugamelli and Pagano 2004) show how production gains were superior
for those firms that adopted ICT and, at the same time, changed their inter-
nal organizations, reducing the number of hierarchy levels and moving toward
more horizontal structures. This suggests that the potential for organizational
improvements is higher in more organizationally complex firms that, thanks
to ICT, can efficiently reduce their scale. Furthermore, reorganization calls for
codifying and standardizing business activities, which is typical of large-sized
firms because smaller ones can count on the use of “informal” exchanges rather
than standardized procedures.
Exports are an important indicator of an economy’s competitiveness, espe-
cially for a manufacturing country, such as Italy. For decades the international
trade literature has focused on the characteristics of countries and industries,
developing the concepts of comparative advantage and economies of scale. More
recent empirical studies (Bernard and Jensen 1999, 2004a, 2004b) and theoret-
ical works (Melitz 2003; Bernard et al. 2003; Melitz and Ottaviano 2008) have
concentrated on firms and their high degree of heterogeneity. Therefore, it is
worthwhile to focus on the characteristics of exporting firms.
In the United States and principal European countries, exporting firms are
few in relation to the total number of active firms—generally larger, more pro-
ductive, profitable, and capital-intensive, and paying higher wages than non-
exporters.5 The set of exporting firms is highly heterogeneous, comprising a
legion of small exporters and a few superstars, which alone account for the bulk
of national exports (Mayer and Ottaviano 2007).
According to Istat-ICE data on the universe of Italian exporters in 2006,
firms exporting goods totaled about 190,000, representing 4.2 percent of all
firms and employing about 20 percent of the total workforce. About 80 percent
of them had fewer than sixteen employees, but these firms accounted for only
16 percent of total exports (compared with 60 percent) for those with one hun-
dred or more employees. Firm size positively affects the propensity to export,
the ability to reach non-EU markets (in particular those that are farther away),
and the number of foreign markets where a firm sells its products. Bugamelli,
Cipollone, and Infante (2000) show that the role of size becomes increasingly
important with the degree of sophistication of international activities, start-
ing from exports (the simplest form) to commercial agreements, technical and
production agreements, and, finally, direct investment.6 Also strong is the link
between internationalization and innovation: companies with production facil-
ities abroad are also more likely to engage in product and process innovation
and R&D, have a higher proportion of high school and university graduates
among their staff, and have a higher propensity to carry out organizational
innovation.
Globalization also means increased competitive pressures. The growing
importance of low-wage countries in international trade has had a significant
impact on Italy’s economy. Analyses conducted on firm-level data from various
countries suggest quite clearly that firms in advanced economies can escape
those new competitive pressures by increasing R&D expenditure, improving
product quality, and hiring high-skilled workers (Bernard, Jensen, and Schott
2006; Bloom, Draca, and Van Reenen 2011; Buono 2011; Martin and Mejean
2011; Mion and Zhou 2011). In the case of Italy, nontechnological innovations—
related to marketing, branding, distribution networks, and postsales assis-
tance—have proved to be important in strengthening firms’ competitiveness in
the post-euro era (Bugamelli, Schivardi, and Zizza 2009). All these activities
impose high up-front costs, effectively precluding smaller firms.
In general, larger firms have a higher propensity toward R&D and
innovation, tend to adopt better management practices, hire more likely skilled
workers, and have the financial strength to invest in capital and new tech-
nologies; it is not surprising that they also turn out to be more efficient. In
Figure 16.1 we plot the value-added per hour worked, at constant prices, com-
puted on the Bank of Italy’s sample of manufacturing firms with at least twenty
employees (Invind). The data, averaged by class size, show that indeed the level
of productivity grows with the size of the firm. With some exceptions, often
caused by the small sample size as in the case of firms with more than five
60
20–49 employees
50–99 employees
55
100–199 employees
200–499 employees
50 more than 500 employees
euro
45
40
35
30
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
years
Figure 16.1 Value added per hour worked by firm size class.
Source: Bank of Italy’s survey on industrial firms (Invind).
hundred employees, the growth rate of productivity has also been increasing
with firm size.
The Size Distribution of Firms

Given the evidence reviewed in the previous section, it comes natural to link
the recent unsatisfactory performance of the Italian economy—in terms of pro-
ductivity, innovation, and technology adoption—to firm size. In 2007, average
firm size in Italy was equal to four employees, less than that of Germany (13.3),
United Kingdom (11.1), France (5.8), and Spain (5.3). It is a structural feature that
is not driven by the sectoral composition of production: according to a shift-
share analysis, the firm size gap between Italy and the EU-15 average is almost
exclusively caused by the within-sector component (Banca d’Italia 2010b). The
average size of Italian firms is smaller than that of the other main European
competitors in all manufacturing sectors (Table 16.2). These average figures hide
a much skewed firm size distribution: in 2009 out of 4.5 million of active firms,
95 percent had fewer than ten employees and overall absorbed 47 percent of
total employment (Istat 2011d). On the other end of the distribution, firms with
more than 250 employees numbered only 3,718 (about a third in the manufac-
turing sector).
The firm size structure of the Italian productive system has been more or
less the same in the last three or four decades. But what was it like before?
Again, data availability (or lack thereof) constrains our analysis. As seen in
Table 16.1, census data are only available since 1911 and only for the manufactur-
ing sector. However, this is not much of a loss. As argued in the second section,
1911 is a key year to draw a quite reliable picture of the industrialization process
Table 16.2 Average firm size, by country and sector, 2008 (in percentage of the
sectoral average of the five countries)
Germany Spain France Italy UK
Foodstuffs and tobacco 110.6 57.7 38.6 26.8 266.4
Textiles 169.8 60.6 96.6 67.4 105.6
Clothing 213.7 73.5 54.9 67.9 90
Leather goods 156.2 68.7 107.3 69.2 98.7
Wood 142.2 80.1 97.4 52.5 127.8
Paper 204.5 59.7 114.1 43.4 78.4
Publishing 197.4 63.7 58.1 61.3 119.7
Energy 115.8 239 89.6 17.2 38.4
Chemicals 202.2 52.2 108.2 53.6 83.9
Rubber and plastic 168.8 65.3 131.1 49.7 85
Glass, cement, and bricks 141.4 92.6 79.3 51.6 135.2
Basic metals 170.8 73.8 131.3 57.7 66.4
Metallurgy 170.6 67.6 108.7 59.3 93.8
Mechanical instruments 217.9 53.7 80.4 57.4 90.6
Office machinery 213.5 31.8 89.9 55 109.8
Electrical devices 223.8 83.7 99.2 29.5 63.7
Radio and televisions 186.5 76.9 132.3 34 70.3
Precision instruments 154.8 51.1 87.3 48.1 158.6
Automotives 254.5 54.4 88.7 61.7 40.8
Other transportation 218.8 42.2 81.8 39 118.2
equipment
Furniture and other 171.7 78.5 54.7 71.5 123.6
manufacturing
Total manufacturing 196.8 64.5 75.9 49.5 113.3
Source: Eurostat.
that slowly interested the Italian economy in the first half century after uni-
fication. Secondly, manufacturing has been (and still is) central to technology
advancements and globalization waves, thus representing the natural focus of
our paper.
Table 16.3 shows average firm size by manufacturing sector for ten of the
last one hundred years. The figure for the whole sector follows an inversely
U-shaped trend: equal to 5.8 employees per firm in 1911, average firm size
Table 16.3 Average number of workers per plant, by sector

1911 1927 1937 1951 1961 1971 1981 1991 1996 2007
Foodstuffs 3.9 3.9 2 4.6 7.1 7.8 7.6 6.8 5.8 6
Tobacco 341 477.8 78.7 70.8 35.9 53.2 87.6 68.8 72.7 139.4
Textiles 51.6 56.9 15.2 16 12.8 10.2 7.6 8.8 9.5 8.8
Clothing 3.5 2.1 1.7 1.9 2.7 4.5 6.1 7 7 5.8
Leather goods 2.4 1.9 1.8 2.2 3.3 6.9 9.6 8.8 9.1 7.7
Wood 2.7 2.4 2 2.5 3.2 3.1 3.1 3.2 3.4 3.9
Paper 27.8 29.2 28.4 40.7 34.7 31.6 21.3 18.1 16.2 15.6
Publishing 9.8 8.6 10 9.9 11.7 11.1 8.6 7.3 6.2 5.6
Energy . 28.4 36.1 81.2 87.1 65.8 42.7 28.9 29.3 27.1
Chemicals 16.3 18.9 9.7 32.1 48.8 55.7 39.6 33.1 27.6 24.6
Rubber and plastic 15.8 44.9 16.2 17.5 14.8 14.2 12.6 13.5 13.6 13.8
Glass, cement, and 11.6 9.8 10.4 11.7 16.4 14.4 12.3 9.4 8.2 8
bricks
Basic metals 24.2 32 38 67.4 44.3 43.2 55.3 42 33.7 30.7
Metallurgy 3.3 3.7 7.5 3.9 5.7 7 6.2 6.7 6.6 6.8
Mechanical 7.4 6 6.4 5.5 6.3 6 9.6 14.6 12.9 12.1
instruments
Office machinery 11.4 18.4 25.7 190.1 375.7 451.7 85.7 66.4 31.4 6.9
Electrical devices 15.6 16.7 16.3 20.6 21 14.1 17.9 12.6 11.9 9.5
Radios and 7.1 9.7 5.4 9 13.9 12.5 19.7 13.2 10.6 10.1
televisions
Precision 6.9 8 4.2 10.6 17.6 15.1 7.3 4.5 4.6 5.8
instruments
Automotives 5.9 9.2 298.6 115.3 210.2 176.7 105.8 92.6 82.2 59.7
Other 10.6 9.8 9.1 13.2 30.7 42.5 42 32.8 22.3 16.8
transportation
equipment
Furniture 5.1 5.6 4.3 4.1 6.7 7 6.1 5.5 5.2 5.6
and other
manufacturing
Recycled materials 17.5 6.7 4.5 13.2 5 3.8 4 5.9
Manufacturing 5.8 5.7 4 5.6 7.5 8.7 9.1 8.8 8.2 8
increased (with only one exception, the interwar period) until the beginning
of the 1980s and then started declining. This pattern is quite striking in some
specific sectors. Textiles, a sector that we classified within the first industrial
revolution, had an average firm size of more than fifty employees until 1927; it
is now about nine. Even more striking is the expansion after World War II and
the fast reduction since the 1980s in some sectors of the second industrial rev-
olution: chemicals, steel, automotive, and other forms of transportations. The
figure for office machinery confirms the relevant and very large presence of
Italian producers until 1971 and then the subsequent dramatic collapse.
Thus, whereas the predominance of SMEs has always distinguished Italy’s
industrial history from that of front-runner nations like the United States,
Germany, France, and United Kingdom, examining Italian average firm size
across one hundred years provides the first signs that something has changed,
in particular after the 1970–1980s.
Again, it is useful to focus on the tails of the distribution, in particular
on the right tail of the largest firms (i.e., those that, according to our thesis,
are more capable (and therefore relevant for a country) of catching up with
new technologies and facing globalization’s challenges). To this aim, Table 16.4
reports the share of employment in units with more than five hundred work-
ers by sector. In line with our thesis, very large firms were highly predomi-
nant in textiles until World War II (with 40 percent of sectoral employment); in
chemicals, energy, rubber and plastics, and steel during the “golden age” (about
50 percent of sectoral employment); and automotives (stable around 80 percent
from 1937 to 1981). Large firms in office machinery absorbed 90 percent of all
employees during the 1960s. Over the last forty years the weight of large firms
decreased in all sectors, reaching 3 percent in textiles, 7 percent in rubber and
plastics, and 45 percent in office machinery.
In Table 16.5 sectors are grouped according to our definition of industrial
revolutions. In the sectors of the first industrial revolution, the employment
share of large firms (more than five hundred employees) was slightly sta-
ble (below 20 percent) until 1951, after which it started a steady decline until
reaching 3 percent in 1996. The same share for the smallest firms (less than
ten employees), very high since 1911 (46.6 percent), declined in the post–World
War II period reaching 29.4 percent in 1971: since then it increased again to
about one-third. Combining these two pieces of evidence, we see quite clearly
the growing importance of medium-sized firms. Turning to the second indus-
trial revolution’s sectors, we see large firms’ employment share to be steadily
around 30 percent until 1981 and then decrease fast. The growth and collapse
of Olivetti depicts the evolution of the employment share of large firms of the
third industrial revolution, going from 23.3 percent in 1927 to 40 percent in 1971
and then collapsing to 18.8 percent in 1996.
Since our thesis revolves around the role of big business as a driving force
of an economy, it is worth focusing on them using firm-level data on the top
two hundred Italian manufacturing firms (Giannetti and Vasta, 2006). Data
Table 16.4 Employees in plants with more than five hundred workers as a share
of total number of employees, by sector (percentages)
1911 1927 1937 1951 1961 1971 1981 1991 1996 2006
Foodstuffs — 3.7 11.6 4.8 11.1 11.6 9.3 6.9 6.9
6.5
Tobacco — 92 51.3 51.2 48.6 42.4 34.1 28.2 27.1
Textiles — 37.3 30.7 40.4 26.2 16.5 7 3.2 3.1
3.2
Clothing — 4.7 2.3 1.9 4.9 11.1 6.7 2.7 3.3
Leather goods — 1.9 2.1 5.2 3.4 6.5 2.7 1.7 2.6 1.1
Wood — 0.1 1.6 1.3 0.5 1.1 0.4 0 0.4 0.8
Paper — 23 14.3 27.3 20.7 17 15.6 10.1 6.6
4.8
Publishing — 4 11.6 12.3 10.8 15.4 14.9 7.3 7.4
Energy — 15.8 25.8 53.6 45.8 46.1 43 36.2 38.6 32.2
Chemicals — 22.1 23 46.8 50 51.4 42.4 30.6 26.8 20.1
Rubber and plastic — 67.4 38.9 57.7 25.3 29.2 27.3 10 7.5 6.8
Glass, cement, and — 4.6 8.8 7.8 6.8 9 8.3 4.2 5.5 3.6
bricks
Basic metals — 48.8 37.7 59.4 48.6 50.5 52.5 37.5 33.4
4.8
Metallurgy — 15.5 22 17.7 12 10.4 4.8 1.4 1.3
Mechanical — 18.7 45.3 22.3 15.7 19.1 22.1 16.2 14.6 12.2
instruments
Office machinery — 45.2 58.4 76.8 90.5 86.7 69.9 61.5 46.2
Electrical devices — 21.7 48.7 42.7 34 35 25.2 12.9 14.6
13.4
Radios and televisions — 18.4 35.2 37.5 42.9 47 51.4 35.7 35.3
Precision instruments — 24.4 29.3 39 27.8 23 14.9 6.4 8.3
Automotives — 52.1 80.9 75.4 75.7 78.7 74.6 65.2 61.3
Other transportation — 51.7 60.9 60.7 62.3 56.8 59.9 50.7 45.2 43
equipment
Furniture and other — 9 8.8 4.6 4.8 4.3 1.9 1.2 1.7
manufacturing
2
Recycled materials — 26 10.3 n.a. n.a. 2.3 10.5 — 11.9
(Imita db7) are available for the years 1913, 1921, 1927, 1936, 1952, 1960, and
1971, and have been complemented by us with similar information found in
Mediobanca publications for the years 1981, 1991, and 2001. For any single firm,
we know the name, the sector, the geographic location, and the value of corpo-
rate stock holdings and of total assets.
Table 16.5 Percentage share of employees by firm size and average firm size, by
group of sectors
1911 1927 1937 1951 1961 1971 1981 1991 1996
<10 employees 46.6 40.6 43.9 40.6 36.3 29.4 32.3 34.9 34.3
1st industrial >500 employees 17.9 15.5 18.1 12.4 10.4 5.7 3.1 3.2
revolution
<10 employees 30.8 28.8 19.2 22 21.3 20.1 18.2 20.3 21
2nd industrial >500 employees 24.9 36.1 34.2 28.5 30.4 28.9 19.1 16.3
revolution
<10 employees 30.1 25.1 28 15.1 12.7 13.6 14.5 22.2 23.6
3rd industrial >500 employees 23.3 37.1 42.3 39.4 41.1 32.5 20.3 18.8
revolution
Source: Federico (2003b).

Notes: Sectors in first industrial revolution: foodstuffs and tobacco, textile, clothing, leather goods,
wood and furniture, paper, and metallurgy. In second industrial revolution: energy, chemicals, rubber
and plastics, glass, cement and bricks, basic metals, metallurgy, mechanical instruments, automotives,
and other transportation equipment. In third industrial revolution: office machinery, electrical devices,
radio and televisions, and precision instruments. Metallurgy is included in the first and the second
revolutions because its products evolved with two different technologies.
A first look at the sectoral composition of the top two hundred firms confirms
the conclusion drawn from census data (Figure 16.2). At the beginning of the
last century Italy had large players operating in sectors of the first and second
industrial revolutions. The importance of the latter kept growing until the end of
the 1970s, whereas the former began contracting after World War I. Among this
sample of big businesses, the relevance of firms in ICT-related sectors has always
been limited. In other terms, if we look at the largest manufacturing firms Italy
today resembles the structure it had at the beginning of the 1980s.
The Imita database does not allow us to study the evolution of large firms,
because the only quantitative figure (total assets) is not homogeneous over time.
Therefore, we have estimated the number of employees8 so as to compare the
data on the top two hundred firms with census data.9
Figure 16.3 reports the ratio between employment in the top two hundred
firms and the total employment of census data by the three groups of sec-
tors related to the technological revolutions. For all three, the reduction in the
weight of the largest firms after 1971 is quite visible: in the case of third indus-
trial revolution sectors, the effect of Olivetti’s collapse is again striking. Overall,
the share of employment of the top two hundred firms decreased from 70 per-
cent before World War I to 40 percent in 1991 and 2001.
The reduction of large businesses’ importance may also be caused by their
direct downsizing. In Table 16.6 we show different points of the size distribution
of the top two hundred firms. Despite some inevitable measurement error in
80
1st Ind. Rev.

70
2nd Ind. Rev.
3rd Ind. Rev.
60
50
40
30
20
10
0
1913 1921 1927 1936 1952 1960 1971 1981 1991 2001
Figure 16.2 Composition of top two hundred firms by group of sectors (percentages).
Sectors included in the first industrial revolution: foodstuffs and tobacco, textile,
clothing, leather goods, wood and furniture, paper, and metallurgy. In the second
industrial revolution: energy, chemicals, rubber and plastics, glass, cement and bricks,
basic metals, metallurgy, mechanical instruments, automotives, and other transportation
equipment. In the third industrial revolution: office machinery, electrical devices, radio
and televisions, and precision instruments. Metallurgy is included in the first and second
Source: Authors’ elaboration on Imita.db data (Giannetti and Vasta 2006).
our estimates, it is quite surprising that, with very few exceptions, for all tech-
nological revolution groupings and any point of the distribution, the highest
number is recorded either in 1971 or in 1981. After those dates, the minimum,
the median, the mean, and the maximum values all decrease.
As pointed out by many commentators (Trento and Warglien 2003), the
downsizing of firms in the last decades is a common phenomenon across all
advanced countries: it is very likely the outcome of organizational innovations
brought about by the new technologies of information and communication. By
allowing better monitoring of the single phases of a production process, ICT
indeed allows firms to adopt more horizontal management practices and make
a stronger recourse to external outsourcing. Both changes favor a reduction in
firm size.
Now the point for us becomes to show that the downsizing of Italian firms
has been stronger than in other advanced economies, despite the fact that the
initial size distribution of firms was already highly fragmented. Some evidence
in this direction, although scant, is provided in Table 16.7 where, using different
sources and trying to take into account differences caused by the unit of observa-
tion (plants versus firms), we show data on the employment share in plants/firms
50
45 1st Ind. Rev.

2nd Ind. Rev.
40 3rd Ind. Rev.
35
30
25
20
15
10
0
1911 1927 1937 1951 1961 1971 1981 1991 2001
Figure 16.3 Share of employment of top two hundred over total employment, by group
of sectors (percentages). Notes: Sectors included in the first industrial revolution:
foodstuffs and tobacco, textile, clothing, leather goods, wood and furniture, paper, and
metallurgy. In the second industrial revolution: energy, chemicals, rubber and plastics,
glass, cement and bricks, basic metals, metallurgy, mechanical instruments, automo-
tives, and other transportation equipment. In the third industrial revolution: office
machinery, electrical devices, radio and televisions, and precision instruments. Metal-
lurgy is included in the first and second revolutions because its products evolved with
two different technologies.
Source: Authors’ elaboration on Imita.db data (Giannetti and Vasta 2006) and census
data (Federico 2003b).
with more than one hundred workers for Italy, France, and Germany. Between 1961
and 2001, that share decreased in Italy by 15 percentage points against around 10 in
France and Germany; considering the initial level, the reduction in Italy amounted
to more than 30 percent, double the reduction recorded in France and Germany.
Entrepreneurship
Firm size is not a given; it is the endogenous choice of entrepreneurs. In this
section we assess the relationship between entrepreneurial choices and models
and the forms of enterprise in the course of Italian economic history.
Entrepreneurship is innovation, decision making at the highest levels, risk,
and the ability to take advantage of favorable business conditions. It is a factor
of development that is difficult to separate from the larger context (Amatori
2006) but an attempt is made here for analytical explanatory reasons.
Table 16.6 Size distribution of top two hundred firms, by group of sectors
Min Median Mean Max
1st Industrial Revolution
1913 52 2,209 3,224 15,000
1927 81 1,191 2,300 21,212
1936 51 1,092 2,581 16,279
1952 24 1,192 1,964 8,009
1960 190 2,200 5,561 138,300
1971 543 2,672 3,215 7,986
1981 674 2,151 3,126 16,137
1991 264 1,464 2,112 8,504
2001 358 1,200 2,057 11,772
2nd Industrial Revolution
1913 41 1,400 2,688 42,222
1927 21 835 2,053 27,778
1936 4 718 2,991 36,711
1952 16 1,127 2,944 39,150
1960 134 1,712 4,199 92,891
1971 14 1,719 5,369 182,501
1981 146 1,945 4,956 119,202
1991 23 1,551 3,463 102,997
2001 164 1,787 3,260 41,093
3rd Industrial Revolution
1913 1,498 1,667 2,353 4,444
1927 541 991 1,081 1,802
1936 197 757 926 1,645
1952 253 1,644 3,584 25,667
1960 575 2,180 3,243 16,396
1971 1,743 3,801 5,784 33,142
1981 1,091 3,917 5,483 21,749
1991 300 2,393 3,175 14,727
2001 19 2,243 2,813 17,481
Source: Authors’ elaborations on Imita and Mediobanca data.

Notes: Sectors in first industrial revolution: foodstuffs and tobacco, textile, clothing, leather goods,
wood and furniture, paper, and metallurgy. In second industrial revolution: energy, chemicals, rubber
and plastics, glass, cement and bricks, basic metals, metallurgy, mechanical instruments, automotives,
and other transportation equipment. In third industrial revolution: office machinery, electrical
devices, radio and televisions, and precision instruments. Metallurgy is included in the first and second
Table 16.7 Share of employees in units/firms with more than one hundred
workers (percentages)
Country Source of data Year Firms Plants
Federico 1961 49* 43
Italy Federico 1991 32
Traù 1996 30
Eurostat 2001 34 29*
Istat 2007 34 29
diff 61–01 pp −15 −14
diff 61–01 −31 −32
Van Ark 1962 72 61*
France Van Ark 1990 60 52*
diff 61–01 pp −11 −9
diff 61–01 −15 −15
Traù 1962 78* 69
Van Ark 1967 82
Germany Van Ark 1990 81 70
diff 61–01 pp −9 −9
diff 61–01 −12 −13
Notes: * indicates that the figure is an estimate.
That being said, in postunification Italy we find a group of entrepreneurs

(a minority but also very outspoken) who were able to take full advantage of the
opportunities offered by the biggest economic operator of the nation: the State.
This intertwining of patriotism and business dealings is evident in the events in
1862 that brought Pietro Bastogi to establish Società Strade Ferrate Meridionali
(southern railways), Italy’s biggest firm at the time as it was created with the
then stratospheric amount of one hundred million lire (Coppini 2004). We also
see it in the Perrone brothers’ project to transform Ansaldo into a group that,
starting with minerals, would be capable of manufacturing anything—from
machinery and warships to automobiles and electrical systems for telecommu-
nications (Webster 1978). Probably the best example of the ties between business
and the State was Terni, a sort of public armory that was entrusted to a private
entrepreneur, Vincenzo Stefano Breda, already head of a large company (Società
Veneta di Costruzioni10) that functioned thanks to public orders (Bonelli 1975).
Along with these examples of government control or political capitalism,

there was a vast segment of firms that took advantage of sectorial interdepen-
dencies and were almost always self-financed. Their leaders included some of
the first great entrepreneurs in textiles (Federico 1994a; Romano 1992; Roverato
1986). They did not turn down State support and at times pursued market con-
trol by cartel agreements, but these entrepreneurs knew how to keep abreast of
the latest developments (technical and organizational) from around the world.
Industry sectors and sizes in this vast area were varied, ranging from the first
attempts of standardized production in foods to similar trials in leather and
shoe manufacturing.11 Most were either small or micro-small businesses related
to agriculture or with origins tied to the dismantling of the corporative system
(Colli 2002a), perhaps explaining the persistent Italian familism.
With the age of the belle epoque (1896–1914) we start to see clusters of
entrepreneurs who have innovation as the foundation of their actions. Giovanni
Agnelli was the first to understand that the automobile was not a toy for the
wealthy but a product destined for mass consumption and capable of trans-
forming civilization (Castronovo 1971). Alberto and Piero Pirelli undertook
consolidation of the rubber business created by their father years earlier. They
transformed Pirelli into a large multinational; in the early 1900s it operated in
Spain, South America, and even in the very heart of international capitalism—
Southampton in Great Britain (Bigazzi 1981). Giorgio Enrico Falck, a technician
of Alsatian origins, transformed steel production in Italy by introducing the
electric oven, a new method that offered greater flexibility. Falck accomplished
it without government commissions, taking advantage of the urban and indus-
trial development underway in Northern Italy (Pozzobon 1982).
As much as this form of capitalism was innovative and on par with the most
significant international competitors of the era, still its dimensions were limited
and it could not be transformed into a diffused capitalism like that of the United
States or Germany (Amatori and Colli 2011). The internal market’s dimension
and insularity were the main reasons for the limited development of firms.
International markets helped to some extent. In the years after World War
I, Italy possessed a number of well-organized and highly competitive multina-
tionals, such as Fiat and Montecatini; by the mid-1920s the largest Italian firm
was Snia, created by Riccardo Gualino, a tycoon who held a real hegemony
on manufacturing artificial fibers on a worldwide basis (Archivio Storico Fiat
1993).
Still, Italian firms faced stiff competition in foreign markets12 and in the
interwar period suffered from increasing international economic instability.
Moments of success alternated with unexpected setbacks and ruinous falls. In
the 1920s Fiat was in a potentially risky situation as it exported more than a
half of its production while the Fascist government pursued a strong deflation-
ary policy. The company decided to focus on reinforcing its political ties in
Italy, a fortuitous move when in 1930 Benito Mussolini exercised his authority
to kick Ford out of the country (Castronovo 1971; Toninelli 2009).
Montecatini is an even more remarkable example. It needed heavy protec-

tionism from the government so as to justify its investments in nitrogenous fer-
tilizer production (Amatori 1990). Still, the support of the regime had its price;
it was accompanied by requests for industrial rescues, including the takeover of
inefficient firms operating in the chemical and mining sectors, the continued
use of obsolete methods that were a burden on large firms. So significant was
the impact of these measures that we can attribute to them much of the respon-
sibility for the irreparable crisis of the 1960s (Amatori 1990).
Bargaining with political power was a common practice among Italy’s major
entrepreneurs. Terni’s head, Arturo Bocciardo, was skilled in working the sys-
tem and some of the agreements he reached are true masterpieces. After World
War I, steel production for war purposes was no longer a good business and
had become a source of steep losses. Therefore, Bocciardo decided to put the
company’s focus on the production of electricity and, subsequently, on the elec-
trochemical sector. Still, the company did not entirely abandon armament steel
production. Bocciardo insisted that the “sacrifice” made by Terni be rewarded
with new tariffs in the electricity industry and an important share of the chem-
ical alliances in effect at the end of the 1920s (Bonelli, 1975).
Italian capitalism was not only limited to its ties with the public sector
and regulation. In the years preceding the Great Depression, a good-sized seg-
ment of Italy’s business leaders studied the American model based on high
production volumes and, as a consequence, high salaries that lent themselves
to greater consumption. Undoubtedly, Fiat wanted to “do things the way Ford
does” when, in 1923, it inaugurated Europe’s most modern automobile factory,
Lingotto. Emulating Ford was even more apparent in 1936 when Giovanni
Agnelli, in his 70s and without a direct heir,13 used the profits made during the
war in Ethiopia to build the large horizontal factory of Mirafiori (Castronovo
1971). However, the limits of the internal market could still be felt. Lingotto’s
director, Ugo Gobbato, visited Detroit in the 1920s to see Ford’s plant in oper-
ation. In the report he sent back to Agnelli he noted “their production line is
like an Alpine torrent that forcefully runs down the mountain. In comparison,
ours is like a pond in the field” (Bigazzi 1980, 918). At the time, Fiat manufac-
tured two hundred automobiles a day, whereas the Ford plant produced three
thousand.14
Has it ever been possible to speak of managerial capitalism in Italy? Or of a
system where a diffused ownership allows salaried managers to make high-level
decisions regarding the allocation of corporate resources?
Theoretically, something like this would have been possible in the electric
industry, which was dominated by large firms with numerous shareholders,
such companies as Edison, SADE, Sip, and SME. The reality, however, was dif-
ferent and only achieved by a happy few (wealthy families like Agnelli, Pirelli,
Feltrinelli, Volpi, Cini, and Marchi) who effectively used mischievous ownership
schemes, corporate pyramids, cross shareholdings, and multiple vote shares.
In these firms salaried managers operated under a clear mission: they were
functionaries whose principal role was to make sure that the affluent families
received hefty dividends (Segreto 2004).15
With the dawn of the State as entrepreneur, managers start to take on a
greater entrepreneurial role. At the moment of its creation in 1933, Istituto di
Ricostruzione Industriale (IRI) controlled 40 percent of the publicly traded
companies on the stock exchange. The man behind IRI was Alberto Beneduce,
a technocrat who had acquired much experience as a collaborator of Francesco
Saverio Nitti, an influential politician of Southern Italy. As head of IRI,
Beneduce’s first objective was to break the ties between bank and enterprise,
which tended to move in tandem; once this had been accomplished, it would be
possible to start privatizing the firms that had been made healthy. This second
objective was only partially achieved because many of the firms taken over by
IRI were in such sectors as steel, machinery, shipbuilding ,and telecommunica-
tions, rendering them not only difficult to find new buyers but also expensive
to operate.
Thus, Beneduce found himself permanently in charge of industrial concerns
and based his actions on precise guidelines. First of all, ownership of the firms
remained in the hands of the State (so as to avoid fire-sales), whereas the com-
panies were expected to act as publicly traded concerns under civil law. Second,
in an era of confused conglomerates, these companies were to adhere to the
conceptual framework of industrial sectors. The outcome was a complex archi-
tecture with the super-holding IRI at the top overseeing the sectorial finance
companies (1934 Finmare; 1936 STET; 1937 Finsider) that, in turn, oversaw the
companies in their care. Lastly, Beneduce opted to entrust management of the
IRI companies to “qualified hands,” the best managers available.16
Supported by bonds guaranteed by the State, the formula adopted by IRI
was effectively an ingenious device for overcoming the gap in Italy between
the financial needs of industrial development and the capital actually available.
For the subsequent transformation into a long-lasting and consistent manage-
rial capitalism, however, IRI still had a weak point: ownership was anything
but diffuse because the owner was a hard-to-please master—the State—who,
once the early years of benign neglect had come to an end, started to show his
weight (Amatori 2000).
In the golden years of the international economy that followed the end
of World War II, Italy experienced a convergence of top managers from
State-owned firms with entrepreneurs from private industry. They included
Oscar Sinigaglia (Finsider), Vittorio Valletta (Fiat), Enrico Mattei (Eni), Adriano
Olivetti (Olivetti), and Giuseppe Luraghi (Alfa Romeo). Sinigaglia, for example,
brought to fruition a plan for steel that he had been envisioning since 1910;
under the plan, Italy advanced from ninth to sixth place in the international
classification of steel-producing nations17 in less than a decade.
Common among these entrepreneurs was their ability to play in the major
leagues, to believe that the wealth of a nation can be increased—so much so
that the game did not end with a tied score. Italian firms could then take
advantage of economies of scale that exceeded the collusive contractual ties

between political powers and competitors (Amatori and Colli 1999).
Up to this point we have only dealt with long-time entrepreneurs. The eco-
nomic miracle also gave rise to new entrepreneurs, such as those who became
important players in the white goods industry: Lino Zanussi, Eden Fumagalli,
Giovanni Borghi, and Aristide Merloni. Italian industry experienced an overall
strengthening with the step up from artisanal shops to factories. Tailors became
fashion industrialists, carpenters were transformed into furniture manufactur-
ers, and cobblers became producers of footwear (Amatori and Colli 1999).
Starting from the 1970s this competitive industrial apparatus started to
weaken. This was the period in which we see a big wave of family businesses
unprepared to efficiently deal with successions (the case of Olivetti in computer
manufacturing is a good example). The system as a whole was unable to grab
on to the opportunities that accompanied nationalization of electricity;18 at the
same time a dramatic form of social unrest manifested itself in the factories.19
The decline of private big business went hand-in-hand with the dramatic defeat
of the big State-owned enterprises, in a climate of shocks external (energy and
monetary) and internal (terrorism).
In this same period, the weight of small businesses never diminished and
their utility seems to be rediscovered in the turbulent 1970s when everything else
seemed to be disintegrating. Small businesses were the vital solution because, in
a nation seen as incapable of creating a system, they easily lent themselves to
being organized into industrial districts (Colli 2002b and 2011).
In 1991, when Italy’s Parliament decided to draft legislation to safeguard
industrial districts, a census accounted for 190 of them scattered around the
country, offering employment to 2.4 million workers, 40 percent of the nation’s
manufacturing work force (Brusco and Paba 1997). Industrial districts are
homogenous territories that specialize in manufacturing goods that call for a
rather sophisticated division of labor, horizontal and vertical. This specialization
extended from goods to include the machinery and intermediate components
necessary to produce these goods. The fact that industrial districts were more
diffuse in Northern and Central Italy can be explained in large part by the his-
tory of the local territory: the heritage of the guild system, enterprising attitude,
a strong work ethic, and a wealth of manual skills found in the sharecropping
system at the base of many local economies. These were highly complementary
to the refined consumers of the many Italian “capitals” and the cosmopolitan
entrepreneurial style of merchants (Fuà and Zacchia 1984; Becattini 1998).
Industrial districts were the seedbed of the so-called fourth capitalism, with
its mid-size firms that excluded big State-owned enterprises, large private cor-
porations, and small companies (Colli 2002b). By the early twenty-first century,
more than 1500 businesses with annual sales between 150 million and 1.5 bil-
lion euros were operative in Italy. Most are concentrated in niches, often global;
thus, we might define them as pocket multinationals. These firms are at the
heart of the Italian economy today and a clear sign of its metamorphosis (Berta
2004).
Still, these businesses have their limits. First, the industries where they
operate are sectors that focus primarily on manufacturing goods for consumers
and households, perhaps too far from the technological path-breakers. Almost
as critical, they were influenced by a family management style that favors own-
ership over performance.
It seems plausible that family firms have a higher risk aversion, as a con-
sequence of the stronger correlation between business and family wealth, with
negative effects on growth, innovation, and internationalization. These “bad”
practices are associated with lower productivity and profits (Bloom and Van
Reenen 2007; Bandiera et al. 2010), innovation and R&D propensity (Bugamelli
et al. 2011). In general, we believe that the negative implications of such manage-
ment structures (more diffuse among small and medium enterprises) may not
be very relevant in periods of stable growth, but become quite limiting when a
firm is called to face significant external shocks and engage in risky activities,
such as innovation and internationalization.
Concluding Remarks
Since Italy’s unification, the nation’s production system has made great strides.
Already at the dawn of World War I it was the only Mediterranean country
with a consistent industrial base. The apex of its success was exactly during
the centennial of unification. In 1961, Italy reached a record growth in gross
national product of 8.6 percent. It was the peak of the so-called economic mir-
acle brought about by the convergence of Schumpeterian entrepreneurs work-
ing in private big business and State-owned firms; by the arrival of large firms
in new sectors, such as white goods; and by the general strengthening of the
nation’s industrial apparatus.
At this point, it might have been possible to envision Italy landing on the
economic and technological frontier, but this is not what happened. In our opin-
ion, the nation’s inability to reach a “Japanese landing” was primarily caused by
the failure of big business. Toward the end of the twentieth century, Italy was a
nation of small -and medium-size firms that permit it to remain on the list of
the ten wealthiest nations and to maintain its stronghold in traditional indus-
tries. At the same time, it was unable to take advantage of new opportunities
presented by ICT and, in general, the third industrial revolution, because these
called for the resources and the structures that only big business offers.
For industrialized Italy, this situation has similarities with that of the early
1900s, but with two big differences: no longer can the nation count on remit-
tances from emigrants, and competition from emerging economies is much

more vigorous.
Why did Italy experience the debacle of big business? The blame can be
equally shared between entrepreneurs (with their tendency to centralize con-
trol and inability to manage social conflict) and political forces who failed to
assemble a modern legal-institutional framework made up of essential compo-
nents, such as antitrust legislation, a system for protecting stock market inves-
tors, plans for promoting institutional investors, and banking regulation in line
with the times, all while continuing to waste the talents of the State as entre-
preneur. This behavior can be explained by its short-term advantages because
research shows that the actions of political powers are brought about by signifi-
cant electoral consensus (Cingano and Pinotti 2011). What can the nation do
to put itself back on the path of economic leadership? Key tools would be to
increase firm size by improving human capital, encouraging private equity, and
a reform of the legal system that places low entry and exit barriers for entrepre-
neurs so as to permit a more efficient reallocation of resources.
Acknowledgments
The authors are grateful to Maggie Dufresne, who has translated and edited the
paper; to Marco Chiurato, for editorial assistance and for his help along with
that of Elena Genito in analyzing the Assonime data; to Michelangelo Vasta,
who supported the consultation of Imita.db; and to Giovanni Federico, who
kindly provided the census data. We also thank Andrea Goldstein, Alfredo
Gigliobianco, Gianni Toniolo, Vera Zamagni, and participants of the workshop
“Italy’s International Economic Position, 1861–2011” (Perugia, December 2010) and
of the conference “Italy and the World Economy 1861–2011” (Rome, October 2011)
for their comments. The views expressed herein are those of the authors and do
not necessarily reflect those of the institutions with which they are affiliated.
Notes
1. The geographic concentration of new “modern” plants in some areas in the North
(in 1911, Milan, Turin, and Genoa produced 55 percent of the country’s industrial
value-added) accentuated the economic divide between the Northern and Southern
regions.
2. Oil refining, one of the symbols of the second industrial revolution, was totally
dominated by US companies, which controlled on-site plants transforming oil
imported from the Middle East for a still limited internal demand.
3. http://www.oecd.org/document/0,3746,en_2649_201185_46462759_1_1_1_1,00.html,
accessed November 2011.
4. Taking into account the informal R&D activity of innovative SMEs, Hall, Lotti,
and Mairesse (2009) confirm the positive relationship between firm size and
innovation.
5. See, among others, the contribution by Barba Navaretti et al. (2011), who use
homogeneous firm-level data on Austria, France, Germany, Hungary, Italy, Spain,
and the United Kingdom.
6. Not only size but also productivity is greater on average among the firms that
adopt more complex and costly forms of internationalization (Castellani and
Zanfei 2007; Casaburi, Gattai, and Minerva 2008; Benfratello and Razzolini 2008;
Federico 2008).
7. The database Imita.db was created using various statistical sources, especially the
publications of Notizie Statistiche, which refers to all stock companies. The series,
covering the period 1911–1972, was started by Credito Italiano and then taken over
in the 1920s by Assonime.
8. For a detailed description of the estimation approach we followed, see our
working paper published in Quaderni di Storia Economica of the Bank of Italy,
available also at http://econpapers.repec.org/paper/bdiworkqs/qse_5f13.htm,
accessed February 2012.
9. Given the slight misalignments between Census and Imita data (1911 versus 1913,
1936 versus 1937, 1951 versus 1952, and 1960 versus 1961), the comparison is a bit
imprecise.
10. The link between business and politics is such that, when the State is forced
to save the almost bankrupt Terni (a crisis brought on by some administrative
maneuverings of Breda) it then proceeded to appoint the wily businessman as
a Senator, meaning that he could only be judged by a special court—the entire
Senate brought together as a high court of justice. Italy’s ruling class was unable
to abandon a project like that of Breda to its own fate but put itself in the same
shoes as the newly nominated Senator (Bonelli 1975).
11. The process of centralizing and decentralizing production then extended to
include other goods for consumers and their households.
12. Breda (locomotives manufacturing) discovered first hand when German
competitors kicked it out of markets in Eastern Europe and the Balkans (Licini
1994).
13. The year before his son Edoardo was killed in a tragic accident.
14. Fordism at Fiat reached its peak in 1932 when the company’s managing director,
Vittorio Valletta, offered his employees a variation on Ford’s plan to encourage
automobile ownership among workers. In the United States a Ford plant worker
would use approximately one-fourth of his annual salary to buy his own Model T.
At Fiat, Valletta encouraged his employees to form groups of four to buy a Balilla
(then the least expensive model manufactured), which they would use to travel
together each day to the factory and then on alternating weekends could take
turns to use the automobile with their families (Bairati 1983).
15. A merciless commentary on this situation can be found in the inquiries of the
economic commission of the Constitutional Assembly (Amatori and Brioschi
2010). In those same years, Ettore Conti, in his Taccuino di un borghese (notebook
of the bourgeoisie), talks of Italian capitalism’s feudal regression in the final years
of Fascism (Romeo 1988).
16. These were individuals like Ugo Bordoni (STET) and Agostino Rocca (Finsider).
17. Sinigaglia’s plan involved the construction, thanks to funds from the Marshall
Plan, of a large new full-cycle plant outfitted with the most advanced technology
(continuous rolling mills) in Cornigliano; a highly focused specialization in two
other full-cycle plants (Piombino and Bagnoli); and the closure of a few obsolete
operations.
18. The electric companies received the conspicuous indemnities by the Government
so that they were cash-laden (Scalfari and Turani 1974).
19. All this came to an end only at the beginning of the 1980s (Berta 1998).
Chapter 17
RESOURCE
ALLOCATION BY THE
BANKING SYSTEM
Stefano Battilossi, Alfredo

Gigliobianco, Giuseppe Marinelli,
with the cooperation of
SANDRA Natoli and Ivan Triglia
Introduction
Since its unification, Italy has been characterized by a bank-oriented financial
system. As a consequence, both contemporary observers and historians always
paid a special attention to the successes and failures of its banking sector.
Indeed, the role of banks in the process of industrialization was a key issue
in early historical debates on Italy’s economic development. Elaborating on
Schumpeter’s intuition of banks as catalysts of growth because of their abil-
ity to sort and fund innovative entrepreneurial activities (Da Rin and Hellman
2002), Gerschenkron (1962a, 1962b) famously contended that German-style
universal banks played a critical role in Italy’s “big spurt” at the turn of the
twentieth century by supplying capital and entrepreneurial guidance to nascent
modern industries. This idea was enriched, revised, and qualified by subsequent
studies (Confalonieri 1980 and 1982; Hertner 1984; Toniolo 1988). The ensuing
new consensus view is that until World War I universal banks did not pursue
any explicit developmental strategy. Bank relationships apparently made no

significant contribution to relax liquidity constraints to firms’ investment, thus
casting doubts on their alleged growth-enhancing role (Fohlin 1998 and 1999).1
Over time the focus shifted from growth to the long record of finan-
cial instability that characterized Italian history from the 1880s to the 1930s.
A growing body of research has been devoted to universal banks’ interwar
evolution into holding companies controlling industrial concerns; their sys-
temic crisis in 1930–1933; and the ensuing reforms that put the State, both as
owner and regulator, at the core of the process of financial intermediation
(Toniolo 1978 and 1980; Ciocca and Toniolo 1984; Battilossi 2009). Because of
the longue durée of the institutional set up designed in the interwar period
(Cassese 1982), the banking system remained largely State-controlled and
heavily regulated until the wave of financial liberalization and privatizations
of the late 1980s and early 1990s (Onado 1982; Monti, Cesarini, Scognamiglio
1982). Often blamed for inducing excess debt in large firms while giving lit-
tle support to small- and medium-sized firms (Balducci 1979), this financial
structure accommodated nonetheless the fast-growing credit demand that
arose from industrial expansion during the Golden Age and was functional to
the pattern of postwar industrial growth, largely driven by investment of big
oligopolies in capital-intensive sectors (Ciocca 1991). Starting in the 1970s, the
regulatory framework became even heavier, also responding to the political
design of directing financial flows to preferred areas or sectors. Some scholars
(e.g., Onado 2003) spotted here the beginning of an opaque and inefficient
management of the banking system.
With the only exception of traditional studies on the long-run correlation
between financial deepening and income per capita (Goldsmith and Zecchini
1999 [written in 1975]; Biscaini and Ciocca 1979; Della Torre 2000; Della Torre
et al. 2008), it is fair to say that the actual contribution of the banking system
to growth over the course of the last 150 years has yet to be assessed empiri-
cally. This chapter contributes to a better understanding of this issue. Our
main objective is to explore empirically whether state intervention and regula-
tion imposed significant distortions in the process of credit allocation, and to
what extent financial liberalization contributed to improve the functioning of
the system.
Due to data availability, we are obliged to limit our research to the post–
World War II period. We examine the allocative efficiency of the banking
system, that is, the ability of banking intermediaries to acquire and process
information on the actual and prospective growth of firms and to allocate credit
accordingly. Within this topic, we focus on allocative efficiency across indus-
trial sectors. To investigate the matter, we use the concept of growth opportuni-
ties (GO) for each industrial sector, as revealed by stock market data. We show
that average sectoral price/earnings (PE) ratios are a proxy for the GOs of each
sector, and assume that an efficient allocation of credit takes into account the
variation of such opportunities. Cointegration between the volume of credit and
resource allocation by the banking system 487
the PE ratio is tested for relevant subperiods, keeping the banking history of the
country in the background. For such purpose we have constructed a new data
set based on information transmitted by banks to the supervisory authority—
the Bank of Italy—which includes statistics on credit allocation across sectors.
In the second section we analyze the concept of allocative efficiency against the
background of the recent literature on the finance-growth nexus, which rep-
resented our main source of inspiration. In the third section we discuss how
the institutional set up of Italian banking and its evolution over time may have
affected banks’ decisions on credit allocation. In the fourth section we explain
the nature of the data and discuss in more detail some possible objections to
our approach. In the fifth section, after summarizing the dynamics of credit
and stock market data, we present our empirical strategy and interpret the
econometric results.
Banks’ Allocative Efficiency:

A Discussion
Moving from Schumpeter’s idea, modern theories suggest that financial sys-
tems can contribute to economic growth by easing market frictions (King and
Levine 1993). The efficiency with which banks and capital markets perform
their key functions (i.e., to mobilize savings, to evaluate investment projects
and allocate resources, to exert corporate control, to facilitate liquidity and
risk management) has been shown to influence capital accumulation and
technologic innovation (Levine 1997). The notion that financial development
enhances growth is now supported by a growing body of empirical research,
mainly based on cross-country analysis (see Levine 2005 for a comprehen-
sive survey). Following on this stream of studies, economic historians also
contend that financial system development contributed to the growth process
in large industrial economies during the nineteenth and twentieth centuries
(Rousseau 2003; Rousseau and Sylla 2005; Bordo and Rousseau 2006; Fohlin
2007 and 2012).
One serious limit of the existing literature is that it is largely based on
crude measures of financial development, such as the ratio of credit to the pri-
vate sector to gross domestic product, which are a poor proxy for the specific
growth-enhancing functions performed by financial intermediaries; besides,
such literature does not discuss the channels through which finance would be
growth-conducive (e.g., by easing access to credit at lower costs for firms with
sound investment projects) (Zingales 2003). However, an empirical analysis of
the proposition that “better functioning financial systems ease the external
financing constraints that impede firm and industrial expansion, suggesting
that this is one mechanism through which financial development matters for
growth” (Levine 2005, 3), is generally prevented by the absence of data on
banks’ allocative decisions.
The concept of allocative efficiency is not easy to define. In principle, finan-
cial intermediaries could contribute to growth by allocating funds where the
marginal product of investment is higher. “Efficient” decisions here may refer
to firms with higher technical efficiency estimated on the base of firm-specific
production functions (Harris, Schiantarelli, and Siregar 1994). However, even
in a fully market-based financial system, banks’ decisions on credit alloca-
tion might be distorted by informational asymmetries. Banks are also likely
to weigh expected investment profitability against other factors that affect the
probability of loan repayment, such as leverage, liquidity, collateralizable assets,
and long-term relationship with firms (Schiantarelli et al. 1996). However, firms
with profitable investment projects are more likely to have valuable assets to
pledge as collateral and to repay loans, because of a more abundant cash-flow.
In turn, the availability of good investment projects is correlated to firms’ main
sector of activity (i.e., firms operating in fast-growing industries are more likely
to enjoy profitable investment opportunities). As a consequence, allocative effi-
ciency would imply a shift in the composition of banks’ loan portfolios from
slow-growing industries to fast-growing or high-growth potential industries.
Recent studies support indirectly this intuition. Firms operating in sectors that
are more dependent of external finance are more able to exploit GOs in finan-
cially developed countries than in financially less developed ones (Rajan and
Zingales 1998). In the former investment increases relatively more in growing
industries and decreases more in declining industries (Wurgler 2000), and real-
ized sectoral growth is more correlated to shocks to global GOs (Fisman and
Love 2004a).2
We do not expect all banks to pursue this kind of allocative efficiency to
the same extent. Differences in size, location, branch network, corporate charter,
and regulation certainly affect banks’ decisions on how to allocate credit across
sectors in response to changes in industry GOs. Banks may also decide to fol-
low a strategy of loan portfolio specialization to exploit their superior exper-
tise and monitoring abilities in particular industries. Recent studies on German
banks show significant differences of behavior across bank categories within
a generalized movement toward market-orientation in the industry composi-
tion of loan portfolios from 1970 onward (Pfingsten and Rudolph 2002; Kamp,
Pfingsten, and Porath 2005).
Theory also suggests that institutional distortions may prevent banks from
pursuing efficient allocation of funds. Banks may be subject to financial restric-
tion or repression, defined as “distortions of financial prices” and “policies,
laws, regulation, taxes, distortions, quantitative and qualitative restrictions, and
controls imposed by goverments, which do not allow financial intermediaries
to operate at their full technological potential” (Roubini and Sala-i-Martin 1995,
279). Regulatory devices may constrain their asset portfolio choices and force
them to earmark resources in favor of firms, sectors, other financial intermedi-

aries, or the government. Selective credit schemes may direct resources toward
State-owned companies, politically connected borrowers, or problematic sec-
tors (e.g., declining industries).3 However, allocative distortions may also arise
in relationship-based financial systems, where banks and firms may pay less
attention to market or price signals in their investment decisions, exacerbat-
ing the problem of resource misallocation (Rajan and Zingales 2004). It follows
that allocative efficiency should improve when liberalizing financial reforms are
implemented, leaving more ample scope to market forces in the determination
of credit cost and allocation. Empirical studies on developing economies found
evidence that after liberalization more efficient firms received more credit
(Jaramillo, Schiantarelli, and Weiss 1995; Galindo, Schiantarelli, and Weiss
2007) and financial constraints suffered by small- and medium-size firms were
relaxed (Laeven 2003).
The Institutional Framework of

Italian Banking
Regulation plays a crucial role in determining the efficiency of a financial sys-
tem. Regulatory changes may have increased or decreased the allocative effi-
ciency of Italian banks by affecting (1) the composition of bank assets directly;
(2) the intermediaries’ specialization; (3) bank governance (ownership, degree of
political control over the management); (4) market fragmentation; (5) competi-
tion; (6) bank size; and (7) the size of the information set available to bankers
(e.g., since the late 1980s bankers could engage in a wider spectrum of opera-
tions than before).
The institutional set-up of Italian banking that emerged at the middle of
the twentieth century was strongly conditioned by previous historical devel-
opments. By World War II, the system had undergone three major reforms,
around 1893, 1926, and 1936, which had shaped the legal framework in which
banks operated.
The first reform, in 1893, was a reaction to a banking crisis (mainly caused
by excessive lending to the real estate sector), which affected the six banks of
issue in various degrees: Banca Romana, a politicians’ stronghold, became insol-
vent; and Banca Nazionale del Regno, the largest issuing bank, was obliged to
a deep restructuring. The new legislation strictly regulated, merged, and reor-
ganized the banks of issue (reduced in number from six to three), by giving
prominence to the newly founded Bank of Italy, and set the stage for modern
central banking and universal, German-type banking (Gigliobianco, Giordano
and Toniolo 2009, Gigliobianco and Giordano 2012).
The second reform, in 1926, was a reaction to a series of banking crises that
in the early 1920s forced the government to intervene with expensive bailouts.
Policy-makers and legislators identified, as one of the key triggering factors of
bank instability, the excessive exposure of banks toward a limited number of
large firms and the ensuing concentration of credit in few sectors. The main
concern of policy makers was the potential impact of banking crises on mon-
etary and exchange rate stability. The 1926 banking law gave the Bank of Italy
note issuing monopoly and declared the protection of savings a matter of public
interest. The law also introduced capital requirements for the establishment of
banks, capital-deposit ratios, and limits on credit granted to individual bor-
rowers to avoid excessive concentration of risk; the Bank of Italy was entrusted
with supervision (Gigliobianco and Giordano 2012). In the 1920s, new “special”
intermediaries controlled by the State were created to grant long-term credit
to public utilities (especially electric companies), with the aim of limiting uni-
versal banks’ immobilizations. The new “special credit institutions” (Consorzio
di Credito per le Opere Pubbliche and Istituto di Credito per le Imprese di
Pubblica Utilitá) raised capital in the bond market under state guarantee (Asso
and de Cecco 1994).
However, the new legal framework proved loosely binding for the few giants
that dominated the market for corporate banking. Characterized by a complex
ownership structure in which large borrowers were also controlling stockhold-
ers, they turned into holding companies in the course the 1920s, immobilizing
an increasing share of their resources in long-term loans and corporate equity
stakes in connected firms. Hit by the consequences of the deflation of the late
1920s and by the spillovers of the international financial crisis of 1931, their illi-
quidity crisis triggered a new government intervention. The extent of the crisis,
however, required more than a new round of liquidity injections by the Bank
of Italy. To recast the bank-industry relationship, a third banking reform was
implemented in various steps between 1931 and 1938. A state-owned credit insti-
tution (Istituto Mobiliare Italiano), specialized in long-term credit to industrial
groups, was created. Corporate stockholdings were instead concentrated in the
hands of the Istituto per la Ricostruzione Industriale (Iri), a state-controlled
holding entrusted with the task of reorganizing large industrial groups. Iri also
became a controlling shareholder of former universal banks. The banks, in turn,
committed to abstain from long-term corporate credit and focus on short-term
commercial lending. The main purpose of this reform, as declared in many
instances by the protagonists involved and embedded in the literature of the
time, was to avoid close, long-term relationships between banks and industrial
firms and to adopt a system of commercial, English-type banking (Vitale 1977).
The existence of a banking cartel, informally promoted by the Bank of Italy
during the 1920s, was institutionalized by giving the central bank the power
to regulate interest rates and banking fees (on all these historical issues, see
Guarino and Toniolo 1993; Confalonieri 1994; Ciocca 2000; Ciocca and Toniolo
1998–2004; Gigliobianco 2006; Giordano 2007; Cova et al. 2008; Battilossi 2009;
Gigliobianco and Giordano 2012; on competition, Albareto 1999).
The reform of 1931–1938, generally known as the 1936 reform, led to a
heavily regulated banking system in which the Bank of Italy enjoyed large dis-
cretion to determine how credit should be managed by different categories of
intermediaries. Banks were subject to a vast array of rules concerning access to
market; the operations they were allowed to undertake (loans exceeding eigh-
teen months were the exclusive domain of a special category of banks4); the
opening of branches; the location of their clients (loans could not be granted
unless the bank had a branch near the borrower); the concentration of risk; and
many other aspects of their business. A fair number of long-term banks were
specialized (i.e., lent only to firms belonging to few economic sectors). The mar-
ket was sheltered from foreign competition. International financial flows were
strictly controlled. Even domestic interbank current account deposits were, in
principle, prohibited (the rationale for this was to ensure that the local savings
be reinvested locally). The banks had to comply with high reserve requirements,
and the composition of such reserves was turned into a policy instrument in
the hands of the regulators. The concept of financial repression (Roubini and
Sala-i-Martin 1995) has been frequently used to describe this situation.
Although some of the regulatory restrictions were gradually relaxed dur-
ing the 1960s and 1970s5 (but no comprehensive legislation was passed6), in the
same years other laws were enacted, and policies started, which had an even
higher potential of affecting the distribution of credit across sectors than the
preceding body of legislation.7 From the early 1960s, a growing set of norms
aimed at providing credit to given categories of borrowers at below-market rates
(credito agevolato); in 1966 the Bank of Italy started a policy aimed at stabiliz-
ing the price of long-term industrial bonds to foster their placement and there-
fore the financing of investment, which clearly affected interest rates; since 1973,
banks could be formally obliged to buy bonds issued by certain categories of
borrowers (vincolo di portafoglio); in 1974, at the suggestion of the International
Monetary Fund, a ceiling was set for total internal credit, and, consequently, to
the amount of loans extended by individual banks (Pontolillo 1980; Bruni and
Porta 1980; Gigliobianco 2006). Further, public ownership of most of the large
banks, and of a good share of the middle-sized ones, most likely favored credit
allocation in accordance with political preferences.
Old and new “special credit institutions” were the main instruments used
to mobilize savings and direct credit toward large industrial groups, often
at subsidized rates. Banks were both “special credit institution” sharehold-
ers and large underwriters of their bonds. This system of “double intermedi-
ation,” explicitly supported by the Bank of Italy, was blamed for favoring the
debasement of entrepreneurial and managerial human capital in banking, as an
increasing share of bank resources was immobilized in fixed-income securities
(Confalonieri 1971; Cesarini 1982; Ciocca 1979).
Given the plethora of norms (often differentiated according to sector,

category of bank, and so forth), it is difficult to spot a turning point toward
excessive political and administrative interference in credit allocation (which
we consider a special form of overregulation). Such a turning point must lie
somewhere between 1965 (when Guido Carli, Governor of the Bank of Italy,
drew attention to the excessive recourse to State-subsidized credit, warning
that this instrument could turn out to be a delusion [Carli 1965, 497]) and
1974, when the last major regulatory device, credit ceilings, started to be used.
We think that 1970 may represent a reasonable choice, in that it falls mid-way
between the two extremes: in the econometric exercise discussed later we use
this date.
In other areas of the banking business regulation during the Golden Age
was scanty, as in many other countries. Three deficiencies, in particular, most
attract the modern observer’s attention: capital requirements, transparency, and
consumer protection were largely neglected.
Overregulation, albeit in different varieties, lasted a full half century. The
fourth reform of Italy’s credit system, largely spurred by European directives,
started in the early 1980s and was completed in 1993, with a new comprehen-
sive banking law. Many aspects of the banking business (including branching,
the access of foreign firms to the domestic market, and, to a certain extent, the
proprietary relationship between banks and nonfinancial firms) were gradually
liberalized; most of the distinctions between different categories of banks were
lifted, so that the divide between long- and short-term banks (which over time
had become blurred) completely disappeared. In 1990, international capital flows
were liberalized. These changes weakened the basis of all norms constraining
the banks in the allocation process: over time, ceilings, mandatory investments,
subsidized credit, and many other rules and policies were scrapped. Summing
up, in the early 1990s the universal banking approach was adopted, and regu-
lation was centered on capital requirements, risk awareness, transparency, con-
sumer protection, and conflict of interest prevention (Ciocca 2000). The bank
cartel (since 1954 “bank agreement”), weakened in 1969 and 1982, had been
fully discontinued in 1990, when, for the first time in Italy, an antitrust law was
enacted. A first wave of bank privatizations started in 1993 (Credito Italiano
and Banca Commerciale Italiana were the first to be put on the market); by
2000, most of the system had been privatized. We chose the year 1995 as the
turning point toward liberalization.
GOs and Credit: Managing the Data

Allocative efficiency refers to changes in banks’ loan portfolio in response
to changes, observed and expected, in the marginal return of investment. To
support our empirical analysis we have constructed from primary sources a

new data set for the period 1948–2010.
Unlike other studies, we directly observe at annual frequency the sectoral
composition of the year-end outstanding stock of credit at the aggregate level.
We owe the availability of credit data to the banking law of 1936, which obliged
all banks to disclose standardized information to the Bank of Italy. Overall,
the law produced a dramatic increase in the amount and quality of credit data
available to the supervisor. Among other statistical obligations, the banks were
required to fill in a form, “Model 101,” in which outstanding credit, broken down
into about eighty economic sectors, had to be reported.8 We hand-collected data
up to 1982 from the Bank of Italy’s Bollettino del Servizio Studi (based on Model
101), whereas we extracted data since 1983 from an electronic database of the
Bank (based on electronic data transmission from banks).
Minor changes in the statistical definition of sectors were dealt with by
sector aggregations (eventually, we considered twenty sectors); however, because
of a major classification change in 1983 (wholesale trade was excluded from
the individual sectors and formed a new sector of its own), we were obliged
to create two different subsets. In the pre-1983 database we were able to con-
sider separately short- and long-term credit, because their data generated dif-
ferent statistics. For the second period this was not possible, because data on
long-term banks from 1983 to 1988 were not available: we therefore relied only
on short-term bank data. However, in the periods when a comparison could
be made, long- and short-term banks showed very little difference in terms of
response to PE dynamics.
Banks’ response to changes in investment opportunities can be either
backward-looking or forward-looking. In the first case, they expand credit
to industries that experienced fast growth in the recent past; this is efficient
insofar as realized growth is a good proxy for marginal productivity of capi-
tal. In the second case, they expand credit to industries expected to grow in
the future faster than average, because of higher GOs. One problem for the
empirical analysis, however, that unlike observed growth, GOs are not directly
observable. Shocks to GOs may depend either on global factors, uniform across
countries, or on country-specific characteristics. Technological innovations or
world-level changes in the cost of factors of production (e.g., oil shocks) are
examples of global shocks to GOs. However, economic integration is likely to
create country-specific shocks to GOs by affecting the structure of national
economies because of shifts in comparative advantages and dynamics of spatial
location of economic activities.
Only a few studies attempt to directly observe sectoral GOs. Fisman and
Love (2004b) suggest that short-run global shocks to GOs are reflected in
actual industry growth rates in the United States, assuming that US firms
respond optimally to worldwide shocks thanks to the high efficiency of the
US financial system. As an alternative forward-looking approach, Bekaert et
al. (2007) use PEs at industry level as a proxy for GOs, assuming that stock
prices reflect future growth efficiently. They find evidence that financial
liberalization, rather than financial development per se, enhances respon-
siveness to industry-specific global shocks, thus bringing potential and actual
growth in line. Using both approaches for a cross-section of emerging mar-
kets, Gupta and Yuan (2009) show that stock market liberalization, by reduc-
ing financing constraints, promotes the growth of industries with higher
external dependence and better GOs, measured by global PE ratios and actual
industry sales growth.
Following this recent stream of research, our empirical strategy uses balance
sheets and stock market data to infer GOs across sectors and over time. We
have collected firm-level data and computed relevant financial ratios (i.e., price
to earnings) for all companies quoted in the Milan Stock Exchange (from 1998,
Borsa Italiana S.p.A). For the years 1948–1985 the price data were hand-collected
from the newspaper Il Sole 24 Ore, whereas other data on listed firms (outstand-
ing capital, corporate actions, stock nominal value, number of common, pre-
ferred and saving stocks, net earnings after taxes) were similarly collected from
various issues of Il Taccuino dell’Azionista, a well-known investors’ manual. For
the years 1986–2010 we used PE ratios from Thomson Reuters Datastream.9 To
maintain consistency, cumulative adjustment factors were applied to the series
of earnings per share and market prices to take into account capital operations
(stock splits and consolidation, bonus issues), in line with the criteria applied by
Datastream for the post-1985 period.
Companies have been assigned to industrial sectors by examining, in
each year, their activities to single out the dominant one (we used Il Taccuino
dell’Azionista and other sources, including institutional sites of the companies
concerned). Stock price are referred to the last business day of each year. We
calculated weighted means of PEs at industry level, using market capitalization
of firms as weights.
In line with the recent literature, we interpret high PEs as evidence that
investors are willing to pay a high price relative to the earnings per share gen-
erated by firms in that sector, because of higher expected future earnings.
Therefore, we use high PEs to identify industries with high GOs.
A number of objections may be raised against this approach. For a long
period of time the Italian stock market was small, relatively illiquid, poorly reg-
ulated, and the quality of information disclosed by listed companies was ques-
tionable. As a consequence, stock market prices could be influenced by factors,
market-rigging in particular, other than fundamentals. A comprehensive reform
to modernize the legal framework of stock market trading and to regulate dis-
closure by listed companies was introduced only in 1974. Although we agree
that balance sheet figures and market prices would have been more informative
in the presence of a better institutional framework, we notice that the most
feared villain in this story, market-rigging, affects individual stocks, not overall
sectors. Therefore, we contend that sectoral prices ought not to have been influ-
enced, with few exceptions, by this type of disturbance.
It could also be argued that a stock market-based measure of GOs may be

not fully representative of most nonquoted firms. Indeed, firms listed at the
Milan stock exchange were just 130 in 1951, hovered around 140 until the early
1980s, and then jumped to 280 between 1986 and 2000. Critics would say that
GOs for (small) unlisted firms of a particular sector do not necessarily follow
from GOs signalled by PE ratios for (large) listed companies of the same sec-
tor. We argue instead that economic sectors are meaningful objects in discuss-
ing GOs. To begin with, if demand for the output of a sector grows, that is
likely to benefit, to various degrees, all the firms belonging to the sector, small
and large. Besides, in sectors with sizeable intraindustry trade, if the outputs of
large firms grow, those firms are likely to increase their demand for goods and
services produced by small firms of the same sector (Inklaar et al. 2010). One
case epitomizes our reasoning, that of the information and telecommunication
(ITC) sector: its growth benefited firms of all sizes, the small ones serving both
the final consumer and the larger concerns.
Another possible criticism is that listed firms with a positive shock to GOs
are better positioned to obtain funds directly from capital markets and may
not demand bank credit to fund their investment. However, given the reduced
number of listed firms with access to capital markets and the well-known
dependence of Italian firms on bank credit, a sector-specific shock to invest-
ment opportunities is likely to translate into a significant increase in loan
demand.10
Finally, one could argue that banks would base their loan decisions not only
on public “hard” information, such as that conveyed and condensed by PEs
ratios, but also on private “soft” information. Although this is certainly true
for the allocation of credit to individual firms, we believe that, barring excep-
tions, no private information exists at sector level. Again, there is no reason to
assume that banks would disregard aggregate “hard” information in their deci-
sions about cross-sector allocation of loanable funds.
The Empirical Strategy and

Interpretation
The long-run evolution of real11 outstanding credit from the aggregate bank-
ing system12 by sector is summarized in Figures 17.1 and 17.2. Given the differ-
ences in industry classification pre- and post-1983, we examine the two periods
separately. In the first period (Figure 17.1) we observe a common pattern, with
an accelerated expansion of the volume of credit in the 1950s and 1960s, fol-
lowed by a slowdown and then a slight contraction over the 1970s–1980s. In
manufacturing, a polarization emerges between sectors with fast-growing credit
(metals and metal products, industrial and electric machinery and equipment,
chemicals, increased by a factor of thirty-five from 1948 to 1982) and sectors
with slow-growing credit (food and textiles, increased by a factor of about five).
In comparison, the service sectors show a slower but more homogenous expan-
sion. This dynamics is inverted in the second period (Figure 17.2). Credit to
manufacturing was generally growing very slowly or even negatively until the
late 1990s in the case of chemicals, metals, textiles, and transport equipment. On
the contrary, growth of credit to the service sectors gained significant momen-
tum since the mid-1990s, especially toward public utilities (electricity and water
supply) and communications.
Table 17.1 and Figures 17.3 and 17.4 provide a long-run view of the stock mar-
ket’s assessment of GOs in the overall economy from 1948 to 2007. In Table 17.1
and Figure 17.3 we observe an increase in the mean PE ratio from twenty-five
to over forty during the Golden Age, followed by a continuous decline from the
mid-1970s, reaching its historical low at around twenty-four in the 1990s. This
secular decline was only partially reversed over the turn of the new century.
Table 17.1 and Figure 17.4 present the sectoral break-down of the data.
Although a similar trend can be observed in most industries, there are also
variations within a common pattern. In manufacturing, spikes in GOs emerged
relatively early in the 1950s in traditional sectors, such as food and textiles, fol-
lowed by medium-technology industries13 (metals, industrial machinery, elec-
tric machinery and equipment, transport equipment, chemicals, nonmetallic
minerals, and rubber and plastics) in the 1960s. Since the 1970s, the decline in
manufacturing GOs was generalized, but especially serious in food, chemicals,
and rubber and plastic products. For the aggregate public utilities sector, PE
fell after the electricity nationalization of the early 1960s; the subsequent recov-
ery was driven by gas and water supply, as electric companies were delisted or
transformed into multisector holdings. In the more recent period characterized
by a gradual liberalization of public utilities, the market assigned high GOs to
gas and especially water supply, but not to electricity. In a similar fashion, PEs
increased significantly in the communications sector over the 1990s, a trend
that was reversed in the new century. However, GOs in the construction sectors
remained stable and relatively low over the entire period.
A key question is to what extent GOs, as identified by PE ratios, were infor-
mative about future realized growth. To shed light on this issue we have col-
lected data on actual growth of value-added by industry from Golinelli (1998)
for the period 1953–1972 and from the EU Klems data set for the period 1970–
2007. Table 17.2 shows the average annual compound growth rate for the main
sectors of the Italian economy.
The Golden Age of the 1950s–1970s was characterized by unprecedented fast
growth across industries in manufacturing and services (see also Chapter 7 for
similar productivity growth dynamics). Italy acquired new industries subject to
significant technology (global) shocks, but also exploited GOs created by the
process of economic integration and trade liberalization at regional (European
Manufacturing, 1948–1982
60
50
40
Index (1948 = 1)
30
20
10
0
1950 1955 1960 1965 1970 1975 1980
Food products
Non-metallic minerals and products
Primary ferrous and non-ferrous metals
Fabricated metal products (ex. machinery and transport eq.)
Transport equipment
Industrial machinery and equipment
Electric machinery and equipment
Textiles, apparel, and leather
Paper, printing, publishing
Pharmaceuticals and cleaners
Chemicals and chemical products
Rubber and plastics
Public utilities, services, construction, 1948–1982

60
50
40
Index (1948 = 1)
30
20
10
0
1950 1955 1960 1965 1970 1975 1980
Electricity, gas, water

Trade
Transport and transport services
Communications
Real estate
Construction and public works
Figure 17.1 Real credit by sectors, 1948–1982: (a) manufacturing, 1948–1982;

(b) public utilities, services, construction, 1948–1982. Source: Elaborations based on data
from Banca d’Italia, Bollettino del Servizio Studi.
Manufacturing, 1983–2009
5
4
Index (1983 = 1)
0
84 86 88 90 92 94 96 98 00 02 04 06 08
Food and beverages Office machines, precision instruments

Non-metal mineral products: cement and plaster Electric machinery and equipment
Non-metal mineral products: glass, clay, stone Textiles, apparel, leather
Ferrous and non-ferrous minerals and metals Paper, printing, publishing
Metal products (exc. machinery and transport equip) Pharmaceuticals and cleaners
Transport equipment Chemicals and chemical products
Industrial and agricultural machinery Rubber and plastics
Public utilities, services, construction, 1983–2009

40
35
30
25
Index (1983 = 1)
20
15
10
0
84 86 88 90 92 94 96 98 00 02 04 06 08
Electricity Communications
Gas Hotels and catering
Water
Trade Construction and public works
Transport and transport services Other services
Figure 17.2 Real credit by sectors, 1983–2009: manufacturing, 1983–2009; public

utilities, services, construction, 1983–2009. Source: Elaborations based on data
from Banca d’Italia.
Economic Community) and global level (General Agreement in Tariffs and

Trade), by acquiring and adapting established technologies and production meth-
ods (see Chapter 14). Growth was particularly sustained in some low-technology
manufactures, such as metal industries, and in emerging medium-technology
Table 17.1 Price-earnings ratios by sector
Sectors 1948– 1953– 1958– 1963– 1968– 1973– 1978– 1983– 1988– 1993– 1998– 2003–
1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007
MANUFACTURING
Food and beverages 56.5 87.4 96.8 45.5 42.2 52.9 30.9 44.4 18.2 15.6 12.9 19
Non-metallic minerals and products 19.5 17.5 34.5 53.3 40.5 44.5 28.3
Concrete and plaster products 21.1 13.1 46.6 28.1 11.6
Clay, ceramic, glass, stone 20.7 44.4 14.7 31.3 36.5
Ferrous and nonferrous metals 20.6 27 59.5 72.1 60 35.3 30.8
Fabricated metal products (excluding machinery) 16.6 18.8 33.9 36.8 45 38.2 16.7
Ferrous and nonferrous minerals and metals 33.7 23.9 25.9 14.9 36.4
Fabricated metal products (excluding machinery) 53.9 26.1 16 19.4 37.6
Transport equipment 40.7 25.5 26 24.2 54.9 64.9 18.2 25.8 13.7 21 22.8 23.2
Industrial machinery and equipment 29.2 34.2 62.1 43.7 37.6 29.7 18
Industrial and agricultural machinery 24.8 31.8 16.3 21.5 23.4
Office machinery, precision machinery, optical
Instruments 14.1 18.6 15.6 38.3 25.4
Electrical machinery and equipment 14.4 29.7 48.5 36.1 46.5 26.6 70.3 11.2 14.4 14.8 24 19.4
Textiles and leather 39.9 72.6 64.8 49.9 39.3 45.8 56.9 74.3 13.1 28.2 30.5 30.1
Paper, printing, publishing 17.5 21.3 39.8 64.2 42.1 78 14.2 36 31 18.8 61.2 26.4
Table 17.1 (cont.)
Sectors 1948– 1953– 1958– 1963– 1968– 1973– 1978– 1983– 1988– 1993– 1998– 2003–
1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007
Chemicals: drugs and cleaners 20.4 28 68 39.7 29.2 25.2 18.6 19.1 35.7 16 26.4 19.8
Chemical products 28.4 27.5 54.8 49.9 36.7 40.5 49.2 27.2 42 17.3 14.7 10.7
Rubber and plastics 22.6 21.9 55.5 51.3 43.3 13.8 12.5 19.7 24 15.5 17.3 16.8
PUBLIC UTILITIES, CONSTRUCTION, SERVICES
Electricity, gas, water 17.8 19.6 28.1 44.2 21.4 34.2 38.3
Electricity 34.1 14.8 16.5 21.8 16.6
Gas 22.4 32.6 33.1 28.6 20.5
Water 22.1 68.3 32 30.8 42.2
Trade 20.5 25 84.7 55.9 53.2 83.5 11 13.4 49.5 30.3 30.1 20.2
Transport and transport services 28.6 19.3 20.1 13.9 34.3 74.9 72.8 33.4 13.2 16.5 23.5 23.1
Communications 18.3 15.4 23.9 16.3 17.5 10.9 58.4 13.5 11.8 21.9 34.6 16.6
Hotels 20.6 22.8 49.2 67.8 68.8 64.5 64 33 43.2 41.9 100.1 38.6
Real estate 30.3 23.5 41.2 26.2 29.1 43.1 57.1
Construction and public works 17.5 23 35.2 20.8 21.5 18.7 10.3 20.2 15 30 24.4 14.1
Other services 33.8 19.8 19.6 46.3 48.8
Median 25.3 29.5 48.8 42.7 40.2 43.4 35.6 28.3 26.9 22.8 30.6 25.1
Standard deviation 10.6 18.6 20.7 16.9 13.3 21.5 21.9 14.4 14.8 9.1 18.6 10.3
Source: Elaborations based on data from Il Taccuino dell’Azionista, Il Sole 24 Ore, and Datastream.
70
60
50
40
30
20
10
0 1948–52 1953–57 1958–62 1963–67 1968–72 1973–77 1978–82 1983–87 1988–92 1993–97 1998–02 2003–07
1 2 3 4 5 6 7 8 9 10 11 12
Mean +/– 1 S.D.
Figure 17.3 Mean price-earnings ratio, 1948–2007. Source: Elaborations based on data
from Il Taccuino dell’Azionista, Il Sole 24 Ore, and Datastream.
manufactures, such as transport equipment, chemicals, and energy products.

Fast growth reflected successful investment strategies pursued by private and
public concerns: the restructuring of iron and steel making; the launching of
mass production of motor vehicles; the take-off of the oil refining sector thanks
to joint ventures established by foreign multinationals with the State-owned
Eni, large private companies (Fiat, Edison, Italcementi), and private entrepre-
neurs; and overall the fast diversification of the chemical sector (inorganic
chemicals and fertilizers, petrochemicals, polymers and fibers, plastic materials
and resins, and drugs), where again State-owned Eni and large private concerns
(Edison, Montecatini [later merged into Montedison], and Snia) allied to large
multinationals competed among themselves and with other foreign companies.
State-owned concerns (Enel in electricity, Snam in gas, Sip-Stet in telecommuni-
cations, Autostrade in motorways, and Rai in broadcasting) led the accelerated
expansion of public utilities and communication network infrastructures, with
growth-enhancing effects on medium- and high-technology electromechanical
and telecommunication sectors. An accelerated transition to mass consumption
also favored fast growth in resource-based and low-technology manufactures
(process food products, textile and footwear manufactures, and furniture) and
in medium-to-high technology engineering products (electric households appli-
ances, television and radio equipment), in which Italian groups and foreign
multinationals competed (Pontarollo 1980; Bruno 1995; see also Chapters 15 and
16 for an in-depth description of the evolution of Italy’s firms).
The 1980s marked a transition to low or even negative growth for many
sectors, with very few exceptions, such as chemicals and electrical machinery.
The decline of growth rates was particularly dramatic in the oil refining indus-
try, badly hit by the oil shocks, which led to the exit of foreign multinationals
Manufacturing sector
Non-metallic minerals: Non-metallic minerals: Ferrous and non-ferrous
Food and beverages cement and plaster glass, clay, stone minerals and metals
100 100 100 100
80 80 80 80
60 60 60 60
40 40 40 40
20 20 20 20
0 0 0 0
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12
Fabricated metal products Industrial machinery: office
Transport equipment Industrial machinery and equipment
(ex. machinery and transport equipment) machinery, precision instrument
100 100 100 100
80 80 80 80
60 60 60 60
40 40 40 40
20 20 20 20
0 0 0 0
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12
Electric machinery and equipment Textiles, apparel, leather Paper, printing, publishing Pharmaceuticals and cleaners
100 100 100 100
80 80 80 80
60 60 60 60
40 40 40 40
20 20 20 20
0 0 0 0
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12
Chemicals and chemical products Rubber and plastics
100 100
80 80
60 60
40 40
20 20
0 0
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12
Public Utilities, Constructions, Services

P.U.: electricity P.U.: gas P.U.: water Trade
100 100 100 100
80 80 80 80
60 60 60 60
40 40 40 40
20 20 20 20
0 0 0 0
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12
Transport and transport services Communications Hotels Real estate
100 100 100 100
80 80 80 80
60 60 60 60
40 40 40 40
20 20 20 20
0 0 0 0
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12
Construction and public works Other services
100 100
80 80
60 60
40 40
20 20
0 0
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12
Figure 17.4 Sectoral price-earnings ratios (x-axis explained in fig. 17.3).

Source: Elaborations based on data from Il Taccuino dell’Azionista, Il Sole 24 Ore,
and Datastream.
Table 17.2 Realized growth
Sectors 1953– 1958– 1963– 1968– 1970– 1973– 1978– 1983– 1988– 1993– 1998– 2003–
1957 1962 1967 1972 1972 1977 1982 1987 1992 1997 2002 2007
Golinelli Golinelli Golinelli Golinelli Euklems Euklems Euklems Euklems Euklems Euklems Euklems Euklems
Agriculture, 0.46 1.77 3 −0.85 −3.82 −0.10 1.85 1.30 2.48 1.40 −0.45 3.52
forestry, and
fishing
MANUFACTURING
Food and 7.35 5.77 4.26 2.44 1.59 3.80 2.87 1.91 3.44 −0.69 −0.29 −0.42
beverages
Non-metallic 9.84 8.46 4.63 6.19 9.87 4 −1.94 2.97 0.86 1.28 3.47 1.52
minerals and
products
Ferrous and 10.41 9.46 6.27 0.84 −0.35 4.17 5.19 0.18 −4.43 5.02 −1.79 −2.99
nonferrous
metals
Fabricated 7.07 9.92 4.70 6.33
metal products
and machinery
(excluding
transport
equipment)
Table 17.2 (cont.)
Sectors 1953– 1958– 1963– 1968– 1970– 1973– 1978– 1983– 1988– 1993– 1998– 2003–
1957 1962 1967 1972 1972 1977 1982 1987 1992 1997 2002 2007
Fabricated 2.15 3.49 5.12 1.88 1.24
metal products
(excluding
industrial
machinery and
equipment)
Transport 12.02 12.55 5.03 4.88 −0.76 −1.93 0.43 2.49 −4.02 4.60 −2.10 −2.98
equipment
Industrial −0.83 3.12 −0.92 2.85 0.29 3.62 −0.07 1.87
machinery and
equipment
Office 7.90 8.73 3.32 4.38 −12.59 −0.64 −2.04 −8.84
machinery,
precision
machinery,
optical
instruments
Electrical 7.90 8.73 3.32 6.38 2.63 3.93 −1.44 3.07
machinery and
equipment
Textiles and 3.19 7.87 3.71 4.26 2.17 2.80 2.45 1.03 0.89 1.09 −1.46 −5.11
leather
Sectors 1953– 1958– 1963– 1968– 1970– 1973– 1978– 1983– 1988– 1993– 1998– 2003–
1957 1962 1967 1972 1972 1977 1982 1987 1992 1997 2002 2007
1800 Paper, printing, 8.74 9.88 3.81 3.29 2.95 4 2.69 4.36 1.91 0.35 0.62 0.63
publishing
Chemicals 11.86 17.36 4.71 5.40 6.29 10.69 7.44 6.75 0.51 2.45 −0.02 0.30
and chemical
products
Chemicals: 1.53 2.39 −0.77
pharmaceuticals
and cleaners
Other chemicals 3.17 −2.29 1.61
and chemical
products
Rubber and 2.49 5.52 10.24 5.11 1.81 3.55 2.67 2.51 2.04 4 0.66 −0.72
plastics
Energy products 5.75 8.29 7.42 4.51
PUBLIC UTILITIES, CONSTRUCTION,
SERVICES
Electricity, gas, 3.38 −3.43 −0.02 2.22 1.63 0.17 1.15 0.50
water supply
Trade 4.40 6.77 4.65 4 1.65 3.63 2.33 2.62 1.43 1.89 0.81 0.27
Transports and 5.83 7.98 2.62 4.78 2.53 3 4.77 3.27
communications
Table 17.2 (cont.)
Sectors 1953– 1958– 1963– 1968– 1970– 1973– 1978– 1983– 1988– 1993– 1998– 2003–
1957 1962 1967 1972 1972 1977 1982 1987 1992 1997 2002 2007
Transport 2.28 3.33 1.97 1.17
and transport
services
Communications 3.20 3.94 10.23 3.40
Hotels 8.04 8.67 5.13 6.98 0.88 0.54 2.51 −0.73 −0.02 3.07 0.69 1.46
Real estate 2.98 4.10 2.44 2.03 3.04 3.54 3.66 4.47 1.61 1.06 1.52 −0.41
Construction 6.85 5.93 0.55 −0.21 −1.73 −0.35 2.18 −1.39 1.60 −0.85 2.85 −1.14
and public works
Note: Average annual growth rates.

Source: Elaborations based on data from Golinelli 1998 and EU Klems Growth and Productivity Accounts: ITA_09I and ITA_06I (data are constantly updated in http://www.euklems.
net/).
from the Italian market. However, a process of restructuring and consolidation

affected also low and medium-technology sectors and was especially remarkable
in textiles, food products, steel and aluminum, mechanics and transport equip-
ment, and basic chemicals.
Across the 1970s and 1980s, Italian governments responded by implement-
ing an industrial policy in which an expansion in subsidized credit and the
take-over of loss-making firms by State-owned concerns (Iri, Eni, Egam, and
Efim) was systematically used to keep firms in problem sectors afloat with the
aim of facilitating the productive and corporate restructuring of private groups
(Coltorti 1990; Locke 1995; Barca and Trento 1997). Accumulated losses covered
by the government budget contributed to the escalation of public debt. Many
firms were eventually liquidated and merged, whereas activities with good GOs
(especially in electric household equipment and electronics, pharmaceuticals,
and food products) were taken over by foreign multinationals in the wave of
privatizations of the 1990s. Over the last twenty years, virtually all manufac-
turing sectors experienced very slow or even negative growth, with the excep-
tion of the engineering sector. Particularly disappointing in an international
perspective was the performance of sectors characterized by technology-based
positive shocks to GOs, such as plastics or electrical machinery and electronics;
a noticeable exception in this dismal picture was the fast-growing telecommu-
nications industry, in line with global trends.
To summarize, until the 1970s the Italian economy was able to exploit global
GOs generated by technology shocks and country-specific GOs generated by
factor endowments and comparative advantages in the early phase of economic
integration at the regional and global level. Since the 1980s, however, this does
not seem to be the case.
To empirically explore the predictive power of PEs (our proxy for GOs) with
respect to realized growth (g), we estimate a simple panel regression in which,
for each sector i, five-year average growth rates are regressed on lagged GOs:
git = c + GOi,t-1 + eit
Given the mismatch between our sector classification and the aggregations
used by Golinelli, we cannot run this test for the pre-1970 period, and have
to confine ourselves to the post-1970 period using the EU Klems classification,
which is close to ours.
As shown in Table 17.3, we find a positive and significant relationship
between GOs and realized growth. Allowing for sector-specific intercepts
through the introduction of cross-section fixed effects (columns 2 and 3), the
within-estimator confirms the positive relationship between lagged GOs and
realized growth. This result is robust to the inclusion of time fixed effects to
account for common factors across sectors (column 4).
Having established that PEs are good predictors of growth, we now turn
to the relationship between sectoral PEs and volume of credit. Our economet-
ric strategy is based on the nonstationary panel data analysis approach and
Table 17.3 Growth opportunities and realized growth: panel regressions

(1970–2009)
(1) (2) (3) (4)
Constant −0.022 −0.041** −0.031*** −0.024
(−1.48) (−2.58) (−4.33) (−1.57)
GOt-1 0.011*** 0.017*** 0.014*** 0.014***
(2.74) (3.71) (6.74) (2.74)
Cross-section fixed effects No Yes Yes Yes
Cross-section weights No No Yes Yes
Time fixed effects No No No Yes
R2 0.038 0.280 0.278 0.389
2
R weighted 0.612
Note: t-statistics in parentheses; *** and ** denote significance at the 1 percent and 5 percent level.
consists of three main steps. First, the variables—credit volumes (in real terms)
and price to earnings ratios—that are supposed to have a long-term relation-
ship are tested for the presence of a unit root and for the order of integration.
Second, after it has been ascertained that the variables share a common order
of integration, the cointegration tests are carried out to determine whether the
series are cointegrated (i.e., they have a common linear relationship toward
which they tend to adjust in the long run). The third and final step of the
econometric analysis includes the estimation of the cointegrating vector coef-
ficients and of a panel error-correction model, which identifies the short-run
adjustment dynamics through which the response variable converges to the
long-run equilibrium.
The data set has been split into four subsamples on the basis of a priori
assumptions on structural changes that occurred in the credit market during
the 1960s and in the mid-1990s, as already described. A further partitioning
point, not driven by economic or regulation factors, has been assumed in 1983
because an important change in the nonfinancial firm sector classification took
place that year and there was no satisfying way to reconcile the previous system
with the new one.
The order of integration of the series that are supposed to have a long-run
equilibrium relationship is determined through a set of panel data unit root
tests. The test results are reported in Table 17.4 and include the Levin-Lin-Chu
(2002), Harris-Tzavalis (1999), Breitung (2000), Im-Pesaran-Shin (2003), and
Fisher-type (based on the Augmented Dickey-Fuller procedure) tests, which ver-
ify the null hypothesis that the panels contain a unit root. However, the Hadri
(2000) Lagrange multiplier test has the panel stationarity as the null hypothesis.
According to these tests, the credit volumes series contains a unit root while
Table 17.4 Panel unit root tests

Subperiod LLC HT BR IPS FADF HA
1948–1970
l −1.083 −1.422 2.905 0.333 −0.731 57.337***
∆l −9.778*** −29.849*** −6.813*** −11.086*** −12.489*** 0.111

p 4.957 −7.739*** 4.894 0.949 0.252 9.032***
∆
∆p −13.742*** −23.593*** −6.001*** −6.236*** −6.982*** 0.937
1971–1982
l 2.272 0.191 1.008 0.409 0.708 9.772***
∆l −11.620*** −30.102*** −9.059*** −4.508*** −5.638*** 3.719

p −5.618*** −12.846**** −5.050*** −2.390*** −2.883*** 6.583
∆
∆p −13.465*** −38.237*** −10.125*** −5.611*** −7.262*** −1.806
1983–1994
l 1.479 −0.100 0.895 −0.906 −0.859 20.715***
∆l −9.320*** −34.556*** −9.475*** −2.789*** −3.414*** 0.617

p −3.260*** −0.628 1.897 1.315 1.205 6.089***
∆
∆p −6.057*** −6.903*** −3.892*** −1.914** −3.026*** −1.072
1995–2009
l −0.528 0.064 3.968 1.731 2.035 28.939***
∆l −5.436*** −39.692*** −9.504*** −3.924*** −4.688*** 2.114

p 0.377 −4.515*** 2.268 −0.201 −0.086 8.953***
∆
∆p −6.293*** −21.954*** −7.239*** −5.882*** −7.053*** −1.551
Note: LLC: Levin-Li-Chu test; HT: Harris-Tzavalis test; BR: Breitung test; IPS: Im-Pesaran-Shin test;
FADF: Fisher-type test based on the Augmented Dickey-Fuller test; HA: Hadri test. The first five
tests have the panels containing a unit a root as the null hypothesis, whereas the Hadri test has the
stationarity as the null hypothesis. *** and ** denote significance at the 1 percent and 5 percent level.
its first difference is stationary in all of the four subperiods; thus, it can be
inferred that the variable is integrated of order one. As for the PE ratio, there
is less convincing evidence that it is not stationary in the 1971–1982 subperiod;
this may be caused by the smaller number of time observations, which leads to
a lower power of the test. However, in the other three time frames the PE ratio
can be assumed to be not stationary in the levels and stationary in the first dif-
ference, leading to the conclusion that the series is integrated of order one.
The cointegration tests are based on the Westerlund (2007) procedure, which
verifies the absence of cointegration through four different tests (two group-
mean and two panel versions). The main advantage of this type of structural
Table 17.5 Panel cointegration tests

Subperiod Statistic Value P Value
1948–1970
Gτ −3.250 0.001
Gα −2.542 0.006
Pτ −3.493 0.000
Pα −6.462 0.000
1971–1982
Gτ 0.347 0.636
Gα 2.810 0.998
Pτ 1.096 0.864
Pα 1.161 0.877
1983–1994
Gτ −0.484 0.314
Gα 1.410 0.921
Pτ −2.816 0.002
Pα −2.326 0.010
1995–2009
Gτ −4.000 0.000
Gα −2.740 0.023
Pτ −3.932 0.000
Pα −4.382 0.000
Note: Westerlund cointegration tests. The null hypothesis is the absence of

cointegration.
cointegration test over previous residual-based ones, such as Kao (1999) and
Pedroni (1999) procedures, is that it does not impose common-factor restric-
tions whose failure can lead to a loss of test power. The results are reported in
Table 17.5 and show that the null hypothesis of no cointegration can be rejected
in the first and in the last subsample (1948–1970 and 1995–2009) and accepted
in the 1971–1982 time frame, whereas there is not a clear evidence of cointegra-
tion for the 1983–1994 subperiod.
After it has been ascertained that there exists a cointegrating relation-
ship between the variables, the following step includes the estimation of the
cointegrating vector coefficient and of the short-run dynamics through which
the loans tend to adjust to the long-run path. The error-correction model
specification is based on the Pesaran, Shin, and Smith (1997, 1999) approach
(i.e., a panel autoregressive distributed lag model), according to which the stock
of loans to nonfinancial corporations can be represented by:
l it µi λ i l i ,t −1 + α1 p it + p i ,t −1 + v it (1)
where the log of real credit volumes l it depends on a sector-specific constant

µ i , on the past values of the credit volumes themselves, and on the cur-
rent and lagged values of the PE ratio p it . It can be easily shown that (1) is
equivalent to:
∆l it φi l i ,t θ i θ1 p i ,t 1 ) 1 ∆p it + v it (2)
µi α + α2
where φi λ i ) , θ0 i = and θ1i = 1 .
1 − λi 1 − λi
The expression ε i ,t −1 l i ,t 1 θ0i θ1 p i ,t −1 is the error-correction term, in
accordance with which the loans tend to adjust in the long run, with the speed
of adjustment φ . This is assumed to be negative as the response variable will
decrease (increase) if it exceeds (is below) the long-run equilibrium value. The
higher the absolute value of φi , the quicker is the adjustment of loans to the
long-run equilibrium relationship.
The model (2) has been estimated in two different ways: through the pooled
mean group (PMG) and the mean group (MG) estimators. The former is char-
acterized by panel heterogeneity in the short-run dynamics and homogeneity in
the long-run parameters (i.e., these have to be the same across all the sectors),
whereas the latter implies heterogeneity in the short-run dynamics and in the
long-run coefficients. The choice between PMG and MG estimates is made on
the basis of a standard Hausman test (Table 17.6).
It is worth noting that the estimation results of the previously described
baseline model have been confirmed also when excluding the electricity sector
and when considering only the subset of Special Credit Institutions.
We now turn to the interpretation of the econometric analysis, by stressing
the economic implications of the estimation results. The presence of a cointe-
grating relationship between loans (in real terms) and the PE ratio implies that
in the long run bank credit tends to adjust toward an equilibrium relationship
with the PE ratio (i.e., the variable that has been chosen as a proxy for the sec-
tor GOs). The estimation results (Table 17.5) suggest that there exists a long-term
equilibrium relationship between credit volumes and GOs in 1948–1970 and
1995–2009, whereas there is no evidence or poor evidence of such relationship
in the central period 1971–1994. As for the sign of the cointegrating vector coef-
ficient, the first and the third subperiod are characterized by a positive coef-
ficient, and the central subperiod by a negative one.14 A positive value of the
cointegrating coefficient θ1 means that in the long-term a higher amount of
credit in real terms is granted to those sectors that have higher (expected) GOs.
Table 17.6 Panel error-correction model estimation results

PMG estimates MG estimates
Subperiod Value P Value Value P Value
1948–1970
θ1 (1) 0.1224 0.000 0.2165 0.005

φ (2) −0.4830 0.000 −0.5317 0.000
Hausman test χ (3)
2
1.40 0.236
1971–1982
θ1 (1) −0.0020 0.153 −0.1440 0.348

φ (2) −1.1368 0.000 −1.1977 0.000
Hausman test χ (3)
2
0.27 0.605
1983–1994
θ1 (1) −0.0157 0.000 −0.2843 0.274

φ (2) −1.134 0.000 −1.323 0.000
Hausman test χ (3)
2
0.54 0.461
1995–2009
θ1 (1) 0.0200 0.012 0.1327 0.126

φ (2) −0.4958 0.000 −0.6237 0.000
Hausman test χ (3)
2
0.81 0.369
Note: (1) Cointegrating vector coefficient of the price-earnings ratio. (2) Error-correction term. (3)
Hausman test of difference between MG and PMG model. The null hypothesis is that the PMG estimator
is the efficient one.
This result can be interpreted as an efficiency signal, provided that the PE ratio
is a good proxy for GOs. However, a negative value of the cointegrating vector
coefficient could reveal a distortion in the allocation of credit because it would
imply that the intermediaries tend to grant money to sectors that are expected
to underperform, at least according to the market expectations incorporated
into the PE ratio. It has been found out that the sign of the PE parameter in the
long-run relationship with credit volumes is positive in the 1948–1970 and in
the 1995–2009 subperiods, whereas it is negative in the two central time frames
(Table 17.6).
The existence of a long-run relationship between loans in real terms and
the PE ratio does not automatically imply that, in the short run, equilibrium
is instantaneously reached whenever a shock occurs. Indeed, the credit mar-
ket could suffer from rigidities and imperfections so that convergence toward
the long-run equilibrium could be sluggish and take some time. This particular
aspect is captured by the coefficient φ of the error-correction model (Table 17.6),

which represents the speed of adjustment of the credit volumes to the long-run
equilibrium. To have a convergence process toward the long-term equilibrium,
the speed of adjustment has to be negative because the stock of credit granted
to a particular sector will decrease (increase) if, given the GOs level, it exceeds
(is below) the value of the equilibrium relationship. The estimated speed of
adjustment for the postliberalizations period is similar to the one estimated for
the Golden Age and is equal to 0.5, which implies a two-year period of adjust-
ment of the credit volumes after a shock has occurred.
Conclusions
We found that Italian banks supported the real economy effectively in the 1948–
1970 period, a time when Italy had the most brilliant growth performance of
its history and realized the bulk of its catch-up (see Chapter 6). Cointegration
tests show that the volume of bank credit to the industrial sectors of the Italian
economy tended to adjust to changes in GOs, proxied by PE ratios. In the 1970s
and through the early 1990s, overregulation and financial repression, which had
been traits of the financial landscape since the 1930s, took on new forms and
had a stronger impact on the sectoral allocation of credit. Although the stated
purpose of the credit policies was to foster industrial restructuring and growth,
credit volumes stopped responding to sectoral GOs and even showed, after 1982,
an adjustment in the wrong direction.
Three factors help explain this finding. First, policies may have been
short-sighted (i.e., the sectors expected to overperform underperformed instead);
the chemical sector is a case in point (Zamagni 2010). Second, policies were in
part socially motivated; although they attained the aim of stabilizing employ-
ment in problematic sectors, they imposed a burden on the economy as a whole.
Third, policies may have been distorted and used to favor politically connected
interests. The fact that a number of large special credit institutions had to be
rescued by government intervention in the 1970s after having lent copiously to
problematic sectors (Ciocca 2000) fits well into this picture. The starkly dif-
ferent performance of the banking sector in the 1948–1970 and the 1971–1994
periods suggests that financial repression comes in different varieties, and that
its impact on the real economy is not always the same.
The liberal revolution of the 1980s was late to take root in Italy, and cul-
minated only in the early 1990s: liberalization, competition, and privatization
became the new guiding principles, which found in the banking sector a stron-
ger implementation than in other areas of the economy. At the same time, it is
generally accepted that stern prudential supervision and sensible management
did not allow the speculative excesses that poisoned the financial sector in
other countries. Our econometric results show that the banks started again to
respond to GOs, directing credit flows to promising industries. Paradoxically,
it is precisely at this moment that Italian growth and productivity began to lag
behind in a European comparison. Our study suggests that the present struc-
tural difficulties of the Italian economy do not depend on a worsening ability
of the banks to select the industrial sectors to which lend money.
Acknowledgments
The authors thank for their useful comments and suggestions Marco Pagano
and Marco Onado, who were discussants of previous versions of this chapter;
Alberto Baffigi, who worked with them in the first phase of the project; and
Federico Barbiellini Amidei, Riccardo De Bonis, Antonio Di Cesare, Giorgio
Gobbi, Matteo Piazza, Luigi Federico Signorini, Daniele Terlizzese, Gianni
Toniolo, and all participants in the seminars of Perugia and Rome where pre-
liminary results of their research were presented.
Notes
1. The revision of the universal banks’ role in the process of industrialization is not
limited to the Italian case. For Germany, see Fohlin 2007.
2. We are well aware that allocative criteria other than “activity sector,” such as firms’
size, age, or ownership, may be relevant for banks’ decisions.
3. One could argue that at least some of the credit policies put in place by the
authorities did not lead to distortions, but were in fact a response to market
failures. We accept the idea that market failures may exist in the field of credit
allocation. Some credit policies, such as those fostering credit flows to agriculture,
are perhaps legitimate on social grounds, and it could be argued that they
compensate for the inability of the market to price the “good” represented by social
cohesion in the countryside or soil preservation. This, however, is not a failure
of the credit market; it is rather a signaling failure of the goods market. In any
case, in this chapter we focus on growth, and our yardstick for evaluating credit
allocation is the ability to accompany or foster sectoral growth, actual or potential.
We leave aside the question of the social desirability of the policies. It should be
pointed out, however, that Rodrick and others showed that, especially in developing
countries, credit policies may help to solve coordination problems (Rodrik,
Grossman, and Norman 1995). On the same line is the work by Monnet (2012).
Another topic we do not dwell on is stability. In the 1930s, and through the 1980s
of the last century, regulators and academics insisted on the trade-off between
stability and competition (Gigliobianco and Giordano 2012). In later years, the
theory of the trade-off was almost totally abandoned. On historical grounds, we
think it is fair to say that most of the trade-off argument was instrumental in
preserving local banks, which were the stronghold of local elites. A more efficient
allocation of credit per se would have contributed to bank stability, by enhancing
the quality of the bank’s assets.
4. This boundary allowed exceptions, such as short-term banks bought long-term
bonds issued by long-term banks; some short-term banks had “special sections,”
which extended long-term credit; and the roll-over of loans permitted, to a certain
extent, the transformation of short-term into long-term loans.
5. Among others, those affecting the duration of the loans: many categories of banks
were allowed to increase the share of their long-term loans. In 1962, restrictions
concerning interbank loans were formally lifted (but we suspect that they had
already been relaxed in the previous years) (Gigliobianco 2006, 283).
6. All the other countries of the European Community, with the exception of
Luxembourg, reformed their banking laws between 1974 and 1979 (Bruni and
Porta 1980, 20).
7. Often, these norms or policies were based on the regulatory powers that had been
created by the 1936 banking law. That is, the potential to regulate was transformed
into actual regulation, in many different fields of the banking business.
8. Instructions on how to fill in the forms (precise definition of sectors, time of
recording, and so forth) are to be found in Bollettino dell’Ispettorato per la difesa
del risparmio e per l’esercizio del credito, year 1, n. 2. The statistics do not allow
one to distinguish between bills, overdrafts, and so forth.
9. Datastream reports zero values of EPS in case of negative earnings. To allow
meaningful comparisons, we followed the same convention for the pre-1986
period.
10. This may not be true for one sector, production and distribution of electricity,
where a large number of firms were listed through the early 1960s, when the
sector was nationalized. However, econometric results do not change significantly
if we exclude the sector from the panel, as shown in paragraph 5.
11. The National Consumer Price Index, calculated by National Statistics Office
(Istat), was used to deflate the credit volumes.
12. We consider here only short-term credit to keep continuity over the whole
1948–2009 period.
13. The technology content of sectors is based on Lall 2000.
14. Although no clear evidence of cointegration has been found in the central period
of the data set, the corresponding cointegrating vector and error-correction model
have been estimated to compare the results across the subperiods.
Chapter 18
PUBLIC DEBT AND

ECONOMIC GROWTH:
ITALY'S FIRST 
YEARS
Fabrizio Balassone,
Maura Francese, and Angelo Pace
Introduction
Italy has experienced high levels of public debt for a significant part of its
history (even excluding the years from the beginning of World War I to the
end of World War II). This, together with the availability of deep time series for
a large set of macroeconomic variables, makes it an interesting case study of the
impact of public debt on economic performance.
This issue has attracted the attention of theoretical and empirical economists
and spurred lively policy debates over many decades. Theory does provide some
rationale for a negative relationship between debt and growth when debt is par-
ticularly high, and empirical analysis has supplied some evidence in support.
However, the robustness of available estimates has been questioned and doubts
have been cast on the direction of causality linking debt and growth. Given the
lack of deep time series, all recent studies have focused on the last three or four
decades and mainly rely on evidence from a panel of developed countries.
This chapter contributes to the debate by investigating the link between
government debt/gross domestic product (GDP) ratio and real per capita
income growth in Italy over 1861–2007 through the econometric estimation of
public debt and economic growth: italy's first 150 years 517
a production function and the descriptive analysis of fiscal policy in two key
periods of debt reduction: 1895–1913, when the negative correlation between the
two variables is particularly strong; and 1994–2007, when the correlation seems
to break down when debt starts declining.
We find support for the hypotheses of a negative relation between the two
variables that seems to work mainly through reduced investment. The timing of
fiscal consolidation and the size and composition of the budget are additional
factors mediating the effect of public debt on economic performance.
The rest of the chapter is organized as follows: the second section gives a
brief description of public debt developments in Italy since 1861; the third and
fourth sections provide a discussion of the relationship between debt and growth
in the literature and as it appears when analyzing Italian data; the fifth section
focuses on fiscal policy at the two turns of century included in the sample, when
in the presence of similar debt developments the pattern of growth turned out to
be significantly different; and the final section summarizes the main findings.
Debt Developments in Italy: 1861–2011

Italy’s history after the unification of the country in 1861 is characterized by high
levels of public debt. Even excluding the exceptional years between the start of
World War I and the end of World War II, nominal debt has been higher than
GDP for long spells (Figure 18.1).1 The debt-to-GDP ratio has been above 100 per-
cent in sixty-three years (42 percent of the time); it has exceeded 60 percent in
111 years (almost 75 percent of the time). Periods with low debt (e.g., less than 35
percent of GDP) are the exception and they are concentrated in the twenty years
after the end of World War II, when Italy experienced its “economic miracle.”
After the unification of the country, the liabilities of preunitary states were col-
lected in the so-called “Gran libro del debito pubblico.”2 Since then, it is possible to
160
140
government debt to GDP ratio
120
100
80
60
40
20
0
1861
1871
1881
1891
1901
1911
1921
1931
1941
1951
1961
1971
1981
1991
2001
2011
year
Figure 18.1 Italy’s general government debt: 1861–2011 (percentage of GDP).
identify four phases of debt accumulation. The first runs through the first thirty
years of the new kingdom; the debt ratio peaks in 1894 at a value around 126 percent.
The second and the third phases are linked with the two world wars. The fourth
starts at the beginning of the 1970s and runs until 1994, when the debt ratio reaches
a new local maximum, just above 121 percent. Fiscal consolidation in response to
the financial crisis of the early 1990s and in preparation for the participation of
Italy in the European monetary union led to a slow decline in the debt ratio, which
halted just before the recent international financial and economic crisis.
The composition of public debt changed significantly over time. The expansion
of its foreign component,3 for example, accompanied debt growth over 1861–1894 (it
was 9 percent of GDP in 1861 and peaked at just above 38 percent in 1893) and in
connection with World War I (after the war in 1919 it was 56 percent of GDP, and
peaked in 1920 at 85 percent). Its reduction, characterized the decrease of the debt
ratio over 1894–1916 (from 32 percent of GDP to 2 percent) and in the decades after
World War I, when the cancellation of war debts played a major role4 (from 1932
the ratio of foreign debt to GDP became almost negligible, staying below 2 percent
for almost 50 years; Figure 18.2). Debt issued abroad was contained also in more
recent decades because over the period 1950–1990 formal restrictions were in place
to the acquisition by nonresidents (residents) of debt issued domestically (abroad).
Detailed data on the breakdown of debt by holding sector (available from 1988)
show that the ratio between debt by nonresidents and GDP grew rapidly since the
beginning of the 1990s (from 5 percent in 1990 to 52 percent in 2010).
Long-term liabilities (in particular long-term government securities) always
accounted for the larger share in public debt (Figure 18.3). Short-term securities
and loans played a more significant role in the twentieth century than in the nine-
teenth. Their share in total debt was especially high from the start of World War I
to the mid-1920s (on average 30 percent); in the decade after World War II (above 55
160
140
120
100
80
60
40
20
0
1861
1871
1881
1891
1901
1911
1921
1931
1941
1951
1961
1971
1981
1991
2001
2011
year
public debt - domestic component public debt - foreign component

Figure 18.2 Italy’s general government debt composition.
Foreign and domestic components (percentage of GDP).
A) percentage of GDP
160
140
120
100
80
60
40
20
0
1861
1871
1881
1891
1901
1911
1921
1931
1941
1951
1961
1971
1981
1991
2001
2011
year
long-term secutities short-term securities loans currency and deposits
B) share on total debt
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1861
1871
1881
1891
1901
1911
1921
1931
1941
1951
1961
1971
1981
1991
2001
2011
year
long-term secutities short-term securities loans currency and deposits
Figure 18.3 Italy’s general government debt composition by financial instrument.
percent); and from 1970 to the early 1980s (about 60 percent). As would be expected,
the shortening of debt maturity was more manifest in periods when inflation expec-
tations were higher and collecting resources on the markets more difficult.
The Link between Public Debt and

Economic Growth in the Literature
Debt dynamics and its impact on economic performance have attracted the
attention of theoretical and empirical economists and spurred lively policy
debates over many decades. Discussions touched several aspects, including

debt management, financial stability, long-term sustainability, intergenerational
equity, resources allocation, stabilization policy, and political economy (Arrow
and Boskin 1988; Dornbush and Draghi 1990). The debate was animated also
in Italy, especially after the rapid increase in government liabilities started in
the 1970s (Giavazzi and Spaventa 1988). As a consequence of the surge in public
debt across industrial countries since the start of the global crisis, the issue of
its effects on economic performance has regained prominence.
Theory does provide some rationale for a negative relationship between debt
and growth when debt is particularly high, and empirical analysis has supplied
some evidence in support. However, the robustness of available estimates has
been questioned and doubts have been cast on the direction of causality linking
debt and growth.
The theoretical literature underlines in particular two possible negative
transmission channels from debt to growth: higher long-term interest rates and
expectations of higher future distortionary taxation (Elmendorf and Mankiw
1999). Other side effects of large debts that might have an impact on GDP
performance are increased macroeconomic uncertainty, which might discour-
age investment (Servén 1997); higher volatility, caused by reduced scope for
counter-cyclical fiscal policy (Aghion and Kharroubi 2007; Woo 2009); and
increased financial fragility (Bernanke and Gertler 1990).
A negative correlation between debt and growth seems to characterize a wide
range of countries. Reinhart and Rogoff (2010) examined economic growth at
different levels of government debt in a sample of forty-four countries spanning
about two hundred years and found that when the debt-to-GDP ratio is above
90 percent, median growth rates are lower by 1 percent, and average growth falls
considerably more, for advanced and emerging economies. However, the causal-
ity underlying the correlation between debt and growth could run either way:
from low growth to high debt, rather than from high debt to lower growth.5
The issue of causality is addressed by Kumar and Woo (2010). They study
a panel of advanced and emerging economies over 1970–2007 and regress per
capita real GDP growth against lagged values of the debt-to-GDP ratio. Their
findings suggest an inverse relationship between initial debt and subsequent
growth which, in line with Reinhart and Rogoff (2010), seems to be stronger
at higher levels of debt. The outcome of a growth accounting exercise also sug-
gests that the adverse effect of debt on growth largely operates through a reduc-
tion in investment, slowing down labor productivity growth.
Checherita and Rother (2010) present a similar analysis for a sample of
twelve countries of the euro area over 1970–2008. They find a nonlinear nega-
tive impact of debt on growth; in particular their study suggests that public debt
has a deleterious impact on long-term growth after it reaches above 90–100 per-
cent of GDP. The channels through which debt is found to impact on the rate
of economic growth are: (1) private saving, (2) public investment, (3) total factor
productivity, and (4) sovereign long-term nominal and real interest rates.
Also Cecchetti, Mohanty, and Zampolli (2011) find that high government
debt ratios (i.e., those above 85 percent) are a drag on growth (although they
improve welfare when they remain at low levels). Their empirical work consid-
ers eighteen Organization for Economic Cooperation and Development coun-
tries in the years 1980–2010 and includes an analysis of the effects of private
liabilities (an extension especially relevant at the current juncture when private
and public debt levels remain at historically high levels). Their findings support
the hypothesis that excessive corporate debt (above 90 percent) and household
debt (around 85 percent) also have negative effects on economic performance.
Given the lack of deep time series, all recent studies have focused on the
last three or four decades and mainly rely on evidence from a panel of devel-
oped countries. Extending the horizon of the analysis to include a longer his-
toric perspective might complement the available empirical works and further
contribute to the debate.
What Comes Out from Italian Data

In this respect Italy is an interesting case study because it has experienced high
levels of debt for a significant part of its history (even excluding the years from
the beginning of World War I to the end of World War II); and deep time
series for a large set of macroeconomic variables are available.
Considering the link between government debt, as a share of GDP, and real
per capita income growth, the period 1861–2010 as a whole is characterized by
a strong negative correlation between the two variables. Excluding the years
between the start of World War I and the first parliamentary election after the
end of World War II (1915–1948),6 the correlation coefficient is −0.61 (Figure
18.4). It is lower before 1915 (−0.15) than after 1948 (−0.72).
An empirical analysis of a standard growth model provides further guid-
ance on interpreting the debt-growth relationship in Italy. In particular, it is
useful to consider a standard framework that allows for endogenous and exog-
enous components in GDP growth (Rao 2010). In such a set up production is
a function of labor and capital, of an exogenous component that depends on
time, and of a set of macroeconomic determinants (in our case the debt-to-GDP
ratio). From this framework one can derive the following estimating equation
to test the significance of the relationship between debt and growth (Balassone,
Francese, and Pace 2011):7
∆ l yt β β t β l yt 1 β3 X t 1 β l kt −1 β5 ∆Xt + β6 ∆ ln kt
p
n m (1)
+ ∑ β yi yt − i + ∑ − + ∑ β Xi t −i + εt
i =1 i =1 i =1
1861–1914 and 1950–2010
10
real per capita income growth
–10 –5 0 5
20 40 60 80 100 120
debt to trend GDP
1861–1914
–10 –5 0 5
40 60 80 100 120
debt to trend GDP
1950–2010
10
–5 0 5
20 40 60 80 100 120
debt to trend GDP
Figure 18.4 Correlation between public debt-to-GDP ratio and real per
capita income growth in Italy.
where εt is a white noise error term, ln yt is log real GDP per worker (full
time equivalent units), t a time trend, Xt macroeconomic variables of interest
(in particular in our case Xt is log debt to trend GDP, or ln dt ), ln kt is log real
capital per worker, and βs the parameters to be estimated.8
The estimation of this model9 provides support to the hypothesis of a neg-
ative relationship between public debt and growth (Table 18.1).10 The other
Table 18.1 Estimation of equation (1)a

Variables Whole Sample 1861–1913 Subperiod 1861–1913 Subperiod 1950–2007
and 1950–2007
(1) (2) (3)
Coeff. P Value Coeff. P Value Coeff. P Value
Constant b0 −2.356 *** 0.000 −10.536 *** 0.001 0.583 0.598
Year b1 0.001 *** 0.000 0.004 *** 0.000 −0.001 0.335
ln yt-1 b2 −0.208 *** 0.000 −0.602 *** 0.000 −0.270 *** 0.001
ln dt-1 b3 −0.023 *** 0.001 −0.109 *** 0.000 0.004 0.726
ln kt-1 b4 0.164 *** 0.000 0.296 *** 0.000 0.246 *** 0.001
' ln dt b5 −0.176 *** 0.000 −0.205 *** 0.000 −0.161 *** 0.000
' ln kt b6 0.800 *** 0.000 0.691 *** 0.000 0.972 *** 0.000
No. Obs. 107 49 58
R2 0.696 0.711 0.818
*, **, and *** significance at 10, 5, and 1 percent, respectively.

a
All models include among regressors also ARDL(1) terms for all variables and an ARDL(3) term for
income per worker.
estimated coefficients have the expected sign. They suggest that higher capital
levels and capital accumulation support income growth and that lower initial
income is associated with faster GDP expansion.
Results are robust to augmenting the model to take into account further
explanatory variables that might have had an impact on income dynamics.11 Of
all the additional variables, only foreign debt turns out to play a role; in par-
ticular, it is significant before 1914.12
Different from recent empirical works discussed in the previous section, the
analysis of growth in Italy along the lines described does not provide support
for the hypothesis of a threshold effect (i.e., that the negative impact of debt on
growth is stronger after the debt-to-GDP ratio is above a certain level).13
If the estimation of equation (1) lends some support to the claim of a neg-
ative impulse of debt on growth in the Italian experience, it cannot provide
guidance on the possible transmission channels. To shed some light on this
issue, investment (public and private) can be regressed against the stock of cap-
ital, the debt ratio, and its rate of growth. Results of this exercise suggest a
significant negative relationship between investment and debt (both in levels
and in growth rates). That the likely transmission channel operates by reduced
investment is also suggested by impulse response functions that can be obtained
from a vector error correction model of ln yt , lndt , and ln kt where the rela-
tion between debt and capital turns out to be negative.
A Puzzle and How to Explain It

Empirical analysis of long time series for Italy seems to lend support to the
proposition that high and increasing debt acts as a drag on growth (possibly
by depressing investment). Conversely declining debt should be associated to
raising income dynamics. At a closer inspection, however, there are instances
in which the negative correlation between debt and growth seems to weaken or
to break down.
Most notably, if one restricts the focus to the periods 1880–1914 and 1985–
200714 (when local peaks in the debt-to-GDP ratio time series are reached,
respectively, in 1884 and 1994), it is apparent that whereas in the first subperiod
growth is lower when debt increases and it picks up when debt declines, this
pattern seems to disappear at the turn of the last century.
The subperiods 1880–1914 and 1985–2007 have some characteristics in com-
mon, in particular they coincide with expansionary cycles in world GDP and
trade.15 In both cases the increase in the debt ratio before the two peaks is
large (33 percentage points of GDP between 1880 and 1894, 41 points between
1985 and 1994; Table 18.2); the decline is faster in the first subperiod (50 points
between 1894 and 1913, less than 20 points between 1994 and 2007). The strik-
ing difference is, however, that although real per capita GDP growth goes from
an average of 0.8 percent over 1880–1984 to 1.5 in 1895–1913, income dynamics
is on average higher in 1985–1994 (2.2 percent) than in 1995–2007 (1.2 points).
Considering trend growth (obtained using a Hodrick-Prescott filter) instead of
actual rates does give a similar pattern.
The results of the empirical analysis provide a partial explanation of this
puzzle. First, the magnitude and pace in the debt reduction are smaller in the
latter episode, with the average value of debt remaining higher in 1995–2007
than in 1985–1994. Second, contrary to econometric estimation, raw correla-
tions do not take into account the roles played by capital accumulation and
foreign debt in the two subperiods: the rate of capital accumulation decreases
over 1880–1894 and increases in 1895–1913, it keeps on declining throughout the
period 1985–2007 providing therefore a fading growth stimulus in more recent
years; foreign debt accounts for almost half of the debt reduction observed
between 1895 and 1913, while it remains broadly stable over 1995–2007.16
There might, however, be further determinants that the simple model used
as guidance in this section cannot capture. The model and the econometric
strategy are a simplification that for technical reasons suffers some limitations.
For example, in the set up described in the previous section it is not possible to
account for the role played by fiscal policy (i.e., the level and composition of the
government budget and its changes) because of the strong collinearity that the
variables would have with the regressors included in the estimating equation.
Available evidence on expenditure and revenue suggests, however, that govern-
ment budget management has played a role in economic developments.
Table 18.2 Developments of selected variables over debt accumulation/

reduction episodes
1880–1913 1985–2007
Debt Debt Debt Debt
Accumulation Reduction Accumulation Reduction
1880–1894 1895–1913 1985–1994 1995–2007
Average per capita GDP 0.77 1.49 2.16 1.19
growth (%)
Per capita capital growth Decreasing Increasing Decreasing Decreasing
Average yearly variation −0.07 0.10 −0.04 −0.07
Average debt ratio 109.44 98.84 97.61 110.52
Change in the debt ratio 32.91 −51.88 40.94 −18.37
Of which: foreign debt 4.8 −22.9 3.4 0.7
Homogeneous and consistent time series for revenue and expenditure items
for the general government covering the 150 years of Italian history are not
available. However, a discussion of the main trends observed in the fiscal pol-
icy stance can be based on data referred to the State budget for the years before
World War I17 and general government accounts since the 1960s.
Data analysis suggests that two factors are significantly different in the
two periods and that they might be relevant in explaining economic perfor-
mance: the size of the government sector and the composition of the budget;
and the timing and the magnitude of the fiscal adjustment needed to kick off
and sustain debt reduction. As to the first point, expenditure/revenue on GDP
stayed on average just above 10 percent before World War I, whereas between
1960 and 2007 it averaged 40 percent. In the first subperiod about 13 percent
of spending was investment (almost 7 percent between 1960 and 2007). As to
the second point: much larger imbalances registered before the years in which
debt peaked in the second subperiod implied that a more significant fiscal con-
traction (mostly based on revenue increases) was needed to keep debt dynam-
ics under control. A brief description of budget developments since unification
gives support to this finding.
As noted, in the nineteenth century government was small by modern
standards (Figure 18.5A) and the composition of the budget was not restraining
growth. Overall State expenditure amounted to 11.4 percent of GDP on aver-
age during 1862–1913 and revenue to 10.2 percent. Using Brosio and Marchese
(1986) data for general government, the expenditure ratio over 1872–1912 can
be estimated at 17 percent (higher than the values registered in other large
European countries: 14.5 in Germany, 13.8 in France, and 10.6 in Great Britain).
In the first fifty years of the new Kingdom of Italy no strong upward trend in
expenditure can be observed.18 After the mid-1860s spending was kept below
the peak level recorded in the early years of the new State. The ratio reached a
minimum under the Right government, in 1874. This was mainly the effect of
reduced military spending, which accounted for about two-thirds of the total
reduction between the expenditure peak in 1866 and 1874. In the second half
of the 1880s a surge in expenditure accompanied a change in the composition
of outlays. According to Plebano (1900), most expenditure in the early years of
the Kingdom of Italy related to military needs, public works, and building the
administration of the new State. Brosio and Marchese (1986) add to this list
the service of debts inherited from preunitary states. Over the 1880s, instead,
the most dynamic component of the budget was investment, which reached 3.7
percent of GDP in 1888, 26 percent of nonmilitary general government spend-
ing, and 21 percent of total outlays. Between 1899 and 1907, during the econ-
omy’s “take off,” as a share of GDP, total public spending declined (by about
2 percentage points; the reduction in primary outlays amounts to 0.5 percent-
age point). Giolitti’s policy reduced the share of government in the economy
at a time when private investment spending was buoyant and this seems to
have benefited the economy. Overall the composition of public expenditure over
1862–1913 was relatively “growth-friendly.” Public investment averaged at about
2 percent of GDP over the whole period, with peaks at around 4 percent in the
late 1880s (the average for that decade is 3 percent). The share of investment in
total expenditure, on average, was close to 13 percent (15 percent of nonmilitary
outlays). Over 1866–1894, the sum of budget deficits is two-thirds of the sum of
investment spending; the latter accounts for about 80 percent of the increase in
debt over the same period.
The size of government is of a very different order of magnitude after
World War II. General government primary expenditure, which amounted to
27 percent of GDP in 1960, grew almost steadily in the following decades as the
provision of public services was widened in scope and extended to the whole
population. A local peak was reached at almost 44 percent in 1993 (Figure
18.5B). Over two-thirds of the increase can be related to the expansion of social
spending (social security and health); in particular pension expenses grew as
benefits were claimed by larger cohorts with substantial entitlements (Franco
1993). From the 1980s the increase in total expenditure was amplified by rising
interest payments related to the rapid debt accumulation that characterized that
decade.
Structural changes in government intervention in the economy have not
been reflected only in the size of government. The evolution of taxation deter-
mined how much resources were left to be borrowed from the private sector
to sustain spending. The revenue ratio grew gradually from very low levels
after unification (5.2 percent in 1862) to peak at 12.4 in 1894 (also in relation
with favorable macroeconomic conditions, with prices and trade growing); it
averaged at 11 percent thereafter. The State budget was therefore characterized
by large imbalances only in the early years right after the unification19 and
A) State budget - 1862–1913

18
16
14
12
10
8
6
4
2
0
1860 1870 1880 1890 1900 1910
year
total expenditure
primary expenditure
revenue
B) General government accounts – 1960–2009

60
50
40
30
20
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
year
total expenditure
primary expenditure
revenue
Figure 18.5 Government expenditure and revenue (percentage of GDP).
stayed close to balance starting from 1874 until 1884 (the average deficit over
this period amounted to 0.4 percent of GDP). It has been argued that such a
result was precarious in nature and based on creative accounting (Plebano 1900;
Pedone 1967).20 In the first half of the 1890s deficits were about 1 percent of
GDP, whereas the budget was again substantially balanced in the second part
of that decade to be followed by small surpluses from 1898 to 1908. Over this
period the absence of imbalances in the public accounts and regressive taxation
were accompanied by an increase in savings that was channelled to industry
(Brosio and Marchese 1986, 54),21 a feature that was captured by the accumula-
tion of capital regressors in the empirical analysis presented previously.
Contrary to nineteenth century developments, the last fifty years in Italian

history have been characterized on average by wide (by historical standards)
public deficits. This was mainly caused by the lag with which revenue followed
the rapid increase in expenditure.22 Over 1960–1964 the deficit averaged at just
below 1 percent of GDP. It grew to almost 3 percent on average in the second
part of the decade and then kept rising, posting average values of 7.6 percent in
the 1970s, and 10.8 in the 1980s and early 1990s.
From the mid-1980s debt stabilization became the main target of Italian
fiscal policy. The rapid increase in interest payments displaced the initial pro-
gress made in closing the gap between primary spending and revenue; however,
significant adjustment in the budget composition delivered a reduction in the
deficit from 11.4 percent of GDP in 1989 to 2.7 in 1997 and to 1.7 in 1999. The
correction was mainly driven by revenue (its ratio to GDP went up by almost
6 percentage points over 1989–1999), whereas current primary spending, as a
share of GDP, was almost unchanged and capital outlays declined by slightly
more than one point. The composition of the fiscal adjustment might have con-
tributed to determining subdued growth: “The heavy reliance on tax increases
and capital spending reduction may have hampered the growth performance of
the economy. The recurrent corrective measures may have negatively affected
expectations of households and companies. Emergency action frequently pre-
vailed over long-term solutions. [ . . . ] These factors may explain why, in spite of
the large reduction in interest rate, the success of the consolidation effort has
not led to a significant acceleration in growth” (Balassone et al. 2002, 779–780).
After 1999 and until the effects of the financial crisis started to kick in (and
determine a new increase in the deficit), public accounts did not show signifi-
cant and sizeable further progresses. The general government deficit averaged
at just around 3 percent of GDP. Total expenditure and revenue were broadly
stable (at about 48 and 45 percent of GDP, respectively). The further decline in
interest outlays, by 1.5 percentage points of GDP, was offset by an equal increase
in primary current outlays.
The description of budget developments suggests that the size and magni-
tude of fiscal action have been significantly different at the turn of the last two
centuries. In the nineteenth century, fiscal consolidation started much earlier
than the debt ratio reached its peak: the budget was close to balance over most
of the 1890s (it then was in balance on average over 1900–1913). In the twentieth
century, fiscal consolidation had only just begun when the debt ratio peaked in
1994. The general government deficit amounted to 9.1 percent of GDP in 1994,
after averaging at 11.3 over the previous decade; it went below 3 percent in 1997,
and averaged at about that level until the global recession in 2008. The fiscal
impulse was therefore very different in the two subperiods: almost no correc-
tion was needed during debt reduction over 1895–1913, whereas a significant fis-
cal contraction was needed just to start off debt reduction in the second half
of the 1990s.
Conclusions
The analysis in this chapter highlights a sizeable negative influence of the
debt-to-GDP ratio on per capita GDP growth over the first 150 years of Italian
history, with the foreign component of debt exerting a stronger impact than the
domestic one before 1914. We also find that the negative effect of debt mainly
works through reduced capital accumulation. This is in line with empirical evi-
dence from the analysis of panel data from industrial countries over the last
decades.
The analysis has also stressed the relevance of additional explanatory vari-
ables that cannot be included in the econometric exercises for technical reasons
when trying to explain why growth picked-up in Italy when the debt ratio was
reduced over 1895–1913, but it did not over 1995–2007.
First, in the nineteenth century, fiscal consolidation started much earlier
than the debt ratio reached its peak. In the twentieth century, fiscal consolida-
tion had only just begun when the debt ratio peaked in 1994. Thus, although
the budget exerted no negative impulse on GDP growth during debt reduc-
tion over 1895–1913, a significant fiscal contraction, mostly based on revenue
increases and cuts to investment spending, marked the start of debt reduction
after 1994.
Second, the size of the budget before World War I was relatively small (rev-
enues and expenditure averaged at around 10 and 11 percent of GDP, respec-
tively) and its composition was growth-friendly, with investment amounting
on average to 13 percent of total outlays over 1866–1913: about 80 percent of
debt accumulation until 1894 can be accounted for by public investment. The
size and composition of the budget were radically different over 1960–2007.
Revenues and expenditure averaged at around 40 percent of GDP and invest-
ment amounted on average to 7 percent of total expenditure. The average deficit
was more than twice investment spending.
Acknowledgment
The views expressed in this chapter are those of the authors and do not nec-
essarily reflect those of the Banca d’Italia. They thank colleagues in the Public
Finance Division at Banca d’Italia’s Research Department, Giorgio Albareto,
Alberto Baffigi, Alfredo Gigliobianco, Pasqualino Montanaro, Patrizio Pagano,
Paolo Sestito, and Gianni Toniolo for help in retrieving some of the data used
in this work and for providing many constructive suggestions. They are also
indebted for helpful insights to the participants in the Workshop on Public
Debt and Economic Growth (European Commission, DG ECFIN, Brussels,

December 3, 2010); in the Banca d’Italia Workshop on Italy’s International
Economic Position, 1861–2011 (Banca d’Italia, Perugia, December 10–11, 2010);
in the 67th Annual Congress of the International Institute of Public finance
(University of Michigan, Ann Arbor, August 8–11, 2011); and in the European
Center for the Study of Public Choice conference on New Perspectives on
Public Debt (Sapienza University of Rome, September 26–28, 2011). All remain-
ing errors are theirs.
Notes
1. Data on public debt discussed in this work are based on the reconstruction
presented in Francese and Pace (2008), updated to include most recent years.
Data on Italian public debt are released and updated monthly by Banca d’Italia
and they can be freely downloaded from its website. Francese and Pace (2008)
includes a discussion of the methodology used for the compilation of the
data. Methodological notes are also available at http://www.bancaditalia.it/
statistiche/quadro_norma_metodo/metodoc/sb7308/en_suppl_73_08.pdf. Earlier
reconstructions were provided by Morcaldo and Salvemini (1984); Confalonieri and
Gatti (1986); Spinelli (1989); Salvemini and Zamagni (1993); and Zamagni (1998a,
1999). Data on GDP (nominal and real) are from Baffigi (2011).
2. The provision establishing the Gran libro del debito pubblico del Regno d’Italia
(i.e., the comprehensive book of the public debt of the Kingdom of Italy) was
issued on July 10, 1861, and the assumption of the liabilities of preunitary states
was established by law on August 4, 1861 (De’ Gennaro 1934). For an analysis of
preunitary states’ debt see De Luca and Moioli (2007).
3. In line with Francese and Pace (2008), foreign debt is defined as debt issued
abroad (either government bonds issued on foreign financial markets or loans
from nondomestic banks). It was not possible to reconstruct complete series of
debt held by nonresidents.
4. In particular, in 1925 debts toward the United States government were reduced by
about four-fifths (see also Toniolo 1980).
5. On this point see Irons and Bivens (2010).
6. This is to prevent distortions from the extreme values recorded by the variables of
interest because of the wars.
7. The approach referred to in this section highlights two things worth noting:
omitting key variables of the production function, such as per capita capital,
from the estimating equation would give unreliable estimates of the growth-effect
of Xt; because many time-series are likely to be nonstationary in their levels,
specifications in first differences may yield unreliable and inefficient estimates
because valuable information on the levels would be lost (Bottazzi and Peri 2004;
Kamps 2005; and Rao 2010).
8. Labor force and capital stock data are taken from Broadberry, Giordano, and
Zollino (2011).
9. The results described in this section refer to the estimation of equation (1) with
ARDL(1) terms for all variables and an ARDL(3) term for income per worker.
The specification is obtained after a general to specific approach that starts with
ARDL(4) terms. Inspection of the time series for ln GDP per worker, capital, and
the debt-to-GDP ratio supports the hypothesis that variables have a unit root,
whereas their first differences are I(0). Similarly, tests support the existence of
a single cointegrating vector among the three variables. Diagnostic tests for the
residuals from the regression give favorable results as do tests for autocorrelation.
Because the hypothesis of homoskedastic disturbances is rejected, robust standard
errors are used. 2SLS estimation (to account for possible endogeneity) provides
results in line with the ones discussed here. Finally, the hypothesis of short- and
long-run Granger causality is supported by the data (Balassone, Francese, and
Pace 2011).
10. The estimated negative effect of debt on growth is in line with results recently
found in the literature. It is for instance close to the one estimated by Kumar and
Woo (2010) where a 10 percentage point increase in the initial debt-to-GDP ratio
is associated with a reduction in annual real growth of around 0.2 percentage
points. Separate estimation of equation (1) over 1861–1913 and 1950–2007 highlights
how the coefficient of the lagged level of debt looses significance over the latter
period.
11. The factors considered include proxies for the world business cycle (e.g., the rate
of growth in the rest of Europe and in the United States); the degree of openness;
human capital formation; government size; population structure; financial
development; relative cost of government borrowing; and the value of the real
exchange rate of the national currency. Many of these variables are similar to the
set of regressors used in other recent empirical studies; for the specific proxies
used for the estimation and the sources of the data, see Balassone, Francese, and
Pace (2011).
12. The link between foreign debt and growth in developing countries is not
unexpected. It has been highlighted for instance by Krugman (1988).
13. To test for a threshold effect in the set up described in this section, debt
regressors were interacted with dummies set equal to 1 at increasing (by 10
percentage points) values of the debt ratio. Estimated coefficients of these variables
did not turn out to be significant.
14. We cut the second period in 2007 to exclude the years affected by the recent
financial and economic crisis.
15. They are characterized by relatively fast growth in the rest of the world.
Furthermore, in both cases external growth was not much different before and
after the local peak in Italy’s debt-to-GDP ratio.
16. If we consider holdings by nonresidents of Italian government securities (instead
of debt issued on foreign markets) the observation is reinforced: debt held by
nonresidents increased over the last decades.
17. Data on the State budget are taken from Pedone (1967) and Ragioneria Generale
dello Stato (2011); the GDP series used in the analysis discussed in this section is
consistent with the data used in the econometric analysis and is therefore drawn
from Baffigi (2011).
18. “Expenditure growth was rather limited during 1866–1914 [ . . . ] set to 100 [the
value of expenditure] in 1866, it was equal to 485 in 1918, after over 50 years,
notwithstanding the acceleration due to World War I” (Brosio and Marchese
1986, 52). The average real growth rate over the period was about 2 percent. Over
1900–1913, as a share of GDP, State and general government expenditure were
broadly on the same level as in the 1860s.
19. The average deficit over 1862–1866 amounted to 5 percent of GDP.
20. Indications that accounting might have played a role are also given by the gap
between the change in general government debt (a measure of the cash deficit plus
debt assumptions, which may not be accounted for in the State budget) and the
State budget deficit (based on accruals), which in some years (1876, 1881, and 1882)
is particularly wide. However, it must be noted that substantial differences among
these two indicators can be recorded also in other periods and by and large the
overall declining pattern displayed by the two variables is similar.
21. Brosio and Marchese (1986) provide a classification of Italy’s revenues over
1861–1913 according to the degree of regressivity. They find that regressive
taxation accounted for about 50 percent of total revenue on average in the period
considered.
22. Revenue remained below 30 percent of GDP until the mid-1970s; it reached the
same level as primary expenditure only in the early 1990s.
Chapter 19
WHY THE ITALIAN

ADMINISTRATIVE
SYSTEM IS A SOURCE
OF COMPETITIVE
DISADVANTAGE
Magda Bianco and

Giulio Napolitano
Introduction
It is widely acknowledged that institutions play an essential role in ensuring
conditions necessary for the development of any system. Even if it is extremely
difficult to disentangle their role with respect to that of human capital, culture,
and other factors, good economic institutions have a fundamental role in favor-
ing economic growth.
Among the various institutions, a number of theoretical and empirical con-
tributions suggest that a “good government” (including a benign and not corrupt
bureaucracy, a legal system that protects property rights and enforces contracts,
and an efficient regulatory framework) is associated with higher growth (North
1990; Acemoglu, Johnson, and Robinson 2005a; Hall and Jones 1999; Knack and
Keefer 1995; La Porta et al. 1999; St Aubyn 2007). The role of a government is
essential in that it affects the characteristics, quantity, and quality of most other
institutions in a country.
Here we consider one aspect of government, the administrative system,
which includes the bureaucracy, its organization, and the discipline governing
its behavior (which in civil law countries is typically administrative law). It is
through its administrative system that a government performs its roles.
Our starting point is evidence (comparative and internal) of the current rel-
ative inefficiency of the Italian administrative system, which is now perceived as
one of the main obstacles to a higher growth of the productive system, because
of the burden it imposes and its ineffectiveness in ensuring an efficient provi-
sion of public goods and reducing other market failures. We evaluate the rea-
sons for the current performance of Italy’s administrative system by looking at
its establishment in 1861 and its evolution. Some of the shortcomings are deeply
rooted and date back to the origin: the way it was created, the role of the legal
culture, and linkages with the political system. Others are more recent and are
partly caused by responses to those original “sins” that, even if adequate when
set in place, later became sources of inefficiencies.
Because there is no single or ideal form of capitalism, or an optimal form
of administration within a capitalist system, the question is whether the Italian
administration has been able to organize its resources sufficiently well within
the existing constraints and whether it has allowed for a sufficient reorgani-
zation and adaptation over time to accommodate the evolution of the Italian
capitalist system (Milhaput and Pistor 2008). Overall, we argue that the admin-
istrative system has been able to adapt and respond adequately, within con-
straints, for a significant share of the period we are considering. However, over
the last decades some of the unsolved problems have rendered the system unable
to further satisfy the needs of a changing context.
In what follows we first define what should conceptually be the role of
the administrative system. We then provide some indicators of how the Italian
administrative apparatus is currently perceived and some measures of how it
performed over time in producing some essential services. After a synthesis
of its evolution since 1861, we identify the reasons for the current perceived
inefficiency, which has become a source of competitive disadvantage for the
Italian economy. Next we consider initial causes of difficulties: starting condi-
tions, the link with politics, and the role of the legal culture. We discuss in
more detail one specific “product” of the administration, civil justice, to bet-
ter understand when and how inefficiencies in this area emerged. We detail
how reactions to these inefficiencies have been in some cases the source of
further problems (i.e., the creation of agencies external to the formal admin-
istration, at the beginning more flexible and efficient, then reproducing some
of the defects of the administration itself). Finally, we discuss recent reform
processes (and their difficulties) and conclude with some caveats with respect
to our interpretations.
the administrative system 535
We do not provide a unifying and general interpretation of the administrative

system evolution, successes, and failures (such as those provided in Melis [1996]
or Cassese [1983]), but simply offer some quantitative, even if only descriptive,
support concerning those successes and failures in some specific areas.
The Role of the Administration
The Role of the Administrative System

The roles that in principle a government should perform vary over time depend-
ing on the phase of development and the characteristics of the economy. In
a capitalist market economy the government’s role is essentially related first
to ensuring the provision of some public or semipublic goods (the law, pub-
lic order, defence, justice, and property rights); second to the management and
regulation of the economy and specifically of activities affected by market fail-
ures (e.g., infrastructures and public utilities) providing services to citizens; and
finally to redistributive roles and social welfare. The way these final aims are
ensured may vary, depending on the legal system, the degree of development,
and the society’s social and political preferences.
Ideally, it is with reference to the provision of these goods that we would
like to evaluate an administrative system. In practice, it is extremely difficult
(and possibly not even correct) to simply use these parameters as a reference
for judgement. The number of factors with respect to which the adequacy of
the system should be evaluated is extremely large and varies over time. For
example, an expansion of the roles of the administrative systems in most coun-
tries occurred gradually between the second half of the nineteenth century and
mid-twentieth century: as parliaments came to represent also lower classes, laws
and regulations were introduced in the areas of welfare, education, labor, and
health (Cassese 2010).
Even more difficult is to evaluate the efficiency of an administrative system.
In general, it is less easy to ensure a good performance of government agen-
cies and public enterprises compared with private entities because managers
and workers in that case lack high-powered incentives. Government agencies’
outputs are harder to quantify and measure; goods and services they supply in
many cases do not have close substitutes (Dixit 1977). Moreover they are large
organizations performing a number of different tasks and hence have weaker
incentives (Holmstrom and Tirole 1991); they answer to multiple principals,
again reducing the power of incentives (Petretto 2008). In Italy only recently
with the “spending review” programs have formal initiatives for developing
measures of the efficiency of public expenditures been introduced.
The Definition of the Administrative System

We define the administrative system in a very broad way, as the central
administration and its local branches, agencies, and state-owned corpora-
tions, which are the instruments through which the State performs it roles
in the system. Formally, administrative systems and administrative laws reg-
ulating them have developed in the context of “nation-states” (Cassese 2010)
in nineteenth century Europe. Typically, a two-way link has been established
between the state and the administration. Administrative systems and admin-
istrative laws have been shaped according to the needs of the different State
models: as different national States developed along divergent lines, so did
administrative systems.
In modern industrialized countries, public administration is often the larg-
est industry in terms of employment and value-added (even if the latter is dif-
ficult to precisely measure) and the production of public goods and services is
performed by a number of decentralized structures.1
The Relevance of the Quality of the Administration

Recent empirical analyses seem to confirm that the “quality of government”
is essential for the growth of the economic system. Olson, Sarna, and Swamy
(2000) claim that differences in governance explain why some developing coun-
tries grow rapidly, taking advantage of catching-up opportunities, whereas others
lag behind. They consider as proxy of good governance the risk of expropria-
tion; the risk of repudiation of contracts; administrative effectiveness (including
the quality of bureaucracy, the level of corruption, and the degree to which
citizens are willing to accept the authority of established institutions); and the
rule of law.
Similar results are found by Kaufmann and Kraay (2002) using the gov-
ernance indicators built by the World Bank. They identify a causal relation-
ship from good governance to per capita income without evidence of a reverse
causation, from higher income to better governance: higher incomes per se
do not guarantee improved governance. Improvements in institutional qual-
ity or governance are unlikely to occur merely as a consequence of economic
development.
Causal effects from better governance to higher per capita income are
identified also by Acemoglu, Johnson, and Robinson (2001a), Hall and Jones
(1999), and Easterly and Levine (2002). As for reasons explaining differences,
La Porta et al. (1999) suggest that some measures of government performance
(which they define as “interference with the private sector,” “efficiency,” “output
of public goods,” and “size of public sector”) are affected by some very general
political and cultural attributes, such as ethnolinguistic fractionalization, legal
origin, and religious affiliation.
Measures of Outcome
Recent International Comparisons

It is extremely difficult to compare administrative systems and their capacity to
provide an adequate framework to a market-oriented system. Here we discuss
some commonly cited indicators. They are based on simplifying assumptions
and have sometimes significant methodologic limitations. Hence, we should not
use any single indicator to provide evidence of a specific weakness. However,
reading them all together we have an indication of the general perception of
investors and analysts of the degree of inefficiency of the Italian administrative
system. This has to be confirmed by some “harder” evidence, which we provide
in the following paragraph.
Data from La Porta et al (1999), those produced within the Doing Business
reports, and the Governance Matters Indicators produced by the World Bank
all suggest that under a number of respects the “quality of government” might
be one of the current burdens for the Italian economy. La Porta et al. (1999)
build indicators of “government efficiency” (including proxies of bureaucratic
delays, corruption, and tax evasion), as averages over a period varying from
1972–1982 to 1995–1996. Italy performs rather poorly in all three. They also pro-
duce measures of the capacity of providing public goods, in terms of quality
of infrastructure, school attainment, and infant mortality, again averaged over
the same period. Italy performs well only with respect to low infant mortality.
Measures of “interference with the private sector” (including property rights,
business regulation, and top tax rate, all measured in 1994 or 1997) show in the
Italian case a value similar to that of a number of developed countries (even if
not in the top rankings).
The World Bank produces a number of indicators on governance. The mea-
sure “government effectiveness” (Figure 19.1) includes the perception of the qual-
ity of public service provision, the quality of bureaucracy, the competence of
civil servants, the independence of the civil service from political pressure, and
the government’s commitment to policies. It is a measure of the inputs required
for a government to be able to produce and implement good policies and deliver
public goods. In 2008, Italy scored very badly compared with other developed
countries, after a worsening of the indicator over the last few years. The index
“regulatory quality” focuses on policies and includes measures of the incidence
of market-unfriendly policies and perceptions of the burdens imposed by exces-
sive regulation. In 2008, Italy performed better only than Greece and Poland,
even after a slight improvement. Similar indications are provided by the rank-
ings in the World Bank’s Doing Business reports, where the Italian position has
worsened in the last few years. Also the Organization for Economic Cooperation
and Development data on product market regulation and service regulation
show an excessively anticompetitive regulation in some areas (and excessive
2.5
1.5
0.5
0
AU LIA
BE RIA
CA IUM
DE ADA
NL K
FR D
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IS E
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RW
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TH AP
RA
A
ST
IT GD
IT
LG
NM
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LA
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ED L
ST
S
AU
NE
Figure 19.1 Government effectiveness (2008). Source: World Bank Governance

Matters Indicators.
State ownership). The World Bank “Rule of law” indicator measures the extent
to which agents have confidence and abide by the rules of society. Also under
this respect in 2008 Italy shows the worst performance. Finally, with reference to
the “Control of corruption” indicator, which measures the perception of corrup-
tion, conventionally defined as the exercise of public power for private gains, in
2008 Italy was the second worst performer, after Greece. The general evaluation
emerging from all these indicators is extremely negative in the current period.
Given the methodologic weaknesses of some of these measures it is useful
to have also some more direct “output” measure.
Some “Representative” Performance Measures

It is complex to evaluate somehow the “output” of a good government; even
more so when we consider specifically the administrative system, because
of the difficulty of measuring the quality of the output and of taking into
account the role of various inputs. Ideally, we would like to have measures
of the efficiency of the administrative apparatus (how well inputs are used),
and measures of the results in terms of public goods and services produced
for the system and on the quality of regulation. These outputs are very
likely to impinge on the productivity and growth of the entire system. This
is the case for infrastructure, education, research and development, and the
legal system. Because available measures of aggregate productivity2 are by
construction based on the costs of inputs (mainly employment) and hence
cannot be used to evaluate how efficiently inputs are used, in what follows
18.000
16.000
14.000
12.000
10.000
8.000
6.000
4.000
2.000
0.000
20 7
01
19 5
19 9
19 3
19 7
19 1
19 5
19 9
19 3
19 7
19 1
19 5
19 9
93
18 1
18 5
18 9
18 3
18 7
18 1
18 5
18 9
18 3
19 7
19 1
19 5
19 9
19 3
19 7
19 1
19 5
19 9
19 3
19 7
19 1
4
4
5
5
6
6
6
7
7
8
8
8
9
6
6
6
7
7
8
8
8
9
9
0
0
0
1
1
2
2
2
3
3
4
19
18
Figure 19.2 Investments in public works (mld 1938 lira). Source: Cannari and Chiri
(2002), based on Fenoaltea (1985); Rossi, Sorgato, and Toniolo (1993).
we show the evolution of some indirect measures regarding the provision

of one public good (civil justice) and the provision of some public services
(infrastructures).
The Provision of Infrastructures

Data on investments in public works and on public capital stock show four
major phases of intense growth of public investments (Cannari and Chiri
2002): (1) the 1880s, (2) before World War I, (3) the 1930s, and (4) the 1950s
and 60s (Figure 19.2). If we compare investments to gross domestic product,
the first period seems to be characterized by the most intense accumulation
process whereas the most recent years show a rapid slowdown. Distinguishing
also by asset type (roads, railroads, and electricity networks) as indicators of
public administration capacity in performing its main role, we observe prob-
lems mainly in the most recent periods. This suggests a decreasing capacity to
act in support of the economy, intervening as provider of public or quasipublic
goods. The main problems recently seem to be not so much in the amount of
expenditures, as in their quality (Balassone and Casadio 2011).
The Provision of a Public Good: Civil Justice

One of the main “public goods” produced by a government is the enforcement
of justice. A measure of performance of the judiciary (the length of proceedings,
in first instance and appeal) shows how until World War II the judicial system
has slightly but not dramatically worsened, but then significantly deteriorated
after the War (Figure 19.3). As discussed later, this is true for other measures of
judicial efficiency.
1000
900
First instance
800
Appeal
700
600
500
400
300
200
100
0 19 0
54
19 8
19 2
19 6
19 0
74
19 8
19 2
19 6
19 0
19 4
20 8
02
18 1
18 5
18 9
18 3
19 7
19 1
19 5
19 9
19 3
19 7
19 1
19 5
19 9
33
19 7
19 1
5
6
6
7
7
8
8
9
9
9
8
8
8
9
9
0
0
0
1
1
2
2
2
3
4
5
19
19
19
18
Figure 19.3 Length of civil procedures (days, estimated). Source: Istat, Statistica
giudiziaria civile e commerciale (1880–1939); Statistica giudiziaria civile (1940–1948);
Annuali di statistica giudiziaria (1949–).
Other indicators (e.g., those related to health or schooling) show a better

performance, even after World War II, but in international comparisons still
suggest a relative weakness of Italy.
Even if all these measures depend on a number of other factors not neces-
sarily related to the efficiency of the public administration, taken together they
proxy how well the administrative system has worked over time to ensure the
provision of public goods and good regulation. Combined with the previous
qualitative indicators they suggest that, at least in recent decades, the quality of
some public goods provided by the administrative system (e.g., infrastructures
and civil justice) has been poor.
The Italian Administrative System

since 1861: An Overview
We describe here the evolution of the administrative system in terms of various
roles it is expected to perform, identifying instances of “degeneration” com-
pared with what should have been a physiologic reaction to the needs of the
economy. The relevant questions are whether the administrative system has
performed its role of providing basic public goods and regulating the economy
in an efficient way, at least over some periods, and whether current problems
were already present since the beginning.
The historical analysis suggests that some weaknesses were present from the
origin but that in some periods the administrative system has accompanied the
rapid growth of the productive system and the needs of an evolving society. We
identify six phases in the evolution of the system (Melis 1996; Cassese 1993).
1861–1898: The Administrative Delay

Compared with other European countries, Italy was a rather anomalous case:
whereas in France, the United Kingdom, and Germany bureaucracies and
administrative apparatuses accompanied and sustained the national unifica-
tion and the construction of a State, this was not the case in Italy because of
the absence of a strong administrative tradition (Cassese and Melis 1990). Italy
started with “small size” public administration (in 1861 there were fifty thou-
sand public servants at large, three thousand in a stricter definition of gov-
ernment; public expenditure was 10 percent of gross domestic product mainly
devoted to debt payment and defense), whereas in other European countries the
weight of public administration was much larger. France had inherited from
the Napoleonic period a large bureaucracy well distributed over the country
and representative of the middle “bourgeoisie.” Germany inherited from Prussia
a “military” organization model and a civil servant ideology. The UK admin-
istration had a long-standing tradition. On the contrary, Italy had no unitary
and compact organization of the judiciary, a legislation that still had a relevant
regional component, and no structured hiring system for the administration
(Melis 2010). After unification, however, the number of civil servants grew rap-
idly (in 1882 reaching approximately ninety-eight thousand units).
A fragmented institutional landscape and a limited role played by the
administration in the unification of the country implied that in 1861 the leg-
islative unification of the country was not associated to an administrative one.
Only in 1865 was a set of “administrative unification” laws enacted.3 But this
was not sufficient to create a homogeneous bureaucratic structure throughout
the country. In the 1880s the relationship between the State and society was
defined by the legislation: for the first time, a leading role of the State in regu-
lating economic and social activities was clearly recognized, through planning,
regulatory, and control powers. Administrative procedures addressed and disci-
plined economic interests; they were already based on administrative “orders,”
with extremely detailed procedures.
The highest ranking officials of the administration belonged to the
Northern elite, mainly Piedmontese: in 1897, 25 percent of the top administra-
tion was from Piedmont, 53 percent from Northern regions, and 15 percent from
the South (Cassese 1977).
1898–1913: The Big Spurt

Over this period the increasing demand for public goods and services induced
growth of the administration. Through a “big spurt,” the administration was
able to satisfy the growing needs of the economic system and of emerging social
groups (workers and their unions).
The boundaries of national and local governments were extended.
Municipalities were allowed to run local services for the benefit of their cit-
izens (1903); railways were nationalized (1905); and a powerful public agency
was established to provide life insurance (1911). In fifteen years public employ-
ees greatly increased: in 1914 there were 286,670 public servants, three times as
many as at the beginning of the century. The percentage of those coming from
the South increased substantially; legal skills became dominant, with a reduc-
tion in the weight of technical competencies and a “bureaucratization” of the
administration. This is partially associated with a rapidly growing legislation,
more and more detailed in shaping the activities of public and private actors.
A reaction to the “bureaucratization” of the public administration was the
creation of public bodies and entities outside the formal administration, the
so-called parallel administrations. A number of special duties were attributed to
special bodies different from the traditional ministerial public administration:
commissariati civili, uffici speciali, amministrazioni decentrate, aziende munici-
palizzate, and later on enti pubblici autonomi.
The establishment of special bodies became a way to escape from the finan-
cial constraints imposed by the ragionerie and the strict regulation of bureau-
cratic behavior within the traditional structure of public administration. Enti
pubblici were also outside the scope of application of the two laws approved
in 1908 (numbers 290 and 693) defining the status, duties, and rights of public
employees (also as a response to the early unions). This allowed these agencies
to freely recruit and manage workers and employees with managerial and tech-
nical skills.
1920–1939: From Administrative “Normalization” to Governmental

Reaction to the Great Depression
During Fascism, the administrative system was subject to two different and
opposed trends. On the one hand, especially after the end of World War I, there
was a retreat of the State and a sensible reduction in the number of employees
in the public sector (from 540,847 in 1923 to 520,979 in 1928); on the other hand,
after consolidation of the Fascist regime and after the Great Depression, the role
and the dimensions of the State greatly increased (public employees grew from
634,328 in 1933, to 787,862 in 1938, to 1,380,904 in 1943). In the 1930s, half of top
civil servants came from the South, 30 percent from Central Italy, and only 20
percent from the North. This tendency toward “Southernization” became even
more noticeable after the 1930s (Cassese 1977).
In this period, several important pieces of legislation were enacted. In many
strategic fields (water resources, energy infrastructures, industrial facilities, and
urban planning), significant discretionary planning and regulatory powers were
given to the public administration. A key feature was the intense growth of
public law bodies and entities: between 1919 and 1943, 352 new entities and 32
new groups were created, partly to ensure the representation of every social
group within the State, but also to create a new area of political patronage, out-
side the traditional body of older bureaucrats operating in central government.
The Great Depression was another source of administrative development
and change. To face the crisis of the financial and the industrial sectors, the
government established a special public law entity, Istituto per la ricostruzione
indutriale. Created in 1933 as a temporary agency, it became a stable institution
in 1937, allowing a wide program of bailout of banks and industrial companies.
At the same time, the banking law reform required the separation of banks
from industrial companies and the establishment of an administrative control
system (1936). Istituto per la ricostruzione indutriale became the holder of 44
percent of the Italian stock market and, with other State-owned enterprises, it
allowed the development of a technocratic elite independent from any political
influence (see Chapter 16).
1950–1973: The Public Sector Contribution to High Growth

After the end of World War II and establishment of the new democratic order
(with the constitution enacted in 1947), the number of public servants increased
again (from a little more than one million in 1948 to more than one million
and hundred thousands in 1963), both as a consequence of the enlargement of
the State machinery and for reasons of political consent.
A key role in the reconstruction of the country was played by State-owned
enterprises, which greatly developed after World War II, with employees increas-
ing from 250,000 in 1951 to 700,000 in 1977. They were active in new strategic
fields, such as energy, chemicals, plastics, and oil distribution (see Chapter 3). A
controversial issue was represented by the establishment of a special agency for
the development of the South (Cassa per il Mezzogiorno, 1950) (see Chapter 20),
aiming at the development of energy, transport, and water infrastructure and
to the renewal of tourist services. However, the agency was not able to ensure a
strong coordination with other central and local administrations.
The development of private industries and markets and the success of
export strategies (see Chapter 3) was sustained by the realization of fundamen-
tal energy and transport infrastructures and the provision of essential goods
and services for citizens by State-owned enterprises.
During the 1960s, the welfare system became stronger and wider. A new
public education system was established, offering free education to young
people until the age of thirteen (1962) (see Chapters 8 and 9). A new pension
scheme granted to old-age pensions even to those who had not contributed to
the scheme, so long as their income fell below an established minimum (1969).
Modernization took place outside the central administration system, especially
through the use of private law instruments. No substantial attempt to reform
the administrative law system was made in this period, but Parliament tried to
strengthen its control over the administration through laws regarding the regu-
lation of administrative powers and tasks.
1973–1990: Still Growing Notwithstanding Administrative Inertia

Notwithstanding the economic crisis of 1973–1974 and the difficult macro-
economic conditions of the country, expansion of the public production of
goods and services proceeded. In 1978, a comprehensive national health ser-
vice was established, providing for universal free medical assistance; special
and extremely favorable public pension schemes were greatly extended; and the
number of public servants constantly increased.
However, while the Italian economy was growing, the administrative sys-
tem lagged behind. Poorly paid personnel, complicated procedures, and pro-
longed delays became more and more its distinctive features. Even the model
of amministrazioni parallele was put under question and some laws (number
70/1975) were enacted to limit their growth.
In the following years institutional and administrative reforms proved to be
complicated and difficult to implement. The establishment of regional govern-
ments and the devolution of administrative tasks to local administrations were
slow and ineffective (1970–1977). The reform of the administrative elite (1972)
and of public employment did not ensure the introduction of managerial crite-
ria. More ambitious attempts for an organic reform of the public administration
were blocked (1979–1980). The law on administrative procedure enacted in 1990
had a limited impact at the beginning.
1992–2010: Administrative Inefficiency as a Source of Slow Growth

The 1992 foreign exchange crisis and the reaction against corruption pushed
toward a reduction of the boundaries of the State. A wide privatization program
was pursued with the highest revenues from sales in Europe, after the United
Kingdom. Liberalizations of utilities, especially telecommunications and elec-
tricity, were wider than in other European countries. Regulatory functions over
markets to promote competition and protect consumers were established and
conferred to newly created independent authorities. Many pieces of legislation
were enacted to foster administrative simplification (1990, 1993, and 1997) and
decentralization (1997 and 2001) policies, the latter also through constitutional
amendments.
For the first time in the Republican period, the central structure of the
administration was deeply reformed. Tasks and internal organization of min-
istries were completely redesigned (1999). A distinction between politics and
administration was introduced (1993–2001), even if balanced through an
extended application of the spoil system (1999–2002). The public employment
discipline was almost fully privatized (1993 and 2001). Also the machinery of
administrative controls was changed to reduce ex ante bureaucratic checks and
to promote performance evaluations (1994 and 1999). A coherent apparatus to
measure the performance of government, of administrative units and individual

employees, was introduced (2009).
Notwithstanding all these efforts, the bureaucratic quality remains low and
“doing business” in Italy is still difficult.
The (Potential) Sources of

Inefficiency: The Initial Conditions
Path-Dependence: The Initial Weaknesses

The first sources of weaknesses, compared with other countries, were a missing
strong administrative tradition and the commitment of the newly formed state
directed mainly at building a single market.
Administrative systems and administrative laws developed in most—even
extremely different—countries in the specific context of the “nation-state,” a
national government run by a political body called the State (Cassese 2010).
Hence, public administrations, with a sort of monopoly of executive power, have
been conceived of as belonging to a national community, structurally depend-
ing on national governments. The Italian administrative system belongs to a
second-generation administrative system and this may explain the limited role
played in Italy by administrative institutions in enforcing the unification of the
country and in enhancing economic growth.
The first generation administrative systems were established during the
Renaissance in England, France, and Spain. However, Germany and Italy estab-
lished a second-generation administrative system because they were unified only
in the second half of the nineteenth century. Their administrative traditions
were deeply different. Prussia had a strong bureaucracy and a well-established
administrative culture, whereas Piedmont had a weak administrative structure
and adopted the French-Napoleonic model. However, the transplants of French
institutions were neither immediate, nor comprehensive, and the Italian admin-
istrative system was incapable of either imitating the models of other coun-
tries or developing an autonomous efficient set of rules and institutions. The
attempt to follow the French model induced the new Italian State to abandon
its decentralized tradition in a context where central institutions had not devel-
oped sufficient administrative capacity. A number of reasons can be found for
this weakness.
First, the concept of droit administratif as a special body of law, different
from private law, was not immediately adopted by the Italian administrative
system. For at least twenty years after the political-administrative unification
of Italy, private law and especially contractual rules prevailed, with public law
elements remaining fragmented and secondary. This prevented the State from
ruling the society and delivering public goods necessary to the development
of the new state. Only two decades after unification, and especially toward
the end of the century, State decisions became imperative; administrative law
developed as a separate branch of law, to enhance the enforcement powers of
the State.
Second, after unification, Piedmont’s laws were extended throughout the
realm, to replace those of individual states. However, the main effort was
devoted to market unification rather than administrations and institutions. The
judiciary was fragmented, even at the top (four Supreme Courts ruled in differ-
ent areas of the country). Different economic conditions of the North and the
South were not corrected by regulatory harmonization. Formally, identical rules
for the administrative bodies throughout the country received a very different
interpretation at the local level.
Third, the Italian administrative organization was only rudimentary, for
at least twenty years after unification (fifty thousand public servants for more
than twenty-five million people). There were nine ministries employing three
thousand people. There was no entity charged with general coordination and,
at least initially, there was no procedure for recruiting and selecting an admin-
istrative elite. Access to top positions, which was granted to Piedmont func-
tionaries on a somewhat privileged basis, gradually became a simple matter of
seniority, an almost mechanical process.
Fourth, the government performed a limited role in promoting economic
development. Only some infrastructural investments were pursued (e.g.,
postal services) at the beginning. The limited financial involvement of the
State was also caused by the high level of public debt inherited from preuni-
tary states.
The big spurt of the Italian public administration began only twenty years
after unification, and intensified at the beginning of the twentieth century.
Industrial development and the related increasing demand for public goods and
services induced a substantial growth in the administration.
Excessive Political Influence over Bureaucracy

A second weakness was associated with the fact that an excessive political influ-
ence over the administration did not allow the creation of an autonomous and
competent bureaucracy, as was the case in other continental countries.
A major component of a modern administration is a professional civil ser-
vice, recruited on the basis of a merit system rather than political patronage.
This principle of neutrality of the administration has many different versions,
from the “faceless figure” of the British civil servant entirely removed from
politics, to the French hybrid of career “haut functionnaires,” and the German
combination of “Beamte” and “Politische Beamte.”
In Italy after unification, politicians and top-level administrators were

closely associated, being both parts of an elite aiming to ensure the effective-
ness of unification and at building an Italian identity. For at least twenty years,
bureaucratic, political, and judicial careers were interchangeable.
Only in 1908 was a law on the legal status of public servants introduced,
with a formal separation between political and administrative careers. At that
point bureaucrats started looking for protection against political interference.
During the Fascist period, the bureaucracy was formally at the service of the
new regime, but their legal status was not substantially affected.
In 1948, the constitution provided that the administration is “subject” to the
political body: each member of the Council of Ministers is responsible for the
activity of his ministry but the recruitment of public officials is carried out pri-
marily by means of open competition; politicization is present only at the top
because of the power granted to the government to appoint top-level adminis-
trators (even if this power is often only apparent, as far as rules and practices
related to seniority greatly reduce the selection capacity).
However, there was no exchange between top level administrators and polit-
ical leadership because civil servants elected in parliament were always a small
percentage (on average 4 percent), much lower than in France (between 15 and
20 percent).
Top-level administrators tended to give importance to their post and career,
trying to avoid any political interference with their work: they somehow traded
power for security, whereas politicians traded independence of action for loy-
alty. This modus vivendi, based on the fact that each of the two sides adopted
a policy of self-restraint, produced inefficiency and immobility, setting off a
vicious circle.
First, ministers surrounded themselves with an ever-growing number of
staff working directly for them. The Minister’s cabinet became inflated (in
some cases with more than one hundred employees). The cabinet played the
role of ensuring transmission of political views from the minister to the admin-
istrative structure.
Second, although ministers could not influence the selection and careers of
the ministerial bureaucracy, they had the power to appoint chairmen and board
members of public agencies.
As a whole, the relationship between top-level bureaucracy and the political
class was different from the French elitist model and the US spoils system. At
first glance, the neutral attitude of the Italian bureaucracy might seem similar
to the British model, but three main features distinguish the Italian experience.
First, the Italian bureaucracy had neither the salaries nor the social status that
permitted British higher civil servants to be neutral vis-a-vis the political sys-
tem. Second, the Italian political class resorted much more than their British
counterpart to political patronage. Third, the Italian top-level bureaucracy
tended to adopt prudent and conservative stances by resorting to excessive
legalism, enforcing laws to the letter, playing a restraining role to institutional
innovation, contrary to the British one, much more ready to follow the new
public management spirit.
In the last decade of the twentieth century, the executive branch extended
its power to appoint top officials: those appointed with a term-limit from out-
side reached 30 percent in 2007; a spoil system was applied extensively (in 1999,
top management faced a huge turnover); and recent attempts, also the result of
constitutional court rulings, to reduce the discretionary power of the executive
and to submit any decision to prior evaluation of individual performance were
only partially successful.
Politicians tried to maintain their influence through the manipulation of
the spoil system. Top level administrators did not take up the challenges of
performance, reward, and flexibility. The attempt to build a more professional
body of public servants, guided by the objective of reaching higher-level per-
formances and delivering high-quality goods and services to citizens largely
failed.
The Role of Lawyers and of the Legal Culture in the Public

Administration and the Administrative Law Tradition
A third source of weakness is the relevance of the legal culture and the role
played by law graduates in the public administration, which over time somehow
constrained the development of a managerial approach. In the early period after
unification most bureaucrats were Piedmontese; only among judges a significant
share graduated in Naples and worked in the Southern courts (Melis 2010).
In the first decades technicians and engineers had an important role in
the administration and could access managerial positions: specific laws for the
development of Southern regions favored new motorways and road construc-
tion; the restructuring of the railway after its nationalization in 1905 and the
enlargements of ports created a strong demand for engineers.
By the end of the first decade of the twentieth century public administra-
tion became less attractive for these professionals (Minesso 1996), because of
low salary levels, not sufficiently compensated by the advantage of job stability;
a progressively higher dependence of technical roles from administrative roles;
and the presence at the highest levels of the public administration of law gradu-
ates, legal training rapidly becoming a precondition for a managerial role. This
induced engineers and technicians to find jobs mainly in the private sector. The
evolution corresponded to an increasing role of administrative law which, sup-
ported by academic scholarship, came to have an extremely relevant influence
over the administration.
A similar evolution could be observed in society at large with an increas-
ing share of enrolment in law schools among university students and a grow-
ing importance of lawyers and notaries in society; the two professions were
Table 19.1 Public administration employees (1954)

University Law High Secondary Primary No Title Total
Degree Degree School School School
Civil 13.51 5.47 25.07 44.18 17.10 0.14 100
employees
Group A 87.71 36.26 8.97 3.05 0.28 0 100
Teachers 31.02 0.85 68.23 0.75 0 0 100
Military 6.48 2.08 20.62 30.01 42.69 0.19 100
Subalterni 0.06 0 0.80 12.77 84.34 2.03 100
Salariati 0.06 0 0 8.95 86.05 4.94 100
Source: Cassese (1977).
recognized and disciplined as early as 1874 and 1875, whereas health professions
were only recognized in 1910 and engineers and architects in 1923. Among stu-
dents who graduated after 1913 the largest percentage has been in law disciplines;
only in the 1960s and 1970s did engineers become the largest group (Cammelli
and Di Francia 1996).
Evidence from the year 1954 (Cassese 1975) shows that a large number of top
positions in public administration were held by employees holding a law degree
(Table 19.1).4
It is relevant to note that many members of Parliament were lawyers. A law
degree was almost a precondition to enter Parliament (Cammarano and Piretti
1996): the percentage of law-degree holders increased from 37 percent in the
1860s to 58 percent in the 1920s. Until the early 1880s they were mainly from
the North; later the share became more homogeneous but much more favorable
to the South compared with the number of citizens represented. This situation
somehow affected the law-making process.
Lawyers or representatives with a law degree were the majority in Parliament
also during the Fascist period, with a larger share coming from the South;
their share slightly reduced over time, from 45 percent in 1921, to 31 percent in
1929, to 24 in 1934 (Cammarano and Piretti 1996). After that lawyers remained
the profession most represented in the Costituente (32 percent), even if slowly
decreasing subsequently.
These three characteristics (the initial weaknesses, the political influence,
and the role of lawyers) produced inefficiencies, already recognized at the time
(e.g., an excessively regulated public administration in terms of employment
discipline and financial discipline), inducing already in the early decades of the
1900s the establishment of “simplification commissions.” In turn these ineffi-
ciencies generated responses that were only temporary and produced even worse
performances of the public administration. One example of these inefficiencies
is the performance of the judicial system (with specific regard for civil justice).
The Case of Civil Justice: Output and

Input of the Administrative System
We might consider a number of different “outputs” of an administrative sys-
tem: from the production of public goods and services, to the provision of
infrastructures and networks, health services, and merit goods, like culture and
education, typical of the welfare state. With respect to some of these services,
it might be argued that the achievement of the Italian system was as a whole
satisfactory, at least until the end of the 1960s.
Here we consider civil justice, which represents an essential condition for
enforcing contracts and hence development. Being one of the fundamental “out-
puts” of an administrative system and an essential input for the productive sys-
tem, its performance over time is useful in evaluating the basic capacity of the
administration and understanding the reasons of its inefficiency. As discussed
next, the enforcement system can be taken also as an “input” to the entire sys-
tem. When inadequate, it might induce even more inefficient responses of the
entire system.5
Measures of Output of a Civil Justice System

We use a simple measure of the efficiency of a civil justice system: the average
time it takes to obtain a decision. Other dimensions of interest are the quality
of these sentences and the costs incurred in obtaining them. We consider the
three main first-instance courts: Uffici di conciliazione, Preture, and Tribunali,6
and the four appeal courts (Preture, appeal over Uffici di conciliazione cases;
Tribunali, appeal over Preture cases; Courts of Appeal, appeal over cases decided
in Tribunali; and Cassazione deciding only over Courts of Appeal appeal cases).
We use as a measure of length of proceedings the “estimated time in the
procedure” of a case, since the actual length of proceedings is not available,
given by the following approximation, where the days needed to obtain a judge-
ment in year t are:
Pendingcasest 1 + Pendingcasest
yst = * 365
IncomCasest + ConcludCasest
The formula is a reasonable approximation for the length of proceedings

when flows are stable (so that pending cases are stable as well). Using this for-
mula we computed the length of the procedures in the various courts over the
period 1880–1970 (with some more recent data for a subset of indicators).
Both in first instance and appeal we observe that procedures took quite a
short time until the first decade of the twentieth century (less than 50 days).
Afterward, trials’ length slowly increased to approximately one hundred days,
without further growth until World War II. After that, procedures became
longer and longer: from approximately three hundred (estimated) days in the
1960s–1970s to nearly nine hundred in the 1990s (Figure 19.3), with a slight
decline afterward.
Specifically, in Uffici di conciliazione the length increased from less than
one hundred days before the war to more than three hundred in the 1960s;
in Preture the length was relatively stable until the first decade of the century,
then after a slow increase it decreased during the 1930s to grow again after
World War II; and in Tribunali a substantial increase occurred after World War
II, after which the trend was persistently upward (Figure 19.4). With reference
to appeals the evolution is less defined, at least in lower courts (Preture and
Tribunali), where a more limited number of cases are decided. In these courts,
after the increase of the length of proceedings in the 1950s, a substantial reduc-
tion occurred after 1966, whereas in courts of appeal proceedings become ever
longer after World War II. In the highest courts we observe a long-term upward
trend, with a lot of variation (Figure 19.5).
After World War II (and specifically after the 1950s) it is in the South and
in the Islands that the increase in length of proceedings is more substantial.
After the war a ranking emerges at Uffici di Conciliazione, with procedures
being shortest in the Northeast and slowest in the Islands. The gap increases
in the 1960s, with procedure length remaining stable in the North and grow-
ing steadily in the rest of the country. A broadly similar pattern is found with
Preture (Figure 19.6). Between 1884 and 1912, the geographic efficiency gap had
not been as deep at after World War II. In Tribunali, a substantial difference in
the length of civil litigation only emerges at the end of the 1950s.
1000
900
Uffici Conciliazione
800 Preture
Tribunali
700
600
500
400
300
200
100
0
1880
1883
1886
1889
1892
1895
1898
1901
1904
1907
1910
1913
1916
1919
1922
1925
1928
1931
1934
1937
1940
1948
1951
1954
1957
1960
1963
1966
1969
1972
Figure 19.4. Length of civil procedures, first instance (days, estimated).

Source: Istat, Statistica giudiziaria civile e commerciale (1880–1939); Statistica giudiziaria
civile (1940–1948); Annuali di statistica giudiziaria (1949–).
1200
Tribunale
1000
Corte d'appello
Cassazione
800
600
400
200
0
1880
1883
1886
1889
1892
1895
1898
1901
1904
1907
1910
1913
1916
1919
1922
1925
1928
1931
1934
1937
1940
1948
1951
1954
1957
1960
1963
1966
1969
1972
Figure 19.5 Length of civil procedures, appeal (days, estimated).
As a whole, it seems that the worsening in the efficiency of civil justice

emerges only after the War and can be partly attributed to the increasingly
poorer performance of Southern courts. To explain this evolution, we con-
sider the evolution of litigation (is excessive length caused by an increase in
the demand for justice) and the possible role played by lawyers; the costs of
access to justice (possibly too low); the quality of judgements (inducing too
many appeals); the resources available, specifically judges and courts assistants
(were they insufficient); and the procedure (too cumbersome). We are not able
1000
900
North West Italy
800 North East Italy
700 Center Italy
South Italy
600 Islands
500
400
300
200
100
0
1984
1912
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
72
18
Figure 19.6 Length of first instance proceedings (preture, days). Source: Istat, Statistica
to attribute empirically the inefficiency to one specific reason but offer some
suggestions of what might have been at the root of this evolution.
Litigation
Litigation was extremely high at the end of the nineteenth century (Figure 19.7).
It was mainly associated with small claims, decided at Uffici di conciliazione:
relative to the population, it increased substantially until the mid-1890s; from
then onward the long-term trend shows a reduction, with an interruption only
in the 1920s, partly associated with an increase in the threshold for cases judged
by Preture. In Preture, where the value of claims is larger, the overall trend is
similar (larger litigation at the end of the nineteenth century, then reduction
with an interruption in the 1920s) but after the beginning of World War II the
number of proceedings grew again. This trend is even more pronounced for
Tribunali: in these courts the reduction before the war (in the 1930s) is more
than compensated by the increase in the following years. This growth is not
offset by a sufficient increase in decided cases. The growing distance between
the two is responsible for the accumulation of pending cases (in Preture and
Tribunali), which did not stop until very recently (Figure 19.8). As a whole the
evolution of litigation shows a reduction in small claims cases but an increase
of larger-value claims over time.
It is useful to distinguish across geographic area to look for possible expla-
nations of the differential inefficiencies emerging after 1950. First-instance small
claim litigation was initially much higher in the South (four times as in the
North) and the Islands (six times as much), then over time it increased in the
9,000.0
8,000.0
7,000.0
6,000.0
5,000.0
4,000.0
3,000.0
2,000.0
1,000.0
0.0
1880
1884
1888
1892
1996
1900
1904
1908
1912
1916
1920
1924
1928
1932
1936
1940
1949
1953
1957
1961
1965
1969
1973
1977
1981
1985
1989
1993
2097
01
18
Figure 19.7 Total incoming cases (per 100,000 inhabitants). Source: Istat, Statistica
900,000
800,000
700,000 Uffici di conciliazione

600,000 Preture
Tribunali
500,000
400,000
300,000
200,000
100,000
0
18 I
1882
1885
1888
1891
1894
1997
1900
1903
1906
1909
1912
1915
1918
1921
1924
1927
1930
1933
1936
1939
1947
1950
1953
1956
1959
1962
1965
1968
1971
1974
1977
80
N
AN
Figure 19.8 Pending cases. Source: Istat, Statistica giudiziaria civile e commerciale (1880–
1939); Statistica giudiziaria civile (1940–1948); Annuali di statistica giudiziaria (1949–).
North and decreased substantially in the South, where a heavy backlog was
accumulating. In Preture the evolution was similar. In Tribunali the already
high litigation in the South (and Center) increased substantially in the postwar
years (especially in the courts of Rome, Naples, and Reggio Calabria) with a
growing amount of pending cases.
Regarding appeals, whereas in Preture and Tribunali incoming cases
diminished after the war, Courts of Appeals experienced an increase every-
where and especially in the South and the Islands, with a positive correlation
between first-instance cases and appeals (higher where the value of claims
was larger).
As a whole litigation after the war remained relatively low in the North
(especially in the Northeast, where also the length of proceedings was low) and
increased steadily in the South and the Islands, suggesting different determi-
nants of litigation in the various areas. This is confirmed by looking at the
different subjects of litigation. Considering an example referred to the period
1966–1970 (Checchi 1978), whereas in the North litigation was relatively high
for contractual issues, in the South labor and social security issues were also
extremely relevant (Table 19.2). Litigation referred to contractual issues was
especially high in Milan, Brescia, Bologna, and Turin; labor litigation in Lecce,
Palermo, Napoli, and Cagliari. It is interesting to note that only 14 percent of
contractual issues were appealed compared with 20 percent of labor ones.
The substantial growth in litigation seems to be attributable in the North
to economic development, whereas in the South it seems to be driven by other
factors (e.g., as a source of compensation for insufficient growth or unemploy-
ment but possibly also by a lower amount of social capital). We turn now to
the analysis of some possible determinants of litigation: the role of lawyers, the
costs of litigation, and the quality of judgements.
Table 19.2 Litigation (per 10,000 inhabitants) (1966–1970)

Contractual Reasons Labor
Northwest 69.6 13.8
Northeast 67.5 2.8
Center 56.7 26.8
South 48.9 32.8
Islands 39.4 33
Source: Checchi (1975).
Lawyers
Although it is difficult to establish the effect of the number of lawyers on lit-
igation,7 already in 1921 P. Calamandrei (a famous lawyer and law professor)
claimed that there were “too many lawyers,” that they were inducing litigation
artificially, and made the proceedings as long as possible.
The number of lawyers (per 10,000 inhabitants) did not grow excessively
between 1881 and 1981 (Cammelli and Di Francia 1996), remaining approxi-
mately between seven and eight (Table 19.3) mainly because of barriers to entry
and the high degree of protection that the profession enjoyed since 1884, when
it obtained formal juridical recognition (but since the beginning of the cen-
tury their number was much higher than in France or Germany). However,
we observe a stable difference between the North and the South (in 1880, 25
percent of all Italian law degrees were obtained at Naples University; Cammelli
and Di Francia 1996).
Table 19.3 Number of lawyers (per 10,000 inhabitants)

Total North South
1871 7.15
1881 5.5 10
1911 8.17 5.5 12
1921 7.81 5.5 11.5
1931 6.83 5.7 8
1936 6.75 5.8 7.8
1951 6.37 5 7.5
1961 7.44 5.5 8.8
1971 7.44 5.5 8.8
1981 7.98 6 8
Source: Cammelli and Di Francia (1996).

Even if not causally established, this suggests a possible role of lawyers and
of the juridical culture in enhancing litigation mainly in the South.
Costs
A second variable possibly affecting litigation is the cost of disputes. The role of
this component is even more difficult to establish because very limited evidence
is available. A survey based on 270 judgements in 1961–1965 in three large courts
(Turin, Milan, and Palermo; Castellano 1968) suggests that costs were high (as
a percentage of the value of the claim) for smaller claims, whereas for larger
claims (both in first-instance and appeal) they were relatively low. This might
help explain the reduction in small claims litigation and the stable growth for
larger claims and even appeals, Costs (with those for lawyers accounting for
slightly less than half) were not a deterrent to litigation.
Quality
It is extremely difficult to judge the quality of the decisions. One (if imperfect)
proxy may be the amount of decisions appealed that are successively reversed.
This relies on the hypothesis that judges in higher courts are more competent,
being selected on their merit, than those in lower courts.
The quality of judgement under this respect may also affect litigation
because it influences agents’ expectations: if the quality is low and decisions are
uncertain, this discourages out-of-court agreements and may create incentives
for those that are on the wrong side to go to court. It also induces excessive
litigation in appeal courts.
Appeal rates increased substantially over time, from less than 5 percent at
the end of the nineteenth century to more than 20 percent after World War II.
The increase was especially relevant for Preture and Tribunali. Data on rever-
sal rates in Preture (appeal on Uffici di conciliazione’s judgements), Tribunali
(appeal on Preture’s judgements), Courts of Appeal (appeals on Tribunali), and
Cassazione (appeals on Courts of Appeal) show relatively high reversal rates
after the war (Figure 19.9), totaling around 40 percent.
Given the very high probability of reversal, litigation in appeal is most likely
high. Given that the chance the judgement will be reversed is almost 50 percent,
why not appeal even if on the wrong side? Moreover, a high reversal rate sug-
gests a relatively “poor” quality of the first-instance judgement.
It remains to be explained why what we defined as quality of judgement
was and has remained poor. It might have to do either with the willingness of
judges to produce “original” judgements rather than ensure uniformity of inter-
pretation (given the absence of a rule similar to the stare decisis of the common
law), or with legislation becoming excessive and difficult to interpret.
Based on this evidence it is not possible to attribute to one of the three
components a prevailing role. It is likely that a combination of “demand” side
(lawyers together with low costs) and “supply” side (quality of judgements)
60
50
40
30
20 % of sentences reversed in preture

% of sentences reversed in tribunali
10 % of sentences reversed in courts of appeal
% of sentences reversed in cassazione
0
1972
1973
1974
1975
1976
1977
1978
1979
1980
81
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
19
Figure 19.9 Reversal rates in appeal. Source: Istat, Statistica giudiziaria civile e
commerciale (1880–1939); Statistica giudiziaria civile (1940–1948); Annuali di statistica
giudiziaria (1949–).
factors played a role, possibly with significant differences across the country,
especially with reference to the demand side.
Resources
The other side of the problem is the supply side aspect. It might be that resources
are (or have become) insufficient to deal with the amount of litigation in the coun-
try. Human resources involved are basically judges and clerks working in courts.
After unification, judges were heavily controlled and constrained by the
government, through nomination, promotion, and transfer powers. Their pro-
fessional quality was not considered very high (Taruffo 1980). During the Fascist
period, dependence on political power was strengthened. It was only with the
1946 reform and even more through Articles 101–110 of the new constitution that
independence and autonomy of judges were recognized and a Judges’ Council
was established as the self-regulating body.
Availability of data limits the possibility to evaluate correctly the role of
supply side factors in explaining the poor performance of the judicial system.
Data on the evolution of employees of the Ministry of Justice (including judges
and clerks) between 1923 and 1978 show a slow growth in the number of judges
over time and a very steep growth of the clerks’ number after World War II
(Ragioneria Generale dello Stato 1993). According to some interpretations
(Castellano 1968), this means that at least in the 1960s the number of judges was
sufficiently high (also given that over time small claims litigation had actually
decreased) and compared with other similar countries, such as France, actually
larger.
6
Preture
5 Tribunali
Courts of appeal
4
0
North West Italy North East Italy Centre South Islands
Figure 19.10 Judges per 100,000 inhabitants (1974). Source: Checchi (1975).
More detailed data on geographic distribution are available for the year 1974
(Checchi 1974). The distribution shows a greater (effective) presence of judges
(compared with inhabitants) in the South for Preture, Tribunali, and Courts of
Appeal (Figure 19.10): in Preture they are approximately 2.5 in the North and
3.3 in the South; in Tribunali 3.8 in the North and 5.7 in the South. Even if we
consider the number of judges per incoming cases this is lower in the North;
the same is true if we consider judges per total cases (incoming and pending).
If we also take into account clerks, we actually see that the number of clerks
per judge is higher in the South in Courts of Appeal and Preture, but not in
Tribunali.
As a whole this suggests a limited relevance of the issue of resources: they
are actually in greater number in the areas where inefficiency is higher, even
taking into account greater litigation and accumulation of pending cases.
It is possible that the problem is then one of productivity of the resources,
its evolution and its distribution across the country. According to a report by
the Judges’ Council (Consiglio Superiore della Magistratura) (Esposito 1968), a
rough measure of productivity, the number of cases decided per judge, decreased
between 1930–1934 and 1960: in Preture from 122 to 57; in Tribunali from 75 to
37; in Courts of Appeal from 36 to 29; and in Cassazione from 48 to 27. The
Council suggests that the distribution of judges across functions and across
courts was partly responsible for this increased inefficiency. In the 1974 data,
where only a cross-section comparison is possible, decided cases per judge are
on average higher in the North and are positively correlated with the sum of
incoming and pending cases (the correlation is 0.6 in Preture; 0.5 in Tribunali;
and 0.6 in Courts of Appeal): where judges had more cases to deal with, they
seemed to be more productive.
As a whole, decreasing productivity rather than lack of resources seem to
be the supply-side explanation of the increasing inefficiency of civil justice.
Procedure
Finally, in the courts’ production function, a relevant role is played by pro-
cedural rules, their formalism, and rigidity. This has certainly always been
another source of inefficiency in the solution of litigation in Italy.
The code of 1865 was based on the old (1806) French code, and had the fol-
lowing characteristics: a substantial role for private parties (and their lawyers)
compared with that of the judge; a greater attention to formalism than to sim-
plicity; partly as a result of this, length and complexity of procedures with lim-
ited attention to speed and efficiency; and a greater role for written procedures
compared with fast or special procedures (Taruffo 1980).
The jurisprudence that followed adopted and strengthened the formalistic
approach with an interpretation of the laws rarely oriented toward efficiency. In
this context the Uffici di Conciliazione, with an oral and informal procedure,
worked relatively well, solving a large amount of small claims.
In the 1920s a number of reform projects were proposed, the most innova-
tive by the famous law professor Giuseppe Chiovenda, which aimed to intro-
duce an oral discussion of the case; to grant the same judge for the whole trial;
to ensure that the trial be concentrated in a limited number of meetings; and
to provide judges with greater powers in trial management. Neither Chiovenda’s
project nor other reforms proposals were introduced.
The Civil Code was finally reformed only in 1940 (and then adopted in
1942). The reform was the result of a compromise and did not innovate exces-
sively: it reduced somehow the degree of formalism without concentrating suf-
ficiently the length of the trial. However, in the following years lawyers strongly
opposed its introduction, formally because it was a Fascist product; in fact,
because it was perceived to innovate on lawyers’ practices. The adjustments
in 1950 partly accepted these critiques reintroducing formalism and excessive
length. Only procedures regarding labor disputes were finally reformed in 1973
in an efficient way, after introduction of the “workers’ statute.”
The provision of civil justice is one essential function of the State. We
showed how in the first decades after unity the solution of controversies was
relatively efficient, but then progressively deteriorated especially after World
War II. It is difficult to identify a single source or a structural break. As for
the administrative system, some weaknesses were present from the beginning
(high number of lawyers, an excessively formal procedure), and shared a simi-
lar nature to those found for the administration at large. Never corrected, they
produced over time greater inefficiencies with an increasing gap between North
and South. As a whole the (excessive) formalism in the juridical culture, the
role of lawyers, the role of incentives, and an insufficient attention to the orga-
nization of courts seem to be at the root of the increasing inefficiency. In the
South civil justice (especially with reference to labor and other social provisions
litigation) might have represented a substitute for other more explicit welfare
measures (as was the case for the administration as a whole).
Effects of the Initial Conditions and

the Reactions of the System
Overegulation
As a reaction to the original inefficiencies and at the same time to insufficient
enforcement, a great number of excessively complicated laws and administrative
acts were introduced shifting the focus from final outputs to the formal respect
for procedures. The Italian system is currently perceived as being burdened by
too many laws (as compared with other countries). Moreover, they are perceived
as unstable and opaque. As a whole, economic activities are too heavily regu-
lated (Mattarella 2011).
It might be that inefficiencies partly stemmed from a reaction to some pre-
vious weaknesses of the system, specifically an inefficient enforcement of laws.
A response to a limited enforcement capacity might be to regulate excessively
and in a detailed way many areas of economic activity (Shleifer 2010): the fact
that most activities are regulated much more heavily than simply by requiring
mandatory disclosure suggests that regulation is not dictated only by market
failures or information asymmetries. Rather, the case for efficient regulation
might rest on the failures of courts: when litigation is expensive, unpredict-
able, or biased, contracts accomplish less and regulation is needed. Under this
respect the growth of regulation might be an efficient institutional adaptation.
To test this thesis, we analyze the specific regulation of economic activities. As
a rough measure of regulation we take the number of all types of laws issued yearly
(Figure 19.11) and the average number of pages per law (Figure 19.12) as a proxy of
their complexity. Concerning the first we do not observe a clear correlation between
law production and enforcement inefficiency. However, if we considered the total
number of laws (i.e., its stock), given the very limited repeal of pervious legislation,
we observe a legal “explosion,” one of the problems of the legal system. The sec-
ond measure suggests that in the last decades the reduction in the number of laws
approved has been accompanied by an increase in their complexity.
A second interpretation is associated with the reaction of the administra-
tion to external pressures: rather than ensuring more efficient services, it might
have aimed at protecting itself with more detailed provisions that are not only
easily enforced but also more difficult to be fully understood and hence reduce
demands and pressure for the administration.
According to Cassese (1992), Melis (1996), and Mattarella (2011) one long-
standing issue has been also the quality of the legislative process, partly because
of the juridical culture, partly because of the way the process works, through
the operation of legislative units of different Ministries (since 1923 when the
legislative unit of the Ministry of Justice was created), which make the different
administrations heavily involved in the process of legal production.
5000
4500
4000
3500
3000
2500
2000
1500
1000
500
0
1861
1865
1869
1873
1877
1881
1885
1889
1893
1897
1901
1905
1909
1913
1917
1921
1925
1929
1933
1937
1941
1945
1949
1953
1957
1961
1965
1969
1973
1977
1981
1985
1989
1993
1997
2001
2005
2009
Figure 19.11 Number of “laws” issued every year. Source: Leggi e decreti del Regno d’Italia
(1861–1946); Leggi e decreti della Repubblica d’Italia (1946–1986); Raccolta ufficiale degli
atti nomativi della Repubblica Italiana (1987–2004); Lex (2004–2009).
Administrative Corruption
The links with politics and excessive regulation favored administrative corrup-
tion. It is extremely difficult to establish the degree of diffusion of corruption in a
system. Underreporting of the phenomenon and the difficulty of proving wrong-
doings make the available statistics hard to interpret. The limited data available
over the long term do not allow a detailed analysis of its evolution. According
to some interpretations, however, only after the 1970s did corruption become a
20
18
16
14
12
10
0
1861
1865
1869
1873
1877
1881
1885
1889
1893
1897
1901
1905
1909
1913
1917
1921
1925
1929
1933
1937
1941
1945
1949
1953
1957
1961
1965
1969
1973
1977
1981
1985
1989
1993
1997
2001
2005
2009
Figure 19.12 Average number of pages per law.Source: Leggi e decreti del Regno d’Italia
(1861–1946); Leggi e decreti della Repubblica d’Italia (1946–1986); Raccolta ufficiale degli
atti nomativi della Repubblica Italiana (1987–2004); Lex (2004–2009).
significant issue in the Italian administration (Melis 1996; Cazzola 1988), explod-
ing at the beginning of the 1990s.8 It might be attributed to the following:
1. The weakness of administrative structures (less and less capable of
technical evaluations); their reduced prestige and reputation; their
inefficiency; and an inadequate discipline of administrative procedures
(or their inefficient enforcement). With respect to these inefficiencies it
might even seem9 that corruption has in some case favored growth by
reducing the negative effects of excessive administrative burdens.10
2. The decentralization process, with the strengthening of local powers,
because of their lower capabilities and more limited responsibilities.
3. The excess of laws and administrative burdens, which created great
discretionary powers for (especially local) public administration
(administrative burden indicators are positively correlated with
corruption indicators).
4. In some areas of the country, the relevance of organized crime,
which might have facilitated the corruptive relationships between
entrepreneurs, administrators, and politicians.
Italy, based on international indicators, is now perceived as a country with
a high corruption level. This in turn has produced severe inefficiencies for the
system: higher costs for firms; barriers to entry; distortions in the allocation
of resources, which is not based on efficient selection; wrong incentives for
agents who invest in corruptive activities; and reduction in public expenditure
efficiency.
Growth of the System Outside the Formal Public

Administration
The rise of public bodies and parallel administrations represented a corrective
device to the growing dysfunctions of the formal administration and its rigidi-
ties. During the Giolitti age, a number of special duties were attributed to agen-
cies different from the traditional ministerial public administration. It was the
first response to the bureaucratization of the public administration, to financial
constraints, and to the stricter regulation of public officials.11
A large number of enti pubblici autonomi and aziende pubbliche reached, at
least at the beginning of their existence, a high level of expertise and efficiency.
This is why, according to a number of authors (D’Antone 1997; Melis 1996;
Cassese 1996), Italy has been able to ensure infrastructures and improvements
in health conditions, agriculture, urban conditions, and education. However,
the degeneration of these agencies was afterward a source of weakness and inef-
ficiency, with an excessive growth in the number of parallel administrations
(Figure 19.13).
600
500
400
300
200
100
1942
1945
1948
1951
1954
1957
1960
1963
66
1861
1864
1867
1870
1873
1876
1879
1882
1885
1888
1891
1894
1997
1900
1903
1906
1909
1912
1915
1918
1921
1924
1927
1930
1933
1936
1939
18
Figure 19.13 Total enti pubblici created (net of suppressed ones) (groups computed as
single units). Source: Mortara (1972)
The Period Until the 1920s

Already in the first decades of the twentieth century there was a wide use of
the so-called legislazione in deroga, creating exceptions in the regular legisla-
tion (regarding Southern regions, the 1909 earthquake), and a number of local
independent agencies were created, independent from the formal public admin-
istration even if under State control (and hence with the flexibility of private
institutions). The same occurred with insurance and financial state agencies
(INA, Opera Nazionale Combattenti, Crediop, Icipu, and Credito Navale) that
had to be flexible and fast in their reaction capacity. However, this did not
challenge the general public administration structure, where the Agriculture,
Industry, and Commerce Ministry remained central for the economic system.
The Second Period (Until 1950s)

This period was characterized by innovations with respect to legislation and
administrative structures, with the traditional apparatus (which already saw a
substantial presence of lawyers) reacting in a conservative way, by reinforcing
the jurisprudential tradition and adding more formal structure to the decision
making process. From 1930 to 1950 a large number of public institutions totally
separated from the formal public administration were created. These activities
avoided being fully absorbed by the State itself, and generated a new different
line of thought within the administrative law (of which Massimo S. Giannini
was one of the major interpreters).
The Final Period (After 1950s)

Here the capacities of the system transformed into bureaucratic obstacles, because
of the limits of the original ministerial structure and the legislative uniformity.
In the end, success stories outside the central administration reduced the incen-
tives to reform and strengthen the latter. That is why the effects of the original
administrative delay were paid for a long time and deeply influenced relation-
ships between the State, the society, and the economic system.
Tentative Reforms in the Last

Decades: Why so Difficult?
In the third quarter of the twentieth century administrative reforms became
a public policy goal in most European countries, even assigned to members
of governments entrusted solely with this task (Cassese 2010). They became
a permanent public function and were put at the top of the political agenda.
They were presented in emphatic terms everywhere: neue Steuerungs Modell in
Germany since 1978, “New Public Management” in the United Kingdom since
1979, Renouveau du Service Public in France since 1989, Modernizacion since
1992 in Spain, and “Reinventing Government” in the United States in 1992. Also
in Italy, a number of reform proposals were put forward.
The Giannini Plan

In 1979 Massimo S. Giannini, Minister of the Public Function and renowned
administrative law professor, submitted to the Parliament a “Report on the
Main Problems of State Administration” with proposals for a reorganization of
Public Administration based on a greater attention to efficiency and productiv-
ity: simplification and rationalization of procedures; wider use of information
technology; privatization of employment contracts; and more intense decentral-
ization of functions. Approximately fifteen subcommissions were established,
which provided in a very short span analyses and proposals.
In 1980 and 1983 a new discipline of the public sector employment was intro-
duced, which aimed to provide a more efficient organization but ended up by grant-
ing more protection to state employees and less meritocratic career prospects.
The Early Nineties Period

In 1990, three major laws were introduced. Law 142/90 on local administra-
tions introduced new local forms of governments, granted local administrations
a greater autonomy, and formally defined the relationship between political and
administrative functions. Law 241/90 disciplined administrative procedures,

imposing a number of (much opposed by the bureaucracy) rules that the admin-
istration was to follow concerning communication to citizens, transparency of
the procedure, and responsibility of public officials in charge of the procedure.
Law 29/93 applied some private employment rules to public employees.
In 1993 Sabino Cassese, Minister for the Public Function, introduced a
“Charter for Public Services” to substantially increase transparency and citizens’
access to information. A major effort was devoted to increase enforcement of
the law for self-certification (law 4/68); the law on local autonomy (law 142/90);
and the law on administrative procedure (law 241/90).
The objective of cost reduction was pursued by suppressing some ministries,
committees, agencies. A survey on the procedures used by the administrations
(five thousand were counted) allowed a rationalization and simplification. The
introduction of codes of behavior for the public administration and strengthened
monitoring functions aimed at reducing length and costs of procedures. These
measures met with substantial resistance within the administration so that the
Minister himself in 1994 claimed that his reform remained partly unfinished.
The Reforms of the Late Nineties (1996–2000)

In the second half of the 1990s a number of laws were passed (laws 59/97,
127/97, 191/98, and 50/99) within another major reform effort made by Minister
Bassanini. They touched a number of different areas.
Administrative decentralization and strengthening of local powers and inde-
pendence were pursued according to the “subsidiarity principle” (administrative
power to the subject who is closer to the citizen, provided it has adequate capac-
ity); some restructuring of central administration and public agencies (with a
reduction and reorganization) and some liberalizations were initiated; simpli-
fication of laws and procedures (through self-certification, yearly simplification
law, the creation of a simplification unit, and the introduction of regulatory
impact analysis) was pursued; and the reform of public administration struc-
tures was associated with a digitalization plan (introducing incentives, transpar-
ency, and separation of politics from administration).
Results were significant at the beginning but in the longer term remained
mainly formal. The most important results were a reduction in the number of
state employees, some partial liberalizations, and the reduction in some agen-
cies. However, digitalization remained limited; simplification of procedures and
laws stopped after some years; decentralization was only partial (with duplica-
tions of functions across State and local administrations and litigation among
different levels); and the restructuring of the organization ended with the intro-
duction of the spoil system. Various reasons account for these partial failures
(Bassanini 2010). The way the constitutional reform in a federal direction was
realized implied that the allocation of powers between different authorities has
weaknesses, and specifically that no safeguard clause was introduced. Financial
resources were insufficient (since the mid-1990s) to ensure the provision of ade-
quate incentives, modernization and digitalization, and formation. Moreover,
the state balance sheet reform did not go through at the time and the alloca-
tion of power between politics and high level bureaucracy with responsibility of
each and transparency on performances was not implemented by administra-
tions because of resistance by politicians and bureaucracy.
A new round of reforms was initiated by the Minister of Public
Administration Brunetta in 2009. It is still too early to evaluate the results but
also in this instance a substantial resistance has slowed the process. As a whole
the difficulties of the reform processes suggest that past weaknesses still affect
the administration. Addressing them is essential but extremely complex.
Conclusions and Caveats

Development of the Italian administrative system showed some initial weak-
nesses: Italy was a late comer, not having a strong administrative tradition; a
substantial role of lawyers and legal administrative formalism strongly affected
the evolution of the administration; and the interaction between administra-
tion and politics was not always virtuous. These had an impact on some of
the expected outputs of the administration: we show as an example the evolu-
tion of the length and quality of civil justice decisions. Some reactions to these
weaknesses (e.g., the development of “parallel” administrations, external to the
public administration and less subject to formal constraints) accompanied and
sustained the country’s industrial growth in the 1950s. However, the inefficien-
cies and inadequacy of the responses prevailed. Parallel administrations slowly
became similar to the formal public administration; overregulation, partly a
reaction to inefficient law enforcement, followed; corruption strongly increased.
Reforming the system proved more and more difficult.
In conclusion we offer some caveats with respect to our analysis and inter-
pretation. First, there are a number of factors that we were not able to con-
sider: one of them, possibly explaining some inefficiencies and their different
relevance across the country, is the role of social capital. Another very relevant
component is the role played by organized crime and the capacity of the State
to ensure a sufficient control of crime.
Second, in our analysis we have considered only some aspects and output
of the administration, somehow “forcing” the inefficiency interpretation. There
are, however, a number of areas where the administration has been over time
capable of producing satisfactory results, providing a source for substantial
development (e.g., the improvement in health conditions12 or in education13).
Third, as a whole, the performance of the system is better than what we

would expect given the quality of institutions and the provision of public goods.
Hence, the question remains of why the bad quality of institutions has had a
relatively limited impact. One possible answer is the development of alterna-
tive, less formal, institutions based on informal networks substituting the legal
system, such as families, other reciprocal ties, even the organized crime. These
have allowed some development, representing a substitute for bad-quality pub-
lic goods; and they might have reduced the demand and hence the pressure for
higher institutional quality.
Finally, the issue of the geographic differentiation of the country is here
explored only to a limited extent (i.e., when analyzing civil justice). The origi-
nal differences in development and characteristics of the areas have played an
extremely relevant role in affecting the evolution of the administrative system.
Initial conditions certainly matter (Nunn 2009). Some development of the sys-
tem might have been a distorted reaction to these different conditions.
If we take the approach by Milhaupt and Pistor (2008) to describe legal sys-
tems and their capability to adapt over time to the needs of market economies,
as a whole the Italian legal system (in terms of law making and enforcement) has
been a substantially centralized system rather than a coordinating one: a limited
number of actors have been typically involved in the law-making process with-
out an explicit inclusion, through consultation or other mechanisms, of affected
parties (except for significant vested interests). The limited coordination of
interests realized ex ante has implied that litigation has been the main mode to
coordinate conflicting interest ex post. Similar to other centralized legal systems,
this has limited the adaptability of the system; however, this has not necessarily
ensured other typical advantages, such as a greater organizational capacity.
Acknowledgment
The authors thank Graziella Bertocchi, Sabino Cassese, Luigi Guiso, Katharina
Pistor, and Gianni Toniolo for extremely useful suggestions and interaction.
The opinions expressed here do not involve them or Banca d’Italia in any way.
Notes
1. In Italy in 2003 the system included 9,976 “institutional units” (ministries, regions,
ASLs, universities, and municipal and provincial administrations) and 3,541,000
employees, 16 percent of total employment (Istat 2007).
2. Data have been provided by Broadberry, Giordano, and Zollino (2012).

3. Law on municipalities and provinces; law on public security; law on public health;
law on the State Council; law on administrative litigation; and law on public
works.
4. According to one interpretation (Melis 1996; Cassese 1977; Alesina, Danninger,
and Rostagno 1999) this juridical presence was associated with the use of public
employment as a redistributive instrument to reallocate resources from the richer
North to the less industrialized South in such a way that the South has been
trapped in an equilibrium of dependency “where public jobs are a critical source
of disposable income in which private opportunities do not materialize” (Alesina,
Danninger, and Rostagno 1999)
5. Similar to what is proposed in Bianco et al. (2007) for the most recent years.
6. The competences of the different judges changed over time. At the end of the
period we consider (1975) Uffici di conciliazione decided on small claims (less than
50,000 liras, excluding labor and pension judgements); Preture on larger claims
(less than 750,000 liras) and on individual labor issues; and Tribunali decided on
larger claims. Courts of Appeal decided only in a very limited number of first
instance cases (e.g., electoral claims), hence we do not consider them here.
7. For some recent evidence see Carmignani and Giacomelli (2010).
8. Some data are included in the Report produced by a committee headed in 1996 by
Sabino Cassese established to study corruption and propose remedies.
9. It is evidence that is referred to developing countries but which could be applied
to the Italian case.
10. Leff (1964) and Huntington (1968) suggest that speed money and other “greasing
wheel” practices raise investment and growth by relieving the economy from
burdensome regulation.
11. All these increasing failures in the design of the Italian administrative system
were also the consequence of “juridification” of public employees and of their
culture (a further result of Orlando’s influence from the end of 1880s, according
to whom the study and the practice of administrative law must be based only on
legal categories).
12. Which might be summarized by the enormous reduction in infant mortality as a
summary indicator.
13. Which again may be summarized by the reduction in the percentage of
analphabetic, or by the increase in the percentage of young population attending
secondary schools.
part v
THE REGIONAL
DIVIDE
Chapter 20
REGIONAL
CONVERGENCE
Giovanni Iuzzolino, Guido

Pellegrini, and Gianfranco Viesti
Introduction
Like other countries, Italy has been marked in its economic development by
pronounced geographic disparities and fluctuating processes of stability and
change in those disparities. The clearest aspect is the persistent backwardness
of the regions making up the South. This highly visible feature, exceptional in
the international framework, has often overshadowed other developments in the
evolution of the history of economic geography (e.g., the extraordinary conver-
gence of another, equally large number of regions toward the levels of income
and output of the most affluent part of the country; or the strong tensions,
within the persistent “Southern question,” between the forces of convergence
and divergence, such as to alter, over time, its causes and features). The history
of geographic disparities is not one of immobility but of change; not a sin-
gle cause but multiple determinants. Nothing could be more mistaken than to
imagine that the great durability of the Southern question means that, in the
history of Italian regional development, nothing has ever changed.
The stylized history we present is that of the differences in levels and trends
in economic growth between regions and between the two great divisions,
North and South. The summary indicator used is per capita output, flanked by
indicators of “human development,” especially education and health. This work
is part of the Bank of Italy’s research project of historical analysis of Italy’s
evolving international position.
572 the regional divide
When, Where, and Why Regional

Disparities Arose in Italy: 1861–1913
For almost twenty years after unification the regional dispersion of gross
domestic product (GDP) in Italy was less than it would become in subsequent
years and lower too than in other European countries at comparable levels of
development (Table 20.1).1 This comes as no surprise, considering that:
– No region had experienced a real industrial take-off, and productivity
did not differ greatly from region to region in agriculture, the largely
predominant sector.
– Economic relations between sectors and factor mobility, variables that
could fuel agglomeration and concentration of production, started out
from very modest levels and were hindered by the backwardness of
transport systems.
– Many regions contained important urban clusters, typically coinciding
with capital cities or old commercial centers and their hinterlands.
This is likely to have determined a greater variability of output within the
economic macro-areas than between them. Consistent with the western location
of the capitals of the preunification states (Fenoaltea 2007), in 1871 the geo-
graphic disparities were also longitudinal, with an East-West divide similar to
the South-North gap (Figure 20.1).
The relative uniformity of per capita income did not mean, however, that
the living conditions of the national population were similar across regions. In
1861, the diffusion of “well-being” was lower in the southern regions than in the
country as a whole, and this holds for the share of the population classified as
poor, equal to 52 percent in the South and 37 percent in the Center and North
(Amendola, Brandolini, and Vecchi 2011); similarly, life expectancy at birth in
1871 (the first year for which we have data on all the Italian regions) was two
years and two months shorter in the South than in the rest of the country, not
a trivial difference considering the very short average life expectancy of Italians
at that time (just over thirty years). In these cases, as with other health indica-
tors, such as infant mortality, the differences within each macro-region were
greater than those between them.
Greater still was the divide in what we can consider preconditions for
industrial development. Some decisive factors, for example the endowment of
such primary resources as water or nearness to the markets of Europe, were
naturally concentrated in the North. Just consider that the flow rate of riv-
ers, a key indicator of the potential for internal transport and hydroelectric
power, was 127 liters per second per inhabitant in the regions of the Center
and North (ranging from 247 in Piedmont and Lombardy to 161 in Veneto
and Friuli-Venezia Giulia) compared with 25 in the South (118 in Campania
Table 20.1 Regional disparities in Italy: an international comparison
Countries Structural Data to 1871 Regional Inequality in GDP Per Capita
(mean log deviation population-weighted)
Population GDP Per Number of 1871* 1911** 1931–1938*** 1951*** 2005 (6)
(million) Capita “Regions”
Italy = 1 Gap between the Italy = 1 1871 = 1 Italy = 1 Italy = 1 1911 = 1 Italy = 1
(UK = 100)
“Capital “ Region
and the Two
Richest Regions
(a)
Habsburg Empire (1) 35.9 37.2 24 5.76 1.38 2.50 0.90 — — — —
di cui: Austria 6.3 59.4 8 1.86 1.38 0.48 0.53 — 0.12 0.95 0.54
Spain (2) 16.3 39 17 1.04 1.46 1.33 2.63 0.95 0.39 1.08 0.51
Italy (3) 28.1 45.2 16 1.00 1.17 1 2.06 1 1 3.69 1
Germany (4) 39.5 54.5 14 — — 0.34 — 0.0002 — — 0.51
France (4) 37.7 57 16 1.16 1.51 — — — 0.25 — 0.73
United Kingdom (5) 31.7 100 11 0.51 1.34 0.50 2.02 — 0.05 0.41 0.54
Source: (1) Schultze (2007); (2) Mart ìnez-Gallaraga (2007), (3) Brunetti, Felice, Vecchi (2011); (4) Williamson (1965), (5) Crafts (2004): data exclude Ireland. (6) Iuzzolino
(2009): the number of regions considered is slightly different than in previous years.
(a) GDP per capita in the region where the capital is located in relation to the average of the two richest regions (except the “capital” one).
* The years of comparison are different: Spain, 1860; Habsburg Empire, 1870; France, 1864.
** The years of comparison are different: Spain, 1914; Habsburg Empire, 1910; Germany, 1900.
*** The years of comparison are different: Spain, 1930 compared with Italy, 1931; Germany, 1936 compared with Italy, 1936.
**** The years of comparison are different: Spain, 1955; Austria, 1957 (source: Williamson 1965); France and United Kingdom, 1954.
80.0
Center North - South
70.0
East -West
60.0 “Capital” regions - Other regions

North West - Other regions
50.0
40.0
30.0
20.0
10.0
0.0
–10.0
1871 1891 1911 1931 1938 1951 1961 1971 1981 1991 2001 2009
Figure 20.1 GDP per capita gaps between macro-regions (indices, Italy = 100;
percentages). The West includes the Northwestern regions, Toscana, Lazio, Campania,
Calabria, and the Islands. The East includes all other regions. The regions “capital” are
Piemonte, Lombardia, Toscana, Lazio, and Campania. Source: Authors’ own elaborations
on Brunetti, Felice, and Vecchi (2011).
and 3–4 in Puglia, Sicily, Sardinia [SVIMEZ 1961]). The role played by water
resources in a country lacking coal is essential to understand the pattern of
industrial location.
The South also lagged far behind in other prerequisites, such as infra-
structure, availability of human and social capital, and the situation of public
order. On the first of these factors, Eckaus (1961) reports that on the eve of
unification, in 1859, “outside the North and the Center, railways were almost a
curiosity” and had “practically no effect on economic activity.” The situation
of the road network was similar: in 1863, 4.7 km per one thousand inhabit-
ants in Piedmont, 6.5 in Lombardy, about 6.2 in the Center, but just 1.7 in the
continental South and Sardinia and 1.1 in Sicily. This confirms the South’s
overland isolation from the rest of Europe, mitigated in part by maritime
transport.
As to human capital, the data presented by A’Hearn, Auria, and Vecchi
(2011) speak clearly: in 1861 the literacy rate in the South was only a third of
that in the rest of the country (13 against 39 percent). The primary school enrol-
ment rate for the population aged six to ten years was 17.1 percent in the South,
but 67.2 percent in the Center and North.
In 1891, the first year for which criminal court statistics are available by
region, there were 1,416 reported crimes for each 100,000 inhabitants in the
South, practically double the number in the North (790). The difference equally
involved crimes of violence, crimes against property, and crimes against the
public order. Crime rates were higher throughout the South, and in some of the
regional convergence 575
major regions criminal organizations, then as now, were subtracting resources

from the legal economy and impeding the formation of indispensable relations
of trust and cooperation between institutions and citizens.
An Inquiry into the Late Nineteenth Century’s

Industrial Geography
At the time of Italy’s political unification, its industrial apparatus was signifi-
cantly undersized. The most perceptive observers did not take long to discern
the environmental conditions that hindered the development of manufactur-
ing in Italy by comparison with other countries2 and to describe the struc-
tural features that characterized the sectors, size and geographic distribution
of industry.
The recent data allow us to fully appreciate the impressive gain in the rel-
ative position of the Northwest in the period up to World War I. It was in
the “industrial triangle” that modern Italian industry was born. As to indus-
try in the South, although lagging behind the national average it hardly disap-
peared. On the eve of the war manufacturing value-added at constant prices
was 2.6 times greater in the South than it had been in 1861, almost on a par
with the gain achieved by the Center and Northeast (whose production tripled),
whereas in the Northwest the multiple was equal to 4.3.
From the sectoral viewpoint, at the time of national unification the dif-
ferences between the North and South were not enormous. However, in 1871
the South was specialized to a greater extent in industries that would have
low relative growth rates in the following decades. More important than the
macro-areas’ initial specialization was the different growth rate of the “mod-
ern” sectors. Between 1871 and 1911 value-added in basic metals, engineer-
ing, and chemicals grew at average annual rates of, respectively, 8.8, 4.3, and
6.3 percent in the Northwest, compared with 6.8, 3.9, and 5.6 percent in the
Center and the Northeast and substantially lower rates in the South (4.3, 2.3,
and 4.8 percent).
As for the detailed geographic distribution of industrial growth rates—by
province—the first observation concerns how large a part of each macro-area
was involved in industrialization to an appreciable extent. By this gauge, in
1871 the Northwest already had a large lead on the rest of the country: eight of
the fourteen provinces of Piedmont, Liguria, and Lombardy had overall indus-
trialization rates more than ten points above the national average; thirteen of
them had a lead of this size in at least one branch of manufacturing (six in
engineering).3 A similar snapshot taken in 1911 shows substantially no change
in the Center and North, and a reduction in the heavily industrialized terri-
tory in the South, where practically the province of Naples alone continued to
claim some prominence on the national scale. In this sense, it is likely that the
greater density of specialized areas that the Northwest already displayed in 1871
helped to determine its industrial success in the decades to come thanks to the
self-reinforcement of locational advantages.
The territories we analyze are the 284 “administrative districts” (i.e., the
smallest geographic unit considered in the 1871 census).4 Applying the speciali-
zation test, we find that forty-six of them had a significantly higher concentra-
tion of employment in a given sector than their share of the population. The
regional distribution of the phenomenon, particularly the share of manufactur-
ing employment located in the “specialized” districts, showed an incidence of
specialization in the Northwest practically double that of the rest of the country
and, more in general, a wider divide between Western and Eastern Italy than
between the North and the South.
The territorial concentration of manufacturing activities could have
depended on the endowment of natural resources (e.g., port facilities for ship-
building) or the size of the market within reach in terms of effective demand.
This thesis seems to be borne out by the fact that the “specialized districts” had
a median population of nearly 143,000, more than double that of the rest of the
districts (64,000). Volume of demand was probably a necessary but not a suffi-
cient condition for the formation of clusters. In the South in 1871 the local size
of the market seems to have been a necessary condition (there were no special-
ized districts with a population under 100,000) but not a sufficient condition.
In the rest of the country, the same factor seems instead to have acted as an
almost sufficient condition (fewer that 9 percent of the large districts did not
have a pronounced specialization in industry) but not a necessary condition,
because a quarter of the specialized districts did not have a large population.
Consequently, if there were locational advantages independent of the local vol-
ume of demand, they can be presumed to have been concentrated in some parts
of the Center and North.
Industry, Agriculture, Migrations, and Policy: Gaps Widen

By all evidence, the North-South gap in economic development was created and
accentuated by the onset of industrialization, which is no surprise given the dif-
ferences in initial conditions propitious for agglomeration economies: the size
of reachable local markets (and access to external markets); energy resources;
skilled labor and entrepreneurial aptitude; and the presence of proto-district
craft clusters even in medium-sized and smaller cities and towns. These fea-
tures and others (the development of the credit system, simultaneously cause
and effect of industrialization5) tended to reinforce one another.
But the output gap was not the product of industrialization alone. Decades
after national unification there was also a divergence in productivity growth
in agriculture that explains a good part of the overall widening of the gap
(Federico 2007a). From the 1890s onward the industrial development of the
Northwest was paralleled by a deep farming slump in the South because of
three concomitant factors: (1) the closure of market outlets with the simulta-
neous protectionist measures of other European countries, above all France;
(2) the tariff protection of wheat; and (3) the international agrarian crisis. The
South immediately lost major export outlets. The deep market slump in mod-
ern, specialized, export-oriented farming was an especially severe blow to the
regions where it had been most developed, Puglia and Sicily. The crisis went to
the vital heart of the southern economy, leaving only the skin and bones and
opening the way to mass emigration (Davis 1999). There was no way of replac-
ing these foreign markets with domestic outlets. Yet, between the turn of the
century and the outbreak of World War I the South made anything but negli-
gible progress, “roughly on a par with the North” (Rossi Doria 1982). The gains
involved technical advances and rural modernization. Thus in 1911, despite the
pronounced drop over the preceding twenty years, several southern regions still
outperformed the national average in agricultural productivity (Felice 2007a,
Table 3.3; Federico 2007a, Table 5).
Migration also played a role in the dynamics of regional disparities: fif-
teen years after unification, Italy experienced an extraordinary wave of emigra-
tion, with an estimated 14 million emigrants between 1876 and 1914. Through
the end of the nineteenth century emigration was highest in the Northeast and
especially in Veneto, because of its vicinity to the most attractive European
destinations and “as a reflection of the conditions most favorable to leaving
which, within a general context of backwardness made it possible to plan and
undertake a journey for a period of work abroad” (Felice 2007a, 45). In the last
decade of the nineteenth century, the ratio of gross emigration to total popula-
tion6 was still higher in the Center-North: an average of around 1 percent per
year, compared with 0.6 percent (1890–1894) and 0.9 percent (1895–1900) in the
South. After the turn of the century, however, emigration accelerated, especially
in the South, where the average annual ratio jumped to 1.7 percent in 1900–1904
(surpassing the Center-North) and then to 2.4 percent in 1905–1909 and 2 per-
cent in 1910–1914.
The emigrants’ destinations were quite diverse. During the period 1876–1914,
62 percent of emigrants from the Northwest and 74 percent from the Northeast
(87 percent for Veneto) went to European and Mediterranean countries. This
was the case for just 9 percent of emigrants from the South (Felice 2007a), who
chose almost exclusively to go to the Americas. This divergence would influ-
ence repatriation rates, which tended to be low for the southern regions. The
repatriation rate was a determining factor in the medium- and long-term effects
of emigration on economic growth in the regions of origin. Although emigra-
tion deprived those regions of dynamic and enterprising human resources,
repatriation attenuated the effects of this loss of human capital. Higher repa-
triation rates were also associated with greater emigrant remittances in favor of
the local economy.
Table 20.2 Effect of migration on the North-South differential in GDP per capita
Year GDP Per Variation of the Gap (percentage points)
Capita Gap
Total of which: of which: Population effect
(South/Center
GDP effect
North )*100 Total of which: of which:
international national
migration effect migration effect
1881 98.5
1901 88 −10.6 −10.7 0.1 −2
1911 81.4 −6.5 −10 3.5 0.1
1921 73.6 −7.8 −12.4 4.6 2
1931 64.5 −9.1 −6.6 −2.6 −0.7
1951 47.3 −17.2 −13.7 −3.5 −0.1
1961 55.8 8.5 7.5 1.1 0 4.1
1971 67 11.2 6.5 4.8 0 7
1981 62.2 −4.8 −3.5 −1.4 0 2.9
1991 59.6 −2.5 −0.6 −1.9 0 1.6
2001 58 −1.6 −2 0.4 0 2.5
2009 61.6 3.6 0.1 3.6 0 20
Source: Authors’ own elaborations on Daniele and Malanima (2007) and SVIMEZ (2011).
With regard to short-term effects, it is estimated that international migra-

tions accentuated the contemporary North-South gap by about 2 percentage
points between 1881 and 1901, whereas their effect in the following decade was
negligible (Table 20.2).
Like demographics, policy also failed to keep the gaps from widening.
Awareness of the existence of a “Southern question” came very early on, but
in the second half of the nineteenth century financial investments associated
with public policy were decidedly low compared with European and Italian
standards in the final decades of the twentieth century. Up to World War I,
overall spending by the central government and local administrations rarely
approached one-fifth of GDP. Moreover, central government spending consisted
very largely of interest on the public debt and armaments (Cohen and Federico
2001a, 91). Public works spending was little more than 10 percent of the total;
redistributive spending was very low, less than 1 percent of total spending for
the entire nineteenth century, whereas spending for education, also low in 1870
(3.2 percent of public spending, or 0.5 percent of GDP) increased constantly
until it doubled its relative portion of public spending on the eve of World War
I (Zamagni 1993a).
The most conspicuous measures directed primarily to the South were those
aimed at improving transportation networks. Between 1861 and 1875 the South
went from 7.2 percent of the national rail network to 32 percent. Nevertheless,
according to some historians, the country’s North-South rail connections, partly
because of particularly high fares, failed to bring about the creation of a national
market or even a significant increase in interregional commerce; “the railways
were built not to be used” (Fenoaltea 2006, 215–216); the purpose was controlling
the national territory. Furthermore, the substantial increase of investment in
Southern railways was countered by a significant reduction in rural reclamation
projects compared with the preunification period (Pescosolido 1998). The 1862
reclamation law entrusted the execution of such projects to private enterprise,
“effectively favoring northern regions where the most extensive marshlands
were concentrated and where there were numerous consortia of land owners”
(Atella, Francisci, and Vecchi 2011, 109). In the age of Giolitti before World War
I, public investment in the South intensified. The sum total of infrastructure
investment contributed to the modernization of North and South, but it was
not such as to modify the relative advantage of locating productive activities in
the two regions; on the contrary, the imbalance was probably accentuated.
In other important areas of national policy the impact on the South’s initial
deficit seems, as with the railways, to have been substantial enough to improve
previous levels but insufficient to narrow the gap. Let us consider education: the
Casati Act went into effect for the whole country in 1859. Studies of the educa-
tion system conducted in the years after the law’s implementation continued to
demonstrate the backwardness of the structure and functioning of the Italian
school system, and the relatively worse situation in the southern regions.
It was not until 1911, fifty years after unification, that the Daneo-Credaro
Act established national funding for elementary education. This choice proved
to be a notable step forward in the fight against illiteracy, even though in just
a few years, “the outbreak of war would be a decisive blow, diverting the gov-
ernment’s attention away from education and postponing all public investment”
(A’Hearn, Auria, and Vecchi 2011, 167–168).
A much debated point is the hypothesized transfer of capital from South
to North caused by geographic asymmetries between tax revenues and public
spending. Unification brought with it the consolidation of public debt, two-thirds
of which was carried over from Piedmont (Cafiero 1996). Unification of the debt
thus meant “a transfer of real resources from the South to the North” (Toniolo
1988). The same may also be true for taxation, which like public spending was
particularly low in the preunification South.
An important role in reinforcing the localization dynamics of Italian indus-
try may have been played by industrial policies and, in particular, the high
concentration of public contracts among several mechanical engineering firms
prevalently located in the North. Contracts related to the arms industry were
more substantial (Pescosolido 1998).
The observer who most clearly understood this relationship was Francesco
Saverio Nitti. Although he did not oppose public policies in support of indus-
try, he grasped their geographically differentiated distributive effects. As a
result, he was the first strong advocate not of reducing support for industry
but of implementing specific economic policy measures to ensure that indus-
trial localization would benefit the entire country, and especially the South.
With the “Special Provisions for Naples,” a package of measures to favor
industry was approved (1904), among them a quota of public mechanical engi-
neering contracts, customs exemptions on imports of equipment for the initial
establishment of industrial plants, and measures aimed at establishing a hydro-
electric industry that would exploit the Volturno river (Barone 1986). In 1909
the big industrial plant in Bagnoli went into operation; the Volturno Power
Authority was set up. In the judgment of Bevilacqua (1993, 88), they “surely
had a positive effect on the Neapolitan economy, whose industry experienced
a remarkable recovery.” Also in 1904 the special legislation, with similar mea-
sures, was extended to Basilicata, then to Calabria and the rest of the southern
provinces.
First Period Balance Sheet: the Situation as of 1911

In the decades around the turn of the century the regional gaps widened. The
process of divergence was simultaneous with the country’s industrial develop-
ment, as would be expected given the tendency to geographic concentration,
as industrial activities strengthened themselves in those areas where they first
began to have success, corresponding, in the Italian case, to the industrial tri-
angle. However, the dimensions and the structural features of the gaps were far
from the dramatic levels that would mark the following decades, and they were
normal by international standards, maintaining an intermediate position with
respect to the low German figure and the very high figures for the components
of the Hapsburg empire (Table 20.1).
The characteristic North-South split became even more marked in these
decades, with a divergence of GDP amounting to 26 percentage points, but the
East-West gap also widened, reaching 18 points (Figure 20.1). Most important,
all the southern regions experienced strong improvements in their indicators of
well-being, although again in this case they were lower than the national aver-
age. Between 1861 and 1911 life expectancy at birth, virtually unchanged for cen-
turies, increased by nearly 16 years in Italy and by about 11 years in the South
(Vecchi 2011, Table S6). With regard to education we take as our reference point
the threshold of 40 percent literacy, believed by many historians to be the min-
imum requisite at that time for modern economic development (Felice 2007a).
At unification, this threshold had been reached only by the three regions of the
Northwest and even in 1881 it had been attained only by the northern regions
and Lazio (Vecchi 2011, Table S10). By 1911, no region of Italy was under 45
percent, with the exception of Calabria, but the North-South gap was still very
wide.
In drawing up a balance sheet of united Italy’s first fifty years, D’Antone
(2012, 640) writes: “at least until the First World War, the still physiological
North-South divergence was not deliberately constructed by virtue of political
decisions to the disadvantage of the South, but it was even acceptable in a coun-
try whose productive system was highly differentiated, and did not constitute
the fatal condition for the ever steeper decline of the southern regions.”
War, Fascism, War: the Gap Explodes

(1914–1950)
The physiologic or at least unsurprising widening of the gaps in the first fifty
years of united Italy was followed by forty years in which those divergences
intensified to reach decidedly anomalous proportions (Figure 20.2), also by inter-
national standards (Table 20.1). The trend is clear and for the first time it fol-
lows a North-South gradient. Between 1911 and 1951 all the regions of the South
visibly lost ground, whereas all those of the Center-North, with the exception
of Umbria,7 gained ground. Overall, per capita output in the South went from
83 to 53 percent of per capita output in the Center-North.8
Very probably, much more than by the nature of initial industrialization,
the true geographic fracture in Italian history was created by the experience of
the world wars and the Fascist dictatorship.
World War I is of fundamental importance (Zamagni 2002b); it marks a
break in previous trends. Overall, “the war subordinated every aspect of social
life to increasing Italy’s industrial potential” and it “determined a new dis-
location of the country’s resources in favor of industry, encouraged finan-
cial agglomerations, and reinforced protectionist practices” (Castronovo 1975,
228, 254).
The war effected a remarkable growth in the role of the public sector.
State support for the defense industry, vast and diversified, created effects that
were destined to last; among them, and decisive for regional questions, was the
process of geographic concentration of industry in areas where it had already
been established: “with some significant spillover effect in Emilia, Veneto and
Tuscany . . . The war proved to be a bad deal for the South of the country”
(Zamagni 1993a, 296). Interrelationships between political decision-makers and
industrial groups intensified; that is, what Castronovo (1975) defines as intimate
relations between government economic policy and business strategies, which
would take on great importance in the following years.
110
100
90
80
70
60
50
40
30
20
1861
1864
1867
1870
1873
1876
1879
1882
1885
1888
1891
1894
1897
1900
1903
1906
1909
1912
1915
1918
1921
1924
1927
1930
1933
1936
1939
1942
1945
1948
1951
1954
1957
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
Disparities in per capita GDP Disparities in population Disparities in GDP (at constant prices)
Figure 20.2 Disparities in population, GDP, and GDP per capita between Center-North
and Southern Italy (Southern Italy as percentage of Center-North). GDP at constant
prices 1911. Source: Authors’ own elaborations on Daniele and Malanima (2007).
The effects of World War I on geographic disparities were probably pri-

marily of a deferred nature; that is, they laid the groundwork for a permanent
reinforcement of industrial dualism. The widening of the geographic gaps, con-
temporary with or immediately after the conflict, was instead not much more
than that of the twenty years preceding the war. It would become much more
intense starting in the final years of the 1920s (Figure 20.3).
–1
–2
1 1 1 1 1 1 1 1 1 1 1 1 1 1 9
1–7 871–8 881–9 891–0 901–1 911–2 921–3 931–4 941–5 951–6 961–7 971–8 981–9 991–0 001–0
186 1 1 1 1 1 1 1 1 1 1 1 1 1 2
Per capita GDP growth in Italy (yearly % changes) Yearly % changes in disparities (Mezzogiorno as % of Center North)
Figure 20.3 Per capita growth and North-South disparities (yearly average;
percent changes). GDP at constant prices 1911. Source: Authors’ own elaborations on
Daniele and Malanima (2007).
0.14
0.12
Total variation
0.1
0.08
0.06
0.04
Variation between
0.02
Variation within
0
1891
1894
1897
1900
1903
1906
1909
1912
1915
1918
1921
1924
1927
1930
1933
1936
1939
1942
1945
1948
1951
1954
1957
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
Figure 20.4 Per capita GDP variability in Northern and Southern regions: variation
between areas and variation within areas. Source: Authors’ own elaborations on Daniele
and Malanima (2007).
These interesting developments were halted and inverted in the second half
of the 1920s, first by changes in Fascist economic policy and the great interna-
tional depression, and then by the explosion of protectionism and restrictions
on emigration. The years after 1925–1926 were certainly the worst period in the
economic history of the South; the economic conditions of the South “dete-
riorated disastrously” (Davis 1999). For the first time, the two components of
the regional output gap (i.e., the variability internal to the Center-North and
the South, and the distance between the two) (Figure 20.4) displayed different
dynamics.
This striking retreat of relative output in the South is, in good measure, the
fruit of policy choices made in the period that created difficulties for south-
ern agriculture in the absence of any kind of industrial development, and in
the presence of a rapidly growing population, because of both natural causes
and restrictions on emigration.9 The autarky policy especially harmed the South
(Toniolo 1980) returning it to “initial conditions” in 1951 much worse in many
respects than those of 1861.10
The South remained an unequivocally agricultural area whose conditions
were decidedly worse than in the preceding period. Fascism’s farm policy, with
its preference for extensive cultivation, its ruralization policy, and its com-
mercial treaties with Germany in the 1930s in a context of a drastic reduction
in international trade, brought still greater damage to southern agriculture.
Fascism “sacrificed the economic interests of the South and devastated its most
advanced sectors” (Davis 1999, 250). The “battle for wheat,” in particular, sacri-
ficed the interests of high-value export crops.
Italian industrial development in the Fascist period “didn’t stop but took
roads that were probably different from those that might have been expected”
(Zamagni 1993a, 214). In the South it was extremely limited. Between 1911 and
1936 the number of workers in the manufacturing sector, as measured by the
population census, went from 2.6 to 3.1 million in the Center-North, whereas in
the South it fell from 893 to 823 thousand (SVIMEZ 2011).
Economic policy tended to crystallize the preexisting structure of produc-
tion and business, because of the distribution of public contracts and the pro-
motion of agreements among producers, reinforcing their monopolistic power
(Romeo 1988, 151). Fascism put into effect a policy to favor industrialization out-
side of the industrial triangle. In certain respects the policy resembled Nitti’s
projects, but it involved only cities of the Center-North.
The Banking Law of 1927 also favored greater channeling of investments to
the Center-North (Castronovo 1975). To this must be added the gigantic bail-
out operation of the banking and industrial system conducted by the Industrial
Reconstruction Institute (IRI) (D’Antone 2011), whose funding division inter-
vened almost exclusively in the North, where most of the national industry was
concentrated.
Rearmament and the war made the situation even worse. War once again
stimulated military production, especially steel and machinery, heavily concen-
trated in the North and for the most part publicly owned through IRI (Romeo
1988). The war provoked moderate damage to Italian industrial plants, but the
course of events ensured that the brunt was borne by the already modest indus-
try of the South, particularly in Campania.
Finally, by favoring imports of raw materials and the resumption of indus-
trial production in the North, reconstruction policy choices widened, yet
again, the regional development disparities: purchases of goods financed by the
Marshall Plan were used to “renovate industrial facilities to favor economies of
scale” (Brunetti, Felice, and Vecchi 2011, 219). Not coincidentally, 84.3 percent
of the financial facilities granted to Italian industry from the end of the war to
1951 were directed to companies in the Center-North (SVIMEZ 2011).
In 1951, the southern economy was in disastrous condition. According to
the recent reconstruction by SVIMEZ, southern industry’s share of value-added
amounted to just over 11 percent of the national total, well under half of its share
in 1911 as calculated by Fenoaltea (26 percent). In the immediate postwar period,
the “strong points” of southern industry, to the extent they appear on the map of
industrial clusters, were reduced to a minimum and almost entirely concentrated
in the food processing sector, still relatively unexposed to competition.
Demographic dynamics, both migratory and natural, are also fundamen-
tal to an understanding of period trends. The period between the two wars
was characterized by much smaller international population flows than at the
turn of the century. Internal migration remained modest. At the same time, the
regional divergence in natural demographic dynamics was accentuated. In the
three decades from 1880–1882 to 1910–1912, Italy as whole experienced a decline
in fertility of just 11 points; in the following quarter century (from 1910–1912 to
1935–1937) this moderate decline turned into a steep drop: the fertility rate lost
nearly 50 points, from 154 to 105. But the decline was much more pronounced
in the Center-North, where it dropped by 61 points, from 149 to 88, whereas the
South it declined by only 25 points, from 163 to 138.
The Economic Miracle and

Convergence: 1951–1973
What Happened
For decades beginning in 1951 the South underwent a period of exceptional growth.
It came at the same time as the fastest overall growth in Italian economic history
but was even faster. For the first—and last—time since national unification, the out-
put gap between South and North was reduced significantly and over a protracted
period (Figure 20.2). All the southern regions took part, if to differing extent.
From 1951 to 1971 per capita GDP in the South rose at an average annual
rate of 5.77 percent, one of the best performances in the entire world (Figure
20.5). Setting average income in the United States, at purchasing power parity,
equal to 100, during these two decades the Italian South rose from 22.3 to 46.6,
leaving the countries of Eastern Europe well behind and overtaking those of the
Mediterranean except Spain (Felice 2007a).
The gap in per capita output with the rest of Italy was narrowed from 53
percentage points in 1951 to 44 in 1961 and 33 in 1971.11 Essentially, the South
gained a percentage point of per capita GDP a year, at a time when Italian GDP
was growing at historically unequalled rates.
For the South as a whole, fourteen of the twenty points recouped can be
ascribed to productivity gains, the remaining six to the relative shrinkage of
population (Table 20.2). Both components, then, were factors in the conver-
gence. There was powerful growth in per capita output, sector-by-sector and
through the sectoral composition effect caused by the sharp relative decline of
agriculture to the benefit of industry and services. The share of the economi-
cally active population engaged in agriculture was nearly halved from 58 per-
cent in 1951 to 30 percent in 1971, whereas industry’s share doubled from 17 to
35 percent. At the same time, mass national and international emigration pro-
duced a structural moderation of the aberrant relation at the end of the war
between the southern population and available resources. The region’s average
negative domestic migratory balance exceeded 6 percent, driving the difference
in per capita output down by nearly seven points (Table 20.2).
Productivity trends were also better than in the North in individual sectors.
Although the effect of the agrarian reform was “far below expectations” (Rossi
Doria 1957), southern farm productivity rose from 79 percent of the national
35.0
Mezzogiorno
Center-North
30.0 Austria
Belgium
Finland
25.0 France
Germany
Netherlands
20.0 United Kingdom
Spain
Australia
15.0 New Zealand
Canada
United States
10.0 Argentina
Brazil
Japan
5.0 South Korea
Turkey
World Average
0.0
1871 1891 1911 1931 1938 1951 1961 1971 1981 1991 2001 2009
Figure 20.5 Secular trends in GDP per capita (indices 1871 = 1). Source: Mezzogiorno
and Center-North: Brunetti, Felice, Vecchi (2011); countries: Maddison, Historical
Statistics for the World Economy http://www.ggdc.net/maddison/Historical_Statistics/
horizontal-file_02–2010.xls .
average in 1951 to 91 percent in 1971 (Felice 2007a). Industrial productivity also

rose sharply, from 76.4 to 99.1 of that of the Center-North (Figure 20.6),12 thanks
in part to the installation of a good many large plants, driven by public sub-
sidies or the impetus imparted by public industry. Also going by gauges other
than GDP or productivity, southern development was equally impressive. Per
capita consumption tripled in real terms, the number of cars on the roads rose
from 125,000 to 3.3 million, and the number of telephones from 110,000 to 2.2
million. Half the region’s housing stock was built during those years, and 54,000
kilometers of new roads (Cafiero 1976). The literacy rate gained 12 percentage
points, practically closing the gap with the rest of the country. Convergence was
also achieved for life expectancy at birth, which was more than 71 years in both
parts of Italy, practically twice as long as 90 years previously (Vecchi 2011).
What Failed to Happen

Not everything was positive. The many, profound changes to the social and
economic structure of the South failed to include at least one of crucial impor-
tance: the local deepening of manufacturing product chains, the expansion
of the capacity to supply goods to serve exploding consumer demand, which
occurred in other parts of the country in those decades. The expansion of the
southern industrial base proved insufficient in a number of enterprises and
ill-adapted in composition to the radical changes in the competitive environ-
ment that began to take place in the 1970s.
120
110
CLUP
100
wages
90
80
70 productivity
60
50
ULA
40
30
19
1951
1953
1955
1957
1959
1961
1963
19 65
19 67
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
19 91
1993
1995
1997
2099
2001
2003
2005
2007
09
Figure 20.6 Productivity (2000 prices), units of labor (ULA), wages, unit labor
cost (CLUP): South as percentage of Center-North. Source: Authors’ own elaborations
on SVIMEZ (2011).
This was the primary reason why from the very outset the southern econ-
omy’s capacity to absorb the manpower shed by agriculture was insufficient to
maintain equilibrium in the labor market. The differential in unemployment
rates, which had been practically eliminated by the mid-1960s, widened again
to nearly 3 percentage points in 1971 (Figure 20.7). Census data show that the
number of workers in plants located in the South and active in industry or
services (excluding government) increased by 51 percent in twenty years (30
percent in manufacturing; SVIMEZ 2011), whereas in the Center and North
it rose by 78 percent (and 56 percent in manufacturing). For the South, this
expansion was not enough to provide jobs for the exodus from farming; in
21.0
Italy Center-North Mezzogiorno

18.0
15.0
12.0
9.0
6.0
3.0
0.0
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Figure 20.7 Unemployment rate (percentages). Source: Period 1954–1992: Casavola (1994).
Period 1993–2003: Istat estimates. From 2004: Istat, data.
the North—where the exodus had begun decades earlier—it was more than
enough.
Brusco and Paba (1997, 271) observe: “The South lost a large number of
small enterprises that may have achieved regional size but could not withstand
the offensive from the enterprises of the North.” Our reconstructed map of
Italian industrial clusters (Iuzzolino, Pellegrini and Viesti, 2011, Table 13) con-
firms their relative unimportance in the South, which was the only part of the
country to undergo a decline in the number of highly specialized industrial
areas in the 1950s and 1960s.13 The regions of the Center and Northeast showed
a completely different pattern (Fuà and Zacchia 1984).
Why? History certainly counts. As we have seen, in 1951 the distance
between the two parts of Italy was already great in terms of industrialization
and in terms of per capita income, hence in the initial volume of local demand,
which fosters the competitive growth of local firms. Physical geography also
counts, and human geography as shaped by infrastructural projects definitely
counts. No internal southern market had ever existed, and certainly none did in
the 1950s and 1960s. The geography of the South and the glaring lack of trans-
port networks, with the consequent absence of a tradition of interregional trade
within the South, meant that for small southern manufacturers the “internal
market” was strictly local. Probably social factors also played a role, in par-
ticular the organization of sharecropping and the coexistence of agricultural
with craft activities, which are masterfully analyzed by Bagnasco (1977), Fuà
and Zacchia (1984), and the abundant literature on the “third Italy” and its vir-
tuous industrialization processes. Certainly, a significant factor was the enor-
mous initial gap in schooling (recouped only subsequently) between South and
Center-Northeast.
To this, must be added the resumption of mass emigration in the 1950s. This
involved not only farm workers and the rural underemployed but also crafts-
men, especially from the southern hinterland. If resurgent emigration offered
opportunities to southerners, at the same time it deprived the South of some
of the best elements of its work force: potential entrepreneurs. It thus helped to
cause the “destruction of the fabric of specific craft and industrial skills that
had been rooted in the South before the war and could have fostered develop-
ment” (Brusco and Paba 1997, 283).
The Role of Policy

The tumultuous process of convergence in the first two postwar decades was
sustained and in many respects led by a set of public policy programs that cre-
ated the conditions for economic growth in the South. A set of programs cen-
tering on the Southern Italy Development Fund (Cassa per il Mezzogiorno) was
devised. In its first decade the Fund focused on agricultural infrastructure, water
systems, and government structure. In the 1960s, it concentrated on the direct

promotion of industrialization. This action was flanked by national programs
to strengthen health, welfare, and education which, although not addressed
directly to the backward regions, had greater impact in the South in terms of
welfare and of resource transfers in proportion to local GDP. They thus fostered
partial structural equalization, given Italy’s historically most uneven endow-
ments in health and education facilities, as is shown by the convergence of the
South’s human development indicators with those of the rest of the country
(Figure 20.4). All of this produced a widespread perception of the positive pres-
ence of the national government in the South, perhaps for the first time since
Italian unification.
The Southern Italy Development Fund is one of Italy’s great, extraordinary
economic institutions, on a par with IRI; it was instituted by Law 646/1950.14 Its
action was governed by two main criteria: its spending was additional (“extra-
ordinary”) to ordinary government operations; and it was to be conducted under
a multiyear program (entrusted to a special Ministerial Committee for the South),
structured as a series of one-year plans. The use of exceptional instruments car-
ried major implications for institutional development in the South (Barca 1997b).
The Fund’s extraordinary measures for the South, theoretically additional
to ordinary action, came in two phases, corresponding to two laws establish-
ing their legal basis. The first was bound up with the law instituting the Fund,
which provided for a ten-year investment of over 1.2 trillion lire for land rec-
lamation, aqueducts, hydroelectric projects, roads, railways, and infrastructure
in general, which were considered essential to the industrial development of the
area. These were complicated public investments with deferred returns, not only
because they involved infrastructure but because in many cases they were com-
plexes of works whose economic return depended on the completion of every
single part. The results were appreciable.
The second phase for the Fund was ushered in by the passage of Law
634/1957, which was based on the idea that the construction of the prerequisites
for growth had been completed, that the Fund had worked well to this end
but that it was now necessary to proceed with industrialization proper. The
new policy, then, was one of more determined industrialization to flank the
traditional agricultural and infrastructural projects. A more substantial sub-
sidy program was put in place; infrastructural projects were concentrated in the
most propitious areas for industry (development poles). This was accompanied
by a more massive presence on the part of the State-owned corporations, which
were required to locate at least 60 percent of new investment and not less than
40 percent of total investment in the South.
The new law accompanied the extensive development of Italian industry
during the miracle years. In the late 1950s and early 1960s, the political impetus
for industrialization was especially strong.
In 1971, the investment rate in the South was 37 percent, nearly twice as high
as the 20.7 percent rate of the Center and North. That same year investment in
the South was 58 percent of the amount invested in the rest of Italy, although
regional GDP was only 36 percent. The growth of industrial productivity was
extremely rapid over the years, virtually closing the gap with respect to the
North (from 76.4 percent in 1951 to 99.1 percent in 1971).
This basically positive assessment of the Fund’s activity and of regional
development policy in general, however, must not be allowed to conceal the
feebleness of the stimulus that it provided for self-sustained growth. First, the
incentives for large plants went mainly to public and private monopolies, espe-
cially in the chemical and petrochemical industries, and—contrary to expecta-
tions—failed to forge any local links between the input and output sides or to
foster local management capabilities, which remained in the North. There was
some local formation and conservation of skills and human capital that would
survive the eventual demise of these plants, but the positive results would come
only in the long term (Bianchi, Masselli, and Pellegrini 2008). Second, the Fund
acted mainly as domestic demand support for northern industry. In 1959, the
South took 70 percent of the Center and North’s net exports (Castronovo 1975).
Access to a growing domestic market enabled northern firms to achieve econ-
omies of scale (and skill) that proved to be a major factor for success on the
international market (Castronovo 2010), whereas southern firms were often
reduced to a local dimension.
These dependency effects are evident in the data on imports. Southern
imports were high already in the 1950s, equivalent to nearly a quarter of
regional GDP, indicating the presence of very substantial transfers from the
rest of the country. The data as reconstructed by SVIMEZ show that net
imports from the rest of Italy and the rest of the world came to 24.3 percent of
southern GDP at current prices in 1951 and 38.1 percent in 1963 before subsid-
ing to 30 percent in 1970.
End of the Economic Miracle and of

Convergence: 1974–1999
The South’s economic convergence with the rest of Italy came to a halt in
1971. The ratio of the region’s per capita GDP to that of the rest of the country
reached a level (two-thirds, up from under half in 1951) that it would never again
equal. Region by region, over the next forty years the gap with the Northwest
remained basically unchanged, but that with the Northeast and the Center wid-
ened, as those areas grew steadily faster than the national average. In purely
quantitative terms the overall North-South gap did not change greatly over these
decades, but the situation within the South, in terms of provinces, grew more
uniform; consequently there was a gradual widening of the disparity between
the “best” southern and the “worst” central and northern provinces. But there
was a major structural modification: the weight of the various components of
the GDP gap changed, with a more and more important role being played by
employment rates. This was when the “Southern question” (since the 1950s no
longer an agrarian question) became the great question of lack of jobs.
The North-South gap in per capita output increased from 33 percent in 1971
to 40 percent in 1991. Most of the widening (55 percent) was caused by the
South’s relative productivity loss, the rest by its relative increase in population,
which reflected not only a higher birth rate but also a sharp reduction in migra-
tion to the North (the net migratory balance was halved during the 1980s com-
pared with the 1970s). This was accompanied by a rise in the unemployment
rate; on a comparable basis the rate doubled from 8.3 percent in 1979 to 15.8 per-
cent in 1989, whereas that in the Center and North rose by just 1 point, from 5.8
to 6.9 percent (SVIMEZ 2011). Given the rapid expansion of service employment
during these years,15 this poor capacity for creating jobs once more highlighted
“industrial backwardness” as a key factor in the Southern question.
The end of convergence was associated with the threefold wage, oil, and
budget shock of the 1970s (Ciocca 2007). The effects were aggravated by major
institutional changes that made it harder to achieve labor market balance or fis-
cal balance (with the creation of new levels of local government). Many of the
explanations why southern per capita GDP ceased to grow faster than the aver-
age turn on the sometimes geographically asymmetric impact of these problems
and the sharp break they caused with the old “idea” behind southern develop-
ment policy. These explanations can be summarized as follows:
− Labor market rigidities that prevented the South from overcoming the
impact of the shocks to factor prices
− Τhe emergence of a competitive deficit in connection with the structure
of the shocks, which had more severe repercussions on the South than
the rest of the country
− The termination (or substantial insufficiency) of public investment
support programs
− The crisis of the development programs of the previous two decades,
which partly as a result of institutional changes proved insufficient to
trigger self-sustained growth
The reduction of domestic migration and the rise in the unemployment
rate suggested that the difficulty of convergence might be connected with the
malfunctioning of the labor market. In effect, the new labor market rules (the
abolition of official regional wage differentials in 1969 and the Labor Rights
Act of 1970) reduced the flexibility of demand and supply, producing a “spa-
tial rigidity of wages” (Mauro and Pigliaru 2011) that was certainly detrimental
to growth. However, the rise in southern relative to northern wages cannot be
traced directly to the wage shocks of the 1970s but had begun in the previous
decade (Figure 20.6).
Value-added per worker reached 99 percent of that in the rest of Italy in

1971 but then slipped to 86 percent in 1991. Relative wages, equal to 60 per-
cent in 1961, rose to 76 percent in 1971 and 81 percent in 1981. As a result unit
labor costs jumped by fifteen points in a decade, from 77 percent of those in
the Center and North in 1971 to 92 percent in 1981. In just ten years the loss of
competitiveness, dominated by the relative decline in productivity, had a severe
impact on the South’s ability to sustain convergence.
This brings us to the second of the explanations set out previously. In part,
the decline in relative productivity in manufacturing in the South was caused
by the differential geographic impact of the energy and wage shocks. First, the
world crisis created severe problems for the more energy-intensive segments of
industry in Italy and throughout Europe. Second, industrial relations, beginning
with the “hot autumn” of 1969 (Rossi 1998) were a major contributory factor in
productive decentralization. Some major corporations diminished the degree of
vertical integration, increasingly outsourcing production phases to smaller firms
with significant advantages in terms of labor costs (Brusco and Paba 1997).
Unfortunately, the industry of the South, largely the offspring of the second
phase of extraordinary development policy, had a series of characteristics that
could only accentuate these shocks. It consisted largely of basic industry, highly
capital-intensive and often energy-intensive; it was dominated by large, verti-
cally integrated plants with little capacity to “induce” new business formation
outside; it was marked by the overwhelming presence of state-owned corpora-
tions and a relative handful of private industrial corporations; and it was ori-
ented almost exclusively to the domestic market.
The measures for the direct industrialization of the South, often analyzed
in the literature, relied principally on incentives to attract capital. As Fenoaltea
(2007) among others notes, at the time it was believed that “in a world of fixed
coefficients à la Leontieff” unemployment depended only on a relative shortage
of capital. These incentives were thus particularly costly. The mobile resources
that arrived in the form of capital did not encounter a corresponding endow-
ment of fixed resources in the form of infrastructure and human capital with
which to interact (Felice 2007a). In short, the shocks threw large industry into
severe crisis while facilitating the activities of small- and medium-sized enter-
prises. The effects on the South were devastating.
The decentralization of production could not make these losses good.
Decentralization is practicable only for modular or assembled products (cloth-
ing, engineering products, and so forth), not for continuous-cycle industry; and
naturally only where large enterprises of the same type are already located.
Outsourced work phases tend to be concentrated relatively nearby the origi-
nal plants, because the potentially greater production savings in distant regions
(such as the South) are more than offset by heightened coordination and trans-
port costs. These developments further boosted the industrialization in the
Center and Northeast, in particular Veneto, Emilia, Tuscany, and Marche.
However, the major investments in the South produced only very slow, although
not negligible, growth in secondary, follow-on economic activity.
This was a period of persistent, pronounced depreciation of the lira,
which resulted in an appreciable gain in the price competitiveness of Italian
products and a surge in exports. However, these effects were asymmetric.
Sectorally it worked to the advantage of industries with greater price elasticity
of demand, such as traditional consumer goods and in part mechanical engi-
neering. Regionally, it favored those who’s propensity to export was already
high and those closer to the main outlet markets, chiefly within the European
Community. These two sets largely coincided. Once again, the sectoral and geo-
economic features penalized the southern industrial apparatus, whose products,
given the nature of the region’s industrialization, were much more heavily ori-
ented to the domestic market.
This productivity-led competitiveness gap was accompanied by a differential
in the profitability of investing in different parts of the country. Although the
infrastructure development programs—designed especially for the South, for the
first time since national unification—had accomplished a great deal, they had
only partly closed the yawning gap in public capital endowment. This raises the
issue of how much the halt to convergence can be blamed on the reduction, or
elimination, of investment policy measures (Barucci, Pellegrini and Miotti 2011).
The investment rate in the South declined practically every year and plunged
in 1992; by 1995 it was down to the same level as the early 1950s (19.5 percent),
just decimal points above the 18.6 percent rate of the Center and North. It is not
hard to see that economic convergence followed the same pattern as the accu-
mulation of capital, public and private. From 1951 to 1971 the investment surge
sustained the growth of productivity, hence the catch-up in output. Afterward,
when the investment rate declined, the output gap was not narrowed.
The reduction in public intervention may have played a role in the end to
convergence. However, the question is broader, going to the nature of devel-
opment policy in a backward region of a developed country compared with
the situation in an underdeveloped country proper. These aspects were lucidly
described by the American economist Hollis Chenery (1962). The problem of the
South is its product specialization within the national economy. The improved
environment in the South and the sharp rise in local consumption failed to
elicit a comparable development on the supply side. The marginal ratio of cap-
ital to output was very low, lower than in the rest of Italy and far lower than
in the developing countries. This necessitated persistent, massive capital invest-
ment to generate any significant increment in production.
In conclusion, it is unlikely that the halt to convergence can be traced to a
single factor. Certainly the shocks of the 1970s affected the South deeply, and
at a time when adjustment mechanisms were less ready to moderate the geo-
graphic disparities. By contrast, in many parts of the “third Italy” decentraliza-
tion and competitive devaluation of the lira lent impulse and provided market
outlets to a myriad of small- and medium-sized enterprises, an economic fabric

that was not rooted in the South.
The Great Stagnation: 1992–2009
The Money Illusion of the Last Devaluations:

A South Out of Step with the Times
Our present history begins with the dramatic crisis of the public finances and
of the political system in general, which led to Italy’s last devaluations and con-
tinued with the entire nation’s strenuous battle to qualify for the European sin-
gle currency. In 1992, this process came together with the dramatic collapse of
the credibility of southern development policy. The Southern Italy Development
Fund and its activities were definitively liquidated and its technical personnel,
many of them highly skilled, were dispersed in a range of general government
bodies.
The resulting policy vacuum lasted through the mid-1990s. The charging of
southern employers’ social contributions to the central government budget was
phased out under a 1994 agreement with the European Commission, and no
offsetting policy measure was taken. The impact of restrictive fiscal policy was
especially heavy for the economy of the South, which was more dependent on
public resources. The dismantling of the state-owned corporations meant the
collapse of another of the southern economy’s traditional buttresses.
The devaluations fostered one last money illusion, shoring up the accounts
of firms in the old industrial districts and permitting the rise in the South too
of clusters of export-oriented producers. In the mid-1990s this process seemed
to be advancing along lines similar to the successes of the “third Italy” (Bodo
and Viesti 1997). Unhappily for the South, the advantages of smallness and
flexibility came too late. From 1991 to 2006 manufacturing employment in the
South in Northern-owned companies (private, privatized, or state-owned) was
nearly halved (D’Aurizio and Ilardi 2011).
The data underscore the South’s difficulty in keeping up with even the slow
growth of the rest of the country. Per capita output, equal to 59.6 percent of that
in the Center and North in 1991, had inched up to 61.6 percent in 2007, gain-
ing a percentage point per decade. Even this minimal gain was caused entirely
by demographics: in terms of output alone the gap widened, albeit modestly,
as southern GDP slipped from 33.8 to 32.7 percent. The population of northern
Italy grew relative to that of the South mainly because of immigration, domes-
tic (which produced an average ten-year population increase of 1.4 percent) and
international (0.8 percent).
In the course of two decades national and international pressure constrained

the South to engage in some economic restructuring, expelling the smallest and
least productive firms from the market and recouping productivity in many
sectors, such as wholesale and retail trade, with the beginnings of the growth in
business size and the exploitation of economies of scale and scope already under
way in the rest of the country. On the aggregate level the loss of employment
was sharper than the loss of output, because the number of full-time equivalent
workers in the South slipped from 40.2 to 36.6 percent of that in the rest of the
country. However, the relative productivity gain (about 1 percentage point) was
not sufficient to offset the rise in relative wages, whose index level, caused in
part by sector and size effects, rose from 84.2 in 1991 to 89.9 in 2007. There was
a pronounced loss of competitiveness.
Italy’s greater income inequality by international standards seems to depend
entirely on the exceptionally broad interregional differences in employment
rates. This is an especially negative feature of Italian economic dualism. That
is, compared with other countries economic inequalities in Italy weigh most
heavily on an essential aspect of living conditions in the backward regions,
namely the chances of being employed.
The Regional Policy Illusion and the Disparity

in National Policy Efficacy
Historically, government action has been fundamental, for better or worse, in
determining the size of the economic and social disparity between the South and
the North of Italy. Regional development programs (also known as “place-based
policies”) have been directed explicitly to the economic and social development
of the backward areas. However, there has also been a powerful territorial effect
from general policy (i.e., central government programs for the entire country
but whose effects differ from region to region).
The nationwide extension of a series of programs (schooling, but also health
programs, such as compulsory vaccination, free medicines, and the building
of infrastructure) enabled the South to share in national development. This
development was in part inclusive: a number of public programs ensured that
income differences were no longer accompanied by unsustainable social dispari-
ties. Thus, the fact that since the 1970s the income and output gap has remained
virtually unchanged does not mean the South has not made progress. Actually,
the southern Italian regions have managed to keep pace with one of the most
advanced areas of Europe. The obvious conclusion is that living conditions in
the South today are better than thirty years ago (Figure 20.8).
The importance of national with respect to regional policy is given by their
relative financial size. Total general government primary expenditure in the
South—current and capital—averaged €200 billion a year from 2004 through
110.0
Improved Human Development Index (1)
GDP per capita (2)

100.0
GDP per capita (3)
90.0
80.0
70.0
60.0
50.0
40.0
1871 1891 1911 1938 1951 1961 1971 1981 1991 2001
Figure 20.8 Income and human development in the Mezzogiorno
(indices Center-North = 100). Source: (1) Felice (2007a): the indicator summarizes the
level of income, education, and life expectancy. (2) Brunetti, Felice, and Vecchi (2011). (3)
Daniele and Malanima (2007).
2006. In the Center and North it came to over €400 billion. Per capita, the
figures were €9,800 and €10,800, respectively. The difference depends mainly
on current spending, in particular pension transfers. Capital expenditure, which
is explicitly targeted to sustain long-term growth, counts for only a tenth of
total spending. In 2004–2006 average annual capital expenditure in the South
was €21 billion (6 percent of the area’s GDP), compared with €35 billion in the
Center and North (3.1 percent of GDP). On a per capita basis capital spending in
the South was about 10 percent higher than in the rest of Italy. However, if we
also count investment by state-owned corporations, such as the State Railways,
the difference vanishes (Viesti 2009).
There are a good many sectors in which the effects of national policy pro-
grams are geographically uneven, including, crucially, education, justice, and
law enforcement. In recent years, at the initiative of the Bank of Italy a num-
ber of studies have collected data on geographic disparities in the quantity and
quality of public services in essential fields (Banca d’Italia 2010). The data make
it clear that there is a gap, in some cases a very wide one, between South and
North. The difference has historical roots, but it also depends on present-day
administrative capabilities at the central and local level. The inequality cannot
be blamed solely on the amount of resources allocated but depends also on
how efficiently they are used and on the characteristics of the local environ-
ment. Overall, we find two important aspects. First, the significant disparity
in the supply of many public services inevitably affects competitiveness and
growth differentials; and second, the future development of the South of Italy
necessarily depends to a great extent on national policy programs, as defined

here, designed to enhance the supply of those services.
The desired result simply cannot be attained unless the South is placed at
the center of economic policy in general, not only explicit policy action to over-
come geographic inequalities in development.
Acknowledgment
The views expressed herein are those of the authors and do not necessarily
reflect the views of the institutions represented. A longer version of this work
was published as Iuzzolino, Pellegrini, and Viesti (2011).
Notes
1. The two reconstructions of the trends in GDP per capita from 1861 available for
this work are that presented in Daniele and Malanima (2007) and SVIMEZ (2011)
in 1911 prices, at factor cost and current borders (which shows the data for years);
and that presented in Brunetti, Felice, and Vecchi (2011), at 2010 prices and the
regional boundaries of time (which starts at the regional level since 1871, and
reports the data at intervals usually twenty years before 1951, ten later). For methods
of constructing the two series and the original sources used, please refer to the
original articles. The differences between the gaps between areas calculated on the
two series are relatively small, and are concentrated mainly in the initial period.
2. The classic reference is to the work of Vittorio Ellena (Ellena 1879).
3. By contrast, high overall industrialization rates could be found in only two of
sixteen provinces in the Northeast, three of fourteen in the Center, and two of
twenty-five in the South.
4. The administrative district, an intermediate entity between province and
municipality, was instituted in the Kingdom of Italy in 1859 by the Rattazzi Law
(Royal Decree 3702 of October 23, 1859).
5. A significant factor accompanying and sustaining the rise of industry in Italy
was the formation of modern banks, first of all Banca Commerciale and Credito
Italiano, established during those years in the Northwest at the initiative of foreign
capital. The role of banking is emphasized in particular by Gerschenkron (1965). In
the South, although credit expanded thanks to many cooperative banks, it played
a much smaller role; its development was much more halting than in the North, as
is attested by the large number of cooperative bank failures (Ferri and Trento 1997;
A’Hearn 2000).
6. Calculated on the basis of the data in SVIMEZ (2011, 129 et seq).
7. As well as Lazio, according to the data in Brunetti, Felice, and Vecchi (2011).
8. This according to the data of Daniele and Malanima (2007) (regarding present
regional boundaries); but the indication is very much the same also on the basis
of the data in Brunetti, Felice, and Vecchi (2011), using the regional boundaries of
the time: per capita output went from 76 to 49 percent.
9. Infrastructure policies also contributed to the widening of the gaps. Initial
construction of the national highway network was concentrated almost exclusively
in the North, with the exception of the Naples-Pompeii route. After the war the
railway network underwent a remarkable modernization, with lines being doubled
and electrified, but this too touched the South only marginally (the Rome-Naples
fast train line and electrification of the Naples-Foggia line).
10. The South’s relative decline extended to other human development indicators
(Figure 20.4) and living conditions, probably because of the scanty attention of the
social policies of the time to the disadvantaged.
11. According to Daniele and Malanima. The data of Brunetti, Felice, and Vecchi
(2011) show a slightly less rapid but still extremely significant relative advance:
from a gap of fifty-one points in 1951 to forty-six in 1961, and thirty-six in 1971.
12. The gain was accompanied by rising wages. Per capita employee earnings in
southern manufacturing rose from 57.2 percent of northern earnings in 1951
to 76.4 percent in 1971. This resulted in a modest loss of competitiveness:
manufacturing unit labor costs rose from 75 to 77 percent.
13. On the possible crowding-out of southern industry by the drop in transport costs
and more competitive central and northern products, see Faini (1983).
14. In addition to the regions of the South, its purview also covered the Isle of Elba
in Tuscany, the provinces of Latina and Frosinone in Lazio, the municipality of
Cittaducale and surrounding towns in Lazio, and the Tronto land reclamation
district.
15. During these decades, the service sector (public and private) was a sort of
“sponge” sopping up a part of the excess labor supply. At the turn of the 1980s
public employees accounted for nearly 17 percent of total employment in the
South, 3 percentage points more than in the rest of the country (Bodo and Sestito
1991).
Chapter 21
REGIONAL
DISPARITIES:
INTERNAL
GEOGRAPHY AND
EXTERNAL TRADE
Brian A’Hearn and

Anthony J. Venables
Introduction
The location of economic activity within a country is determined by three
broad factors: (1) the location of natural advantages, such as mineral depos-
its, climate, or water supply; (2) domestic market access, meaning how well
placed a location is to meet demand from the domestic market and also to
obtain inputs from labor, capital, and intermediate goods markets; and (3)
foreign market access, capturing access to international trade. Our thesis in
this chapter is that each of these forces has been particularly important at dif-
ferent stages of Italy’s economic history. Italy’s misfortune is that each, in the
period when it was most important, has favored the North. In many coun-
tries the changing balance between these locational factors has caused dif-
ferent areas of the country to prosper at different times, as with the rise and
fall of industrial areas in the north of England, north of France, or Northeast
of America. In Italy the timing and geography have combined to repeatedly

favor the North.1
Our narrative is as follows. The early years preceding and following reuni-
fication were those in which natural advantages played a decisive role in key
sectors of the Italian economy. The North benefitted from relatively abun-
dant water which permitted an intensive agriculture, dense population, and
cost-effective production and processing of raw silk. Although most silk was
exported (and accounted for a huge share of total Italian exports), the ready
tradability of this high-value commodity meant that market access consider-
ations, domestic and foreign, were not particularly important. In addition to its
impact on local incomes, the silk industry generated important spillover effects
for other sectors, such as the development of engineering expertise, banking,
and commercial networks and institutions. Other natural assets that played a
role in new sectors in other European economies (e.g. coal and iron ore) were
not present in Italy.
Although a high proportion of silk production was exported, many of the
new sectors that started to grow fast from the mid-1880s onward did so in a rel-
atively closed economic environment and with greater dependence on domestic
markets. Import protection was imposed in 1878, gradually extended beyond the
grain, textile, and iron and steel sectors, and finally integrated into an autar-
kic development strategy in the Fascist period. Furthermore, remittances meant
that Italy experienced a “Dutch disease.” Remittances peaked at 6 percent of
gross domestic product (GDP) just before World War I, so that the value of
goods exports was just two-thirds that of imports. These factors combined to
mean that Italy’s exports as a share of GDP were broadly constant at around
10 percent for half a century, apart from the war years, until their collapse in
1930 to 6 percent. Compared with other countries, Italy’s share of world trade
relative to its share of world income fell from the world average (unity) in 1880
to 25 percent below the world average in 1914 and 30 percent below in 1938. In
1916, this trade share measure for Italy was just half what it was for France or
Germany (see Chapter 12). At the same time as the export share was stagnating
or declining, there were improvements in internal transport and considerable
growth in the domestic market. These factors combined to mean that domestic
market access became a key determinant of industrial location. The North had
gained advantage in the size and sophistication of its markets during the earlier
period, and so it was natural that during a period of more closed development
it was the North that attracted the new industries.
The third phase starts the 1950s, based on a combination of fast-growing
engineering sectors and trade within the European Communities. The North
had the advantage of existing clusters of activity, although this was accompa-
nied by the competitive disadvantage of higher wages. External opening might
have been expected to reduce the advantage of an existing cluster as economic
interactions outside the cluster become more important. However, because of the
process of European integration, economic opening primarily meant opening to
regional disparities: internal geography and external trade 601
the markets of Northern and Central Europe; foreign market access became
important, and once again the North of Italy was favored over the South.
Many other factors (political, cultural, and economic) played a role in shap-
ing Italy’s regional divide. Our thesis is, however, that as Italy’s production
structure changed it turned out to be the North that was repeatedly better able
to grow the new booming sectors because of the changing importance of natu-
ral advantage, domestic market access, and foreign market access.
The remainder of the paper develops these ideas more fully. The next sec-
tion lays out the facts about regional economic structure, at both the aggregate
and sectoral level. It also has a brief discussion of theory. The third section
looks in greater detail at the three broad phases we have sketched previously,
drawing on the material of the second section and other supporting informa-
tion sources. The fourth section concludes.
Data and Theory: Economic Geography

and Industrial Structure
Although our analysis is based on a periodization, it is important to see pat-
terns in the data over the entire time period under study. We report the evo-
lution of regional population, income, and domestic market access, and then
turn to sectoral detail, demonstrating the changing structure of the economy in
aggregate and in the regions. In doing this, we are interested in the geography
of Italy, in particular the North-South dispersion of activity, and we display
data in a manner that draws this out. Geography also features in the mecha-
nisms that we think are important—the effects of trade on the performance
of different regions—and we present a brief theoretical discussion of economic
geography forces.
Regional Population, Income, and Market Access

The starting point is the distribution of population, which has not become more
concentrated in the North. The main change is the growth of Lazio, which saw
its share of population increase by 6 percentage points from 1891 to 2001. Of
this gain, 3 percentage points came from regions to its north, and 3 percent-
age points from regions to its south (Table 21.1). There were some substantial
changes at the regional level, the most marked being the increase in Lombardia’s
share of population and fall in Piemonte’s.2
Unlike population, income has become more concentrated in the North.
The right-hand three columns of Table 21.1 give the North-South division of
Table 21.1 North-South population and income shares

Population Share Income Share
North of Lazio South of North of Lazio South of
Lazio Lazio Lazio Lazio
1891 0.573 0.034 0.393 0.599 0.054 0.348
1911 0.580 0.038 0.383 0.622 0.056 0.322
1938 0.577 0.063 0.359 0.672 0.076 0.253
1951 0.552 0.073 0.376 0.693 0.079 0.228
1971 0.558 0.088 0.354 0.656 0.098 0.246
1981 0.550 0.090 0.360 0.657 0.097 0.246
1991 0.540 0.092 0.368 0.639 0.107 0.254
2001 0.543 0.091 0.366 0.648 0.105 0.247
total value-added.3 In 1891, income in the North was 72 percent larger than in
the South, and in 2001 it was 116 percent higher. The peak was in 1951, when
income was 203 percent higher. Regional value-added per capita, relative to the
national average, is shown in Figure 21.1. In this and subsequent figures the
horizontal axis gives regions ranked by their distance from Milano (Trentino
Alto-Adige omitted). Most Northern regions experience increases of more than
20 percent, whereas Southern regions have declines of more than 25 percent.
Value-added per capita contains nonlabor income and varies with regional labor
force composition and participation rates, and wage differences.
The spatial distributions of population and per capita income combine
to give a measure of each region’s domestic market access. This is defined,
for each region, as the sum of income across all regions weighted by inverse
1.8
1891 1911 1938
1.6
1971 2001
1.4
1.2
1
0.8
0.6
0.4
0.2
0
ia
Lig te
Em ia
Ve m
To to
Um a
M ia
La e
zio
ol
na
ia
Pu ta
Ca ia
Sic ia
ilia
h
n
ard
ur
br
an
gl
r
n
ica
r-M
ne
o
arc
sca
eg
lab
mo
-R
mp
sil
rd
mb
Ab
Pie
Ba
Sa
Ca
Lo
Figure 21.1 Value added per capita, relative to average, by region.

0.4
1891 1911 1938
0.35
1971 2001
0.3
0.25
0.2
0.15
0.1
0.05
ia
Lig e
Em a
Ve m
To to
Um a
Ma ia
e
Ab io
ol
na
ia
Pu ta
Ca ia
Sic ia
ilia
i
n
nt
rch
rd
ur
br
an
gl
r
z
r-M
ica
-Ro
ne
sca
eg
lab
La
mo
ba
mp
sil
rd
m
Pie
Ba
Sa
Ca
Lo
1891 1911 1938 1951 1971 2001

Elasticity of DMA with
respect to distance from –0.34 –0.38 –0.47 –0.50 –0.46 –0.44
Milano
R2 0.68 0.75 0.82 0.84 0.82 0.78
Figure 21.2 Domestic market access by region.
distance (i.e., DMAi = ∑j yj /dij, where yj is region j ’s share of GDP, and dij is
the distance between the capitals of regions i and j). We compute this using
road distances, assuming that the distance from a region to itself is 25 kilome-
ters, and that there is a penalty to being an island equivalent to an additional
100 kilometers of road distance. The North has a very substantial advantage, as
illustrated in Figure 21.2; Lombardia faces a domestic market twice as large as
that of each of the four southernmost regions in 1891, and three times as large
in 1971. The advantage of the North, especially Lombardia, steadily increases
into the postwar period, diminishing somewhat thereafter. Lazio has a large
increase in domestic market access, because of population and income growth,
whereas most Southern regions have a large decline.
Useful summary statistics of the geographic pattern of regional differences
come from regressing the log of a variable on the log of distance from Milano.
The coefficient is the elasticity with respect to distance, and R 2 the propor-
tion of variation accounted for by distance from Milano.4 For domestic market
access these statistics are reported in the lower panel of Figure 21.2. The elas-
ticity is large and negative, peaking in 1951 in which year being 10 percent fur-
ther away from Milano reduced domestic market access by 5 percent. A full 84
percent of the regional variation in domestic market access was accounted for
by distance from Milano.
A further piece of evidence links back to our discussion of population.
Although the aggregate population balance between North and South did not
change over the period, there were important changes in the balance of urban
populations. This can be seen most clearly by focusing on the largest six cities,
reported in Table 21.2. Whereas in 1871 the combined population of Napoli and
Table 21.2 Urban population (thousands)

Milano Torino Genova Roma Napoli Palermo
1871 262 208 130 244 449 219
1901 491 336 235 463 563 310
1931 992 597 608 1,008 839 390
1961 1,573 1,032 784 2,188 1,183 588
Source: http://www.populstat.info/Europe/italyt.htm
Palermo exceeded that of Milano, Torino, and Genova, these three Northern
cities had overtaken as early as 1901, and had total population nearly twice as
large by 1961. Modern urbanization was primarily a phenomenon of the North,
rather than of the South.
Regional Economic Structure

Sectors of the economy differ in the extent to which their location is tied to
natural endowments, influenced by domestic market access, or by foreign mar-
ket access. In this subsection we draw out the structure of the Italian econ-
omy as a whole, and of the regions. Time series on the structure of activity in
the economy come from employment data derived from two main sources: the
industrial census (CI) and the population census (CP). In what follows we use
both, the latter having the advantage of a longer time series.5
The broad picture of the structure of the economy as a whole is as would be
expected. The share of agriculture continues at over 60 percent until 1914 then
declines rapidly to less than 10 percent at present. Manufacturing accounted
for around 17 percent of employment in 1880, rising rather slowly to reach 20
percent by 1940 and peaking at 30 percent in the 1970s. Within manufacturing,
textiles and clothing, footwear, and leather were dominant until the interwar
period. Engineering then becomes the largest sector, overtaking textiles in the
1920s.
Our primary interest is the structure of different regions. We look
sector-by-sector, taking as our measure of location the share of the sector in
total employment in each region. Once again, we organize the data by rank-
ing regions according to their distance from Milano.6 Figure 21.3 illustrates the
location of various industries and the way they change (using CP data), and
Table 21.3 reports elasticities of employment share with respect to distance from
Milano by industry (reporting results for CP and CI).
The sectoral aggregates of agriculture and manufacturing are shown, for
selected years, in Figures 21.3A and 21.3B. As is clear, the share of agriculture
fell in all regions and, as it declined, so a South to North gradient emerged.

Table 21.3 (column 1) reports the elasticity of agriculture’s employment share
with respect to distance from Milano (εCP, εCI), indicating rather little spatial
pattern in 1881, with the gradient only becoming significant in 1911. In con-
trast, the increase in manufacturing’s share of employment was almost entirely
a Northern phenomenon. There is a significant North-South gradient through-
out, and one that increased steadily until the 1960s when distance from Milano
explains 89 percent of the variance, falling back somewhat thereafter.
The two largest activities within manufacturing, textiles and engineering,
are those with the most pronounced North-South gradient. Engineering grows
from a uniformly low level, with most of the growth taking place in the North,
first Liguria and then Lombardia (Figure 21.3D); the elasticity of employment
share with respect to distance from Milano increases steadily, peaking between
1951 and 1961, then falling back somewhat (Table 21.3). In textiles, the overall
employment share is falling, and the decline is spread across all regions except
Veneto and Toscana (at least until 1961, Figure 21.3C). Northern regions had a
strong presence throughout the period, and a significant change is the falling
employment share in the South, in particular the decline of Campania. Other
manufacturing sectors are generally less concentrated in the North than is
manufacturing as a whole. Figure 21.3E illustrates the case of clothing produc-
tion, which does not have a significant North-South gradient and has been in
decline in most regions.
Economic Geography: Analytical Ingredients

In explaining these changing patterns, we draw on traditional endowment-based
trade theory for “natural advantages” and on economic geography for the impli-
cations of domestic and foreign market access. In this subsection we sketch how
these economic geography forces operate in a model of trade and firm location.
In the simplest form of such a model labor is the only factor of production and
there are two sectors. One is a perfectly competitive sector operating under con-
stant returns and free trade which, as shorthand, we call agriculture. The other
is a monopolistically competitive manufacturing sector in which each firm pro-
duces a distinct variety of product, which it sells in all regions. The quantities
sold by a firm depend on costs of production, market size, trade costs to reach
these markets, and the number of competitor firms. Increasing returns to scale
mean that the total sales of each firm must reach a particular level if the firm
is to cover its costs (Dixit and Stiglitz 1977). Industry equilibrium occurs when
the number of firms in each region has adjusted such that all active firms have
reached this scale and therefore make zero profits. The equilibrium distribution
of firms generally involves activity in both sectors in all regions, implying that
intraindustry and interindustry trade occur. Differences in market size or in
606
(a)
(b)
Lo Lo Lo
0
0.02
0.04
0.06
0.08
0.1
(c) 0.12
0
0.1
0
0.1
0.2
0.3
0.4
0.5
0.2
0.3
0.4
0.5
0.6
0.7
0.8
mb mb mb
a ard ard
Pie rdia Pie ia Pie ia
mo
n mo
n
mo
nt
Lig te Lig te Lig e
Em uria ur u
-R Em ia Em ria
o -R -R
Ve m o o
Ve m Ve m
ne ne ne
To to To to To to
sca sca sca
Um na Um na Um na
br b b
M ia M ria M ria
arc arc arc
h h h
La e L e L e
Ab zio Ab azio Ab azio
Textiles
r- r-M r-M
Agriculture
Sa Mol Sa o Sa o
Manufacturing
rd rd l rd l
eg eg
Ca egn
mp a Ca n a Ca n a
mp mp
Ba ania an an
sil
ica Ba ia Ba ia
sil sil
Pu ta ica ica
g Pu ta Pu ta
Ca lia g g
lab Ca lia Ca lia
ri lab lab
Sic a Sic ria Sic ria
ilia ilia ilia
1961
1936
1911
1881
1961
1936
1911
1881
1961
1936
1911
1881
the regional divide
Engineering
(d) 0.18
0.16
0.14
0.12
0.1 1871
0.08
1911
0.06
1936
0.04
1961
0.02
0
ia
Lig e
Em ria
Ve m
To to
Um na
M ria
L e
Ab azio
rd l
na
ia
Pu ta
Ca lia
Sic ria
ilia
o
nt
an
ard
ica
r-M
ne
o
arc
g
sca
eg
u
lab
mo
-R
mp
sil
mb
Pie
Ba
Sa
Ca
Lo
Clothing
(e) 0.1
0.09
0.08
0.07
0.06
1871
0.05
0.04 1911
0.03 1936
0.02 1961
0.01
0
rd l
na
ia
Pu ta
Ca lia
Sic ria
ilia
ia
Lig e
Em ria
Ve m
To to
Um na
M ria
L e
Ab azio
o
nt
an
ard
ica
r-M
ne
o
arc
g
sca
eg
lab
u
b
mo
-R
mp
sil
mb
Pie
Ba
Sa
Ca
Lo
Figure 21.3 Industry employment shares by region. (A) Agriculture. (B) Manufacturing.
(C) Textiles. (D) Engineering. (E) Clothing.
trade costs change the number of manufacturing firms in each location, and a
region with good market access (a large local market or good access to other
markets) tends to have relatively more manufacturing firms and therefore be a
net exporter of manufactures and importer of “agriculture.”
Figure 21.4 gives an example designed to capture the Italian story (equa-
tions are found in the Appendix). There are three regions, North (N), South
(S), and the Rest of the World (R). The market in N is assumed to be 50 per-
cent larger than that in S (because of a larger population), and R has twice
the market size and twice as many firms as N and S combined. Parameters of
the model are set such that, in the initial situation, the distribution of firms
across regions is in proportion to their market sizes. In the simulation illus-
trated, production costs, market size, and the distribution of population and
of the labor force are held constant, thereby switching off several potential
Table 21.3 Elasticity of employment share with respect to distance from Milano (εCI, εCP: CI, Industrial census: CP, Population census:
R2 in brackets)
Agriculture All Manufactures Manufactures Food Manufactures Tobacco Manufactures Textiles Manufactures Clothing
εCP εCI εCP εCI εCP εCI εCP εCI εCP εCI εCP εCI
1871 ... −0.16 −0.06 −0.14 −0.41 −0.06
(0.33) (0.05) (0.02) (0.29) (0.05)
1881 −0.03 −0.19 −0.21 −1.10 −0.53 −0.04
(0.03) (0.36) (0.33) (0.26) (0.38) (0.03)
1901 0.07 −0.30 −0.31 −0.19 −0.83 −0.12
(0.14) (0.61) (0.52) (0.05) (0.66) (0.21)
1911 0.13 −0.34 −0.53 −0.19 0.01 −0.87 0.08 −1.04 −1.72 −0.07 −0.22
(0.26) (0.65) (0.74) (0.21) (0) (0.11) (0.01) (0.63) (0.53) (0.08) (0.39)
1921 0.18 −0.32 −0.25 −0.93 −0.75 −0.07
(0.34) (0.64) (0.32) (0.14) (0.47) (0.13)
1931 0.25 −0.37 −0.24 −0.49 −1.16 −0.04
(0.44) (0.66) (0.29) (0.04) (0.71) (0.03)
1936* 0.24 −0.42 −0.54 −0.35 −0.05 −0.39 −0.35 −0.96 −1.38 −0.06 −0.19
(0.42) (0.64) (0.80) (0.44) (0.02) (0.02) 0.03 (0.70) (0.77) (0.07) (0.48)
1951 0.37 −0.55 −0.65 −0.35 0.01 −0.03 −0.16 −1.58 −1.64 −0.08 −0.23
(0.63) (0.77) (0.87) (0.37) (0) (0) 0.01 (0.80) (0.81) (0.10) (0.59)
1961 0.48 −0.54 −0.72 −0.30 −0.12 0.32 −0.16 −1.21 −1.28 −0.12 −0.34
(0.63) (0.83) (0.89) (0.36) (0.15) (0.04) 0.01 (0.79) (0.80) (0.10) (0.46)
1971 −0.65 −0.17 0.12 −0.97 −0.40
(0.83) (0.26) (0.01) (0.64) (0.27)
Agriculture All Manufactures Manufactures Food Manufactures Tobacco Manufactures Textiles Manufactures Clothing
1981 −0.54 −0.13 0.45 −0.93 −0.46
(0.73) (0.16) (0.18) (0.54) (0.17)
1991 −0.49 −0.11 0.45 −0.89 −0.42
(0.63) (0.13) (0.07) (0.43) (0.11)
2001 −0.44 −0.09 1.53 −0.85 −0.33
(0.48) (0.07) (0.32) (0.33) (0.06)
The CI estimates refer to 1938.
Manufactures Manufactures Manufactures Manufactures Manufactures Manufactures

Furniture Metallurgy Engineering Bricks, Glass Chemicals, Petroleum Other
1871 −0.12 −0.58 −0.09 −0.21 −0.18 −0.81
(0.21) (0.31) (0.14) (0.16) (0.06) (0.44)
1881 −0.10 −0.39 −0.14 −0.20 −0.14 −0.62
(0.12) (0.24) (0.42) (0.14) (0.08) (0.33)
1901 −0.14 −0.34 −0.26 −0.31 −0.51 −0.71
(0.19) (0.32) (0.29) (0.23) (0.45) (0.40)
1911 −0.17 −0.31 −0.59 −1.18 −0.47 −0.70 −0.39 −0.63 −0.35 −0.45 −0.74 −0.89
(0.19) (0.43) (0.40) (0.33) (0.53) (0.61) (0.60 (0.65) (0.19) (0.24) (0.44) (0.50)
1921 −0.18 −0.38 −0.55 −0.31 −0.46 −0.92
(0.25) (0.59) (0.55) (0.25) (0.41) (0.56)
Manufactures Manufactures Manufactures Manufactures Manufactures Manufactures
Furniture Metallurgy Engineering Bricks, Glass Chemicals, Petroleum Other
1931 −0.09 −0.89 −0.55 −0.35 −0.74 −0.96
(0.11) (0.59) (0.68) (0.34) (0.45) (0.62)
1936* −0.04 −0.11 −1.35 −1.04 −0.64 −0.96 −0.48 −0.45 −0.78 −0.92 −1.03 −1.11
(0.02) (0.14) (0.53) (0.22) (0.67) (0.73) (0.50) (0.56) (0.43) (0.44) (0.65) (0.61)
1951 −0.03 −0.20 −1.68 −1.59 −0.78 −1.05 −0.60 −0.53 −1.05 −1.19 −1.09 −1.11
(0.01) (0.47) (0.49) (0.37) (0.81) (0.86) (0.55) (0.59) (0.48) (0.52) (0.62) (0.62)
1961 −0.14 −0.33 −1.37 −1.71 −0.71 −1.09 −0.50 −0.40 −0.99 −1.12 −0.94 −1.02
(0.24) (0.55) (0.64) (0.46) (0.8) (0.88) (0.05) (0.45) (0.67) (0.60) (0.66) (0.68)
1971 −0.37 −1.12 −0.88 −0.25 −0.55 −0.90
(0.34) (0.47) (0.87) (0.21) (0.45) (0.72)
1981 −0.31 −0.81 −0.67 −0.13 −0.34 −0.71
(0.22) (0.39) (0.86) (0.06) (0.27) (0.66)
1991 −0.30 −0.74 −0.62 −0.12 −0.43 −0.67
(0.20) (0.45) (0.82) (0.06) (0.43) (0.72)
2001 −0.19 −0.78 −0.53 −0.10 −0.49 −0.58
(0.06) (0.50) (0.65) (0.03) (0.53) (0.61)
2.0 Opening to R
1.6 Output in N
Output in N, S
1.2
Initial
0.8
Closure:
0.4
Output in S
0.0
1.5 1.7 1.9 2.1 2.3 2.5
External trade cost: cost factor of shipping to R
Figure 21.4 External trade costs and manufacturing location: an example.
agglomeration forces. We simply change external trade costs (horizontal axis),

and show how this changes the equilibrium location of manufacturing firms
(and hence manufacturing output in N and S, vertical axis). In the initial
situation N and S both face the same costs in trading with R (set at trade
cost factor of 1.5 [i.e., tariff equivalent of 50 percent]).7 If external trade costs
increase (by the same amount for N and S), then manufacturing outputs
change according to the solid lines on the figure, with N gaining industry
and S losing industry. The reason is that, although the foreign market access
of firms in both N and S deteriorates, the small domestic market in S means
that the loss of external market is proportionately more serious for its firms.
Labor for the expanding manufacturing sector in N is freed up by contrac-
tion of agriculture there, whereas the mirror image development takes place
in S. Closing the economy therefore accentuates differences in the pattern of
manufacturing location.
What if, from the new high level of external trade costs (illustrated at
trade cost factor of 2.5 [i.e., tariff equivalent 150 percent]) these costs now start
falling, but twice as fast for N as for S? While the solid lines give industrial
location as external trade costs vary equally for N and S, the dashed lines
illustrate equilibrium with external trade costs falling faster for N than for S.
Firms in N and S benefit from better access to R but the effect is larger for N,
and because firms sell to all markets, additional firms in N crowd out firms
in S. The competitive pressure reduces manufacturing output in S, driving it
to zero in the case illustrated. We therefore see that both periods—rising rela-
tive costs of external trade in the earlier period, and opening to Europe (R) in
the later period—have the effect of increasing manufacturing in N and reduc-
ing it in S.
We stress that this is the very simplest “economic geography” model, and
point to a number of important other factors. First, relative wages of regions
were held constant throughout the changes reported in Figure 21.4. If moving
manufacturing from S to N increased wages in N relative to S, then the quan-
tity effects illustrated in Figure 21.4 would be of smaller magnitude, although
qualitatively the same. Furthermore, constant relative wages imply no changes

in international comparative advantage. If, during the final phase, R lost com-
parative advantage in the manufacturing sector (and Italy as a whole gained a
cost advantage), then the final phase changes would be larger than illustrated.
Second, although economic geography makes much of “positive feedback”
effects, they are switched off in the simulation. The example assumes that rel-
ative market sizes are unchanged, although moving manufacturing to N might
be expected to increase its market size; for example, if workers move to N this
would amplify effects, and possibly lead to full agglomeration of manufacturing
in N (Krugman 1991). If there are input-output linkages between firms, then
moving manufacturing has demand and cost linkage effects that amplify effects
and can lead to full agglomeration (Venables 1996). In both of these cases there
may be multiple equilibria and consequent path dependency (an agglomeration,
once established, is hard to dislodge), again amplifying the effects illustrated
(Fujita, Krugman, and Venables 1999). Furthermore, the model sketched only
captures changing locational patterns due to forces operating in the product
market (and hence firms’ domestic and foreign market access). Other clustering
forces also reinforce effects. These include the development of thick markets
for skilled labor, urban agglomeration economies, knowledge spillovers, and the
presence of sunk capital investments.
Causes: External Trade and Regional

Specialization
The broad facts were laid out in the previous section. In this section we make
the case for the story outlined in the introduction, drawing on the facts and
theory established in the previous section.
1861–1890: Natural Advantage

Economic geography forces can work to greatly magnify small initial differ-
ences, as the previous simulation exercise demonstrates. Here we argue that
the North’s slender lead in industrialization during the first decades after uni-
fication can be traced back to natural resource advantages. It is not coal or
metal-bearing ores (so important in other industrialization experiences) that
benefited the North, but rather water abundance: precipitation in the North is
both greater and more evenly distributed through the year.
Relatively abundant water allowed parts of Northern Italy to develop an
intensive agriculture based on heavy inputs of labor, livestock, and capital (e.g.,
irrigation infrastructure), which supported a dense population. An important

role in this system was played by silkworm rearing, which plentiful water favored
in two ways. A direct effect was to facilitate cultivation of the mulberry tree,
the leaves of which are the food of silkworms. In the drier South, an expansion
of silk production would have required irrigated mulberry groves, with high
opportunity costs in terms of displaced citrus groves or vineyards (Federico
1994a, 1994b). In the North, mulberry trees grew “promiscuously,” around the
edges of arable fields. Indirectly, the intensive agriculture possible in a (rela-
tively) wet climate supported a dense population of rural peasant households.
Their cheap labor, space to accommodate silkworms, and geographic concentra-
tion (which lowered transport and transaction costs) were the real advantage of
the North according to Federico. The arid South’s low population densities and
clustering of agricultural workers in urban places were not conducive to this
model of silk production.
In permitting a dense population, water increased the size of local mar-
kets; and it was local rather than national markets that mattered for most
manufacturing. Indeed, it is not at all clear that there was a national market
until the end of the century. Before unification, rugged terrain, poor surface
roads, and the absence of railways meant high overland transport costs, with
internal tariff barriers a further impediment to trade. To be sure, maritime
transport along the coasts was easy, but the sea brought foreign markets as
close as Italian destinations. Moreover, the scope for trade among the Italian
states was constrained by a lack of complementarity; all preunification states
exported agricultural commodities and semiprocessed raw materials, such as
olive oil and raw silk. Zamagni’s (1983) summary of the available evidence indi-
cates that less than 20 percent of “foreign” trade was with other Italian states
on the eve of unification.8
After unification, internal tariff barriers were abolished, a single currency
adopted, and rapid progress made on the construction of a national rail network.
Yet, it was not before the 1880s that Italian markets came to be as well inte-
grated as those of other large European countries, as judged by the dispersion
of grain prices. Federico argues that it was not direct trade links that brought
about price convergence, but “progress in maritime transportation, which
exposed all Italian markets to competition from overseas producers” (Federico
2007b, 312; 2010). Fenoaltea has similarly argued that rail freight rates in Italy
were so expensive that “ . . . coastal locations were more cheaply reached—and,
in the absence of tariff barriers, more cheaply supplied—from northern Europe
by sea than from northern Italy by rail” (Fenoaltea 1983, 78). The available data
on rail traffic confirm the impression of very limited interregional movement
of goods as late as the 1880s. The Italian network had levels of traffic per dollar
of GDP only a quarter to a third of the levels in Austria-Hungary, France, and
Germany.9 Little of this was North-South trade; of all rail shipments into the
North via border crossings, ports, or North-South transit stations, as little as 12
percent came from the South.
In the absence of an accessible national market, one might expect much

of manufacturing to choose non-scale-intensive technologies and to locate
close to centers of consumption. These local markets were dispersed right
across the Italian regions, but were somewhat larger in the North because
of greater population density, ultimately attributable to water. This is just
the pattern that the manufacturing employment data reveal in the 1870s and
1880s. Most industries were organized on an artisanal basis, including wood-
working (carpentry, furniture production, carriage making, and so forth);
clothing and leather goods (tailoring, dressmaking, shoemaking, tanning,
hat- and glove-making, and so forth); food processing (dominated by bakers,
butchers, pasta makers, and the like); and even “engineering” (dominated by
blacksmiths).10 As Table 21.3 illustrates, the Northwest had opened up a slen-
der lead over other regions in these industries, but the North-South gradient
was not at all pronounced.
The case of textiles is different. Parts of the sector were already organized
on a factory basis in the mid-nineteenth century, and employment was much
more concentrated in the Northwest, which had 45–50 percent of the national
total in the 1870s and 1880s.11 The elasticity of employment share with respect
to distance from Milano was as high as −0.5, compared with less than −0.2 for
manufacturing as a whole. Most of this pattern is attributable to silk, in par-
ticular the reeling and throwing of raw silk, which was the dominant textile
branch by employment. Silk differed from other industries in relying on a raw
material that was domestically produced but, because of climatic differences,
was geographically concentrated in the Northwest. Because silk loses significant
weight in processing, the industry was drawn to its sources of supply. Market
access, by contrast, was not an important consideration because the high value
of silk relative to its bulk made even long-distance transport cost effective. A
total of 80 to 90 percent of production was exported, but in this period nei-
ther physical geography nor transport infrastructure gave the Northwest much
advantage in access to foreign markets.
Thus it was water that, indirectly, drew the silk industry to the North. Silk
processing and export, in turn, generated positive spillovers (additional effects,
not contemplated in the previously discussed model) for the future develop-
ment of other manufacturing industry. Italian firms became world leaders in
the design and production of specialized equipment for the industry. Skilled
engineers and craftsmen from these firms were a locally available resource for
further development of the engineering industry. Meanwhile, financial inno-
vation was spurred by circulating capital requirements in silk (because of the
high value of the raw material), numerous banks were founded, in part with
capital from silk producers and merchants, and local and international mercan-
tile networks were developed. Water gave the North an additional advantage:
an inexpensive source of motive power in a land where the absence of domestic
coal supplies rendered steam power prohibitively expensive across the early and
middle decades of the nineteenth century. Textile and other mills were drawn
to dispersed locations in the foothills of the Alps not only for cheap labor and
(in the case of silk) cheaply accessed raw materials, but also for cheap power.
As late as the 1880s, then, Italy remained a congeries of largely local mar-
kets, with manufacturing employment similarly dispersed. The North, particu-
larly the Northwest, was slightly more industrialized because of more abundant
water, which permitted a dense population and larger local markets, favored
silk production and processing, and supplied energy. Subsequent developments
would serve to greatly magnify this difference in initial conditions.12
1890–1950: Domestic Market Access

Three developments beginning in the late nineteenth century progressively
diverted the orientation of the economy toward internal markets. The first was
a rise in the size and integration of the domestic market, relative to foreign, as
development raised incomes above subsistence levels and industrialization cre-
ated new markets for capital goods and intermediate inputs. A decline in the
costs of transport within Italy made this relatively larger market relatively more
accessible. The second was a consequence of the high level of remittances to the
economy; exports were crowded out by these foreign exchange flows, through a
Dutch disease mechanism. Finally, there was a change in commercial policy in
the direction of protection. We treat these in reverse order.
From 1890 to 1950 Italian commercial policy was more protectionist than
before or after. After a period of near free trade postunification, tariffs were
imposed on a number of products in 1878, leading to a lengthy trade war with
France that dramatically curtailed Italian exports (Figure 21.5). They were raised
further and extended to a wider range of goods in 1887. Federico and Tena’s
(1998a) measure of average tariffs rises from 7 percent in 1877 to 17 percent in
1889, falling back somewhat to 13 percent in 1913. Increasing protection culmi-
nated in the Fascist policy of autarchy in the 1930s, embracing tariffs, quotas, and
foreign exchange controls; according to General Agreement on Tariffs and Trade
data average tariff rates went from 17 percent in 1913 to 48 percent in 1931.13
Italian tariffs were not unusually protectionist in comparative perspective,
and their purpose was at least partly fiscal, in that particularly high rates were
imposed on goods without domestic substitutes, such as sugar, coffee, or fuels.14
However, they did help secure the domestic market for important industries.
In the late nineteenth century this meant textiles, especially cotton. Textiles
were Italy’s most important source of factory employment, had significant
political weight, and could portray themselves as the natural expression of a
labor-abundant country’s comparative advantage. Circa 1890, textile tariff rates
had reached nearly 30 percent on average, making the sector one of the most
protected.15 Behind tariff barriers, the industry boomed. The number of cotton
spindles nearly tripled between 1876 and 1900, then doubled again by 1911 before
0.14
0.12
0.10
0.08
textiles
0.06
engineering
0.04 + metals
primary
0.02
total
0
1865
1869
1873
1877
1881
1885
1889
1893
1897
1901
1905
1909
1913
1917
1921
1925
1929
1933
1937
year
Figure 21.5 Export shares in GDP, 1862–1938. Export share calculated using current price
trade and GDP data from Bank of Italy.
growth decelerated; the number of power looms grew even faster (A’Hearn
1998, 737). In higher value-added products Italy long remained a net importer,
and domestic producers continued to depend on protection. Fenoaltea’s (2006,
Chapter 4) estimate is that tariffs increased the size of the cotton textile indus-
try by some 40 percent on the eve of World War I.
In the interwar period, the sector that was becoming important was engi-
neering. High tariffs on iron and steel had initially implied low, even negative,
effective protection for engineering. However, tariff increases on final output in
engineering during this period at last offset those on inputs, so that between
1913 and 1926 effective protection rose from 4 to 24 percent for machinery,
from −4 to +30 percent for office equipment, from 14 to 55 percent for vehicles,
and from 17 to 37 percent for other equipment.16 Nominal tariffs on imported
automobiles and spare parts were as high as 122 to 212 percent from the late
1920s, buttressed by a quota specifying a maximum 3 percent market share for
imports (Fauri 1996, 174). Having also been spurred on by the military demands
of World War I, the rapidly growing engineering industries surpassed textiles as
Italy’s largest sector by employment and value-added during the 1920s.
The domestic orientation of the engineering industries in the interwar
years is suggested by indices of revealed comparative advantage. These show
that Italian exports were much less concentrated in engineering products than
was the case for other countries in 1929.17 More direct evidence is available for
the end of the period. In the early 1950s, as Italy embarked on a process of
European integration, exports amounted to perhaps 8–10 percent of produc-
tion in the engineering industries as a whole, roughly 15 percent in vehicles.
Although less inward-oriented than manufacturing as a whole (for which the
export share probably did not exceed 7 percent), the engineering industries
were still overwhelmingly dependent on domestic markets.18
Italy’s greatest export in the late nineteenth and early twentieth centu-
ries was people. Indirectly, this turned out to be another factor that oriented
the country’s industrial production toward internal markets. Esteves and
Khoudour-Casteras (2011, 10) report emigrant remittances growing to reach as
much as 5.8 percent of GDP around 1910. Together with other capital inflows,
this explains the persistent balance of trade deficits documented by Federico
and Wolf (see Chapter 12), which exceeded 6 percent of GDP on either side
of World War I. Working by a “Dutch disease” mechanism, large remittance
inflows maintained the real exchange rate at levels that rendered Italian exports
less competitive and so contributed to a domestic orientation. Although remit-
tances and foreign lending diminished in the Depression, Mussolini’s 1927 reval-
uation of the lira kept the real exchange rate high.
The third factor tending to orient important industries toward the inter-
nal market was its growing size and accessibility. At the time of unification,
many Italian households were not far from subsistence levels of consumption,
and at the beginning of the period now under discussion, around 1890, almost
two-thirds of private consumption expenditure was for food and drink. Rising
per capita income meant that Italian markets for nonfood manufactures grew
more rapidly than those in the country’s better-off trading partners, even if
Italian GDP per capita was catching up on the West European average only
slowly. Food’s share of private consumption fell from 60.4 to 50.6 percent
between 1911 and 1938, whereas the share of durables, transport, and commu-
nication rose from 4 to 11 percent. Meanwhile, the structural change associated
with modern economic growth increased demand for capital goods more than
proportionately, as investment’s share in GDP rose from values generally less
than 10 percent before 1900 to around 15 percent thereafter.19
This larger domestic market was also becoming relatively more accessi-
ble. Exports left Italy primarily by sea or by rail. Regarding maritime shipping
charges, a best guess is that they evolved along the lines of British tramp ship-
ping rates on Mediterranean routes, which had fallen dramatically between 1870
and 1900 but then showed no significant decrease until as late as 1950.20 Turning
to rail transport, the important connections with the networks of neighbor-
ing countries, notably the Fréjus tunnel with France and the St. Gotthard with
Switzerland, had been made by the mid-1880s, after which improvements were
limited. It is internal transport costs that continued to fall in this period. To be
sure, rail transport remained expensive in the years before World War I because
of a combination of high costs and inept public policy (Fenoaltea 1983). However,
the 1890s saw completion of a host of minor, internal lines that offered substan-
tial savings relative to horse drawn road haulage, and seem to have generated a
high social rate of return. (The main trunk lines, completed by the mid-1880s,
mostly ran along the coasts, outside the Po Valley, and offered little advantage
relative to coastal shipping.) Freight was also carried on urban and extraurban
tram networks, which doubled from 2,260 kilometers in 1888 to 4,030 kilome-
ters in 1909 (Maggi 2009, 40–48).
Internal transport costs were further lowered by the growth of road haul-
age by truck. The number of licensed trucks grew very rapidly, from a mere
200 in 1910 to 17,000 in 1920, and almost 60,000 in 1930. In the interwar years
the first experiments with modern, limited access highways were undertaken
in the North. By 1933, trucking’s share of total freight traffic reached 20 per-
cent, which put so much pressure on revenues of the (now State owned) rail-
roads that the government in 1935 imposed a tax on freight shipped by truck
between destinations also served by rail.21 Such measures did not stop the rise
of road transport, which by 1951 was responsible for more than half of all inter-
nal freight shipment (18.5 billion ton-kilometers, as against 14.1 for the railroads
and 3.5 for coastal shipping) (Pala and Pala 1978, Table XI.2, 364).
The combined impact of these forces can be seen in the trade data for this
period. Exports as a share of GDP, after growing rapidly in the first two decades
after unification and reaching 11 percent in the early 1880s, stagnate over the
several decades to the late 1920s (Figure 21.5). They then decrease dramatically
under the combined effects of the Depression, autarkic policy, and international
sanctions. This performance seems worse when Italy is compared with other
countries. Italy’s share of world trade relative to its share of world income fell
from the world average (unity) in 1880 to 25 percent below the world average
in 1914, 30 percent below in 1938, recovering to unity only in the course of the
1950s. It is worth noting that a recent study of the link between exports and
GDP finds no evidence of export-led growth in the period under discussion.
Before World War I, GDP caused exports, whereas in the interwar years there
was no stable relationship. Only after World War II is there evidence of a causal
role for exports (Pistoresi and Rinaldi 2010).
Figure 21.5 also plots the shares in GDP of exports of primary products
(agriculture, food, and raw materials, SITC 0–4); textiles (SITC 65, including
silk); and metallurgical and engineering products (SITC 66–69, 7).22 Textiles
and primary products are the largest export sectors throughout the period. The
growing engineering industry, which overtook textiles in its employment share
in the 1930s, remains a very small exporter. Although engineering in 1911 has
15 percent of CI industrial employment, it generated exports amounting to less
than half a percent of GDP.
To this point we have shown that developments during this period, particu-
larly in so far as they affect export sectors, made the Italian economy relatively
more inward-oriented, especially although not only in the 1930s. The impli-
cation is that industrial sectors are more likely to cluster in a few locations,
because domestic markets (for both outputs and inputs) are more important
in firms’ location decisions. The elasticities of employment shares with respect
to distance from Milano presented in Table 21.3, show that just such a process
of concentration was taking place from the 1890s to the 1950s. Textile indus-
try employment, already predominant in the Northwest in the 1870s and 1880s
(εCP ≈ −0.5), becomes more and more concentrated there; in 1951 εCP reaches −1.6
in textiles. The alternative CI figures indicate that although peak concentration
was already reached by 1911, there was no tendency toward diffusion before 1951.
Engineering employment also undergoes a pronounced process of concentration
with εCP ≈ −0.1 in the period of relative openness and strengthening to −0.8 in
1951, a trend also evident in the CI data. Very similar patterns are evident in
smaller industries, such as iron and steel, or chemicals. Only clothing and fur-
niture resist the pull of the North, with low levels and no trend in geographic
concentration.
Although relatively closed development favors sectoral clustering, why
should this have occurred in the North rather than the South? After all, Napoli
remained the largest city in Italy until the 1920s. One reason is superior domes-
tic market access. The estimates presented in Figure 21.2 indicate that already
in 1891 the domestic market access of Lombardia and Piemonte was around 50
percent greater than that of Campania, the region with the second highest share
of its labor force in manufacturing. This advantage only grew in the decades
that followed; by 1938, Lombardia’s market access was twice that of Campania.
Another reason is linkages to existing activities. Industrialization was gen-
erating a market for capital equipment and industrial inputs that was con-
centrated in the Northwest by 1890. Furthermore, the new emerging sectors
were more prone to cluster than existing sectors, so would not be deterred by
existing wage differentials. Engineering industries had upstream linkages (e.g.,
to protected domestic iron and steel producers), and downstream linkages to
Italian industrial customers. According to the 1911 input-output matrix reported
in Federico and O’Rourke (2000a), the share of industrial inputs in the value
of output was approximately 34 percent in engineering, compared with only 21
percent in other industries, 16 percent in services, or 6 percent in agriculture.23
An example of these linkages is the Lombard engineering firm Franco Tosi (still
trading today), which started life in the 1870s as a repair workshop for textile
machinery financed in part by the noted cotton industrialist Cantoni, and soon
graduated to construction of boilers and steam engines. By the 1900s the firm
was producing diesel motors, steam turbines, and eventually even submarines.
In addition to domestic market access, natural advantages too continued
to favor the North. Italy lacked coal deposits and was dependent on expensive
imported fuel in heat-intensive industries, such as metallurgy, or where motive
power was required to drive machinery, unless water power was available. Thus,
hydroelectric power was enthusiastically adopted in Italy when it became feasi-
ble. It was the North where regular precipitation combined with mountainous
terrain to yield hydro power potential, Italy’s “white coal” as it was dubbed. A
1940s estimate put the North’s potential at ten times that of the South (Vöchting
1951, 626). In the cotton industry, the capacity of electric motors installed rose
from less than 5,000 horsepower to 73,000 between 1900 and 1911. Electric
power had the crucial advantage of being transmittable over distance, emanci-
pating power users from waterside locations in mountain valleys. Ciccarelli and
Fenoaltea (2010) argue that this was responsible for a growing concentration of
industrial employment in urban centers within the Northwest.
(a)
3 Liguria
Lazio
mean hourly wage, lire
1938
2 1928
1933
Veneto Marche
1 Puglia
0 200 400 600 800 1000

distance from Milan, km
(b)
2.5
Modena
Reggio
Parma Ravenna
Piacenza
2 Cremona Porto Maurizio Sassari
Torino Livorno
Milano Savona Bologna Forli Pesaro Urbino Nuoro
Berg. CuneoGenova Grosseto Foggia
hourly wage, lire
Vercelli
Novara Mantova Firenze Venezia
La Spezia Ferrara
Pavia Bolzano Agrigento
Sondrio Pisa
1.5 Trento
Verona Udine Rieti Frosinone Napoli Catania
Trapani Enna
Varese Viterbo
Aosta Siena Arezzo Macerata Pescara Lecce
Alessandria Reggio C
Rovigo Ascoli Piceno Benevento
Brescia Padova Potenza
Como Roma Palermo
Pistoia Salerno
Bari
Terni Messina
Vicenza
1 Lucca Perugia Catanzaro
Siracusa
Caltanissetta
Chieti
Brindisi Cosenza Ragusa
Ancona Avellino Matera
Cagliari
.5
0 200 400 600 800 1000
distance from Milan, km
Figure 21.6 (A) Regional industrial wages, 1928–1938. (B) Wages of agricultural day
laborers, 1923.
While the benefits of good market access and natural advantage will (in
equilibrium) be offset by higher prices of labor (and perhaps also land), such
wage gaps were not large at this stage. Figure 21.6A displays estimates of
regional mean wages in industry plotted against distance from Milano for the
period 1928–1938.24 It is clear that there is a downward wage gradient, but the
elasticities are around −0.10, implying that doubling the distance from Milano
(say, from Umbria to Basilicata) results in only a 6.7 percent fall in the wage.25
Moreover, there are regions in the Northeast and Center, close to the Industrial
Triangle, with very low wages. Alternative wage data from the national work-
place accident insurance scheme display a pattern that is not dissimilar for ear-
lier years.26 Northwestern wages in industry failed to generate a significant cost
disadvantage for manufacturing firms because of pools of low wage labor in
the countryside in nearby regions. This is evident in the provincial data on
wages for unskilled construction workers (in 1910) and agricultural laborers (in
1923) plotted in Figure 21.6B.27 There are significant wage decreases as distance
from Milano increases, but numerous individual provinces in the Northeast
and Center with wages as low as in the distant Southern and island regions.
Emigration, which became a massive and primarily Southern phenomenon
from the 1890s through the 1920s, also played a role in limiting the emergence
of wage differences, indirectly linking regional labor markets by their connec-
tion with common migrant destinations.
1950 to Present: Foreign Market Access

The period since World War II has seen a reorientation of the economy toward
external markets, in particular those of European Economic Community part-
ners France, Germany, and the Benelux countries. The reorientation took time,
and export growth began from a low postwar start. The ratio of exports to
GDP doubled between 1948 and the early 1960s, and then doubled again by the
late 1970s, reaching 18 percent of GDP. However, the 1870–1930 average (10 per-
cent) was not reached until the late 1960s.
A number of forces were at work, not all in the direction of greater out-
ward orientation. First, the Italian domestic market was growing fast during
the period. Italy’s share of Western European GDP grew from the 11–12 percent
typical of the interwar years to over 15 percent by 1980. Over the same years
GDP per capita converged on the Western European average, rising from 75
percent to 100 percent according to Maddison’s (2001) estimates. Neither did
the evolution of transport costs obviously favor external markets. The salient
development of the first postwar decades was the increasing ascendancy of
road haulage by truck over rail shipment, a dominance that had already begun
to emerge in the 1930s and was facilitated by investment in the Italian road
system. The network of state highways nearly doubled between 1955 and 1975
and was complemented by the new autostrade, which grew from 500 to 5,000
kilometers over the same period (Maggi 2009, Table 2.3, 118). If this lowered
internal transport costs, similar infrastructural development in other European
countries also lowered external costs. In Italy’s export trade, too, road came to
dominate rail by ten to one: 44 versus 4 percent by volume, or 64 versus 4 per-
cent by value.28 Only late in the period, with the spread of container shipping
and air freight, can a change in relative transport costs in favor of distant mar-
kets be discerned.
Working more clearly to orient production toward foreign markets was the
diminished importance of remittances and capital inflows, which no longer
assumed such values as to generate a significant trade deficit. Remittances aver-
aged just 0.4 percent of GNP from 1955 to 1965. Tourism came to be consider-
ably more important, averaging 1.4 percent of GNP over the same decade, but
even the sum of the two was not close to the nearly 6 percent share of remit-
tances just before World War I. Capital inflows, meanwhile, were not consis-
tently positive; when they were, they were smaller than earnings from tourism.29
As a result, the enormous trade deficits that Italy had run from the early 1880s
to the early 1930s, peaking at 6 percent of GDP, dwindled to about 1 percent,
and occasionally gave way to surpluses (see Chapter 12).
The most decisive change was in commercial policy. Early developments were
somewhat ambiguous. As late as 1950 Italy enacted a new tariff offering protec-
tion of about 20 percent for textiles, from 8 to 45 percent for electrical appliances,
and from 20 to 45 percent for vehicles (Clementi 2002, 236). However, the rates
actually enforced were less than these legal maxima from the outset (Fauri 2008).
The record on quantitative import restrictions is similarly complex. Italy removed
quota restrictions for countries in the Organization for European Economic
Cooperation on 99.7 percent of goods by 1952; but the 0.3 percent included auto-
mobiles, of which Italy imported only about six thousand in 1958—fewer than
thirty years earlier, and a tiny share of the national market (Fauri 1996). In part
as a result of continuing protection, Eichengreen (2006, 112) argues that exports
were less significant for Italian industry than for other fast growing countries
in the 1950s. An argument by Ciocca, Filosa, and Rey (1975) similarly maintains
that rapid Italian growth was driven by internal demand until 1958, especially
investment. The 1957 Treaty of Rome inauguration of the Common Market serve
as a salient event to identify a turning point in the process of trade liberaliza-
tion. Average nominal tariffs on manufacturing imports from EC members were
halved from 18 percent (but as high as 30.6 percent for transport equipment) in
1957 to 9 percent in 1962, then eliminated entirely by 1968, while the remaining
intra-EC quotas were also phased out (Pierucci and Ulizzi 1973).
The effects of liberalization are evident in the foreign trade statistics. The
share of exports in Italian GDP rises steadily from 7 percent in 1955 to 12 percent
in 1970 (a value touched only once before in Italian history, in 1876), reaching
20 percent in 1995. Having declined steadily from the late nineteenth century to
the eve of World War II, the ratio of Italy’s share of world trade to its share of
world GDP reversed course from 1950 to 2000, growing from unity to approxi-
mately 1.5 (see Chapter 12). Although levels of export-dependence varied across
industries, all shared in the increase from 1955 to 1970, with the exception of
food processing. Particularly export-oriented in 1970 were motor vehicles (with
exports equal to 35 percent of production); textiles and apparel (30 percent); and
other engineering (26 percent). At the other end of the spectrum were wood-
working and furniture (7 percent) and paper (5 percent).30
In addition to growing relative to income, exports also experienced a geo-

graphic reorientation. Formation of the Common Market had a predictable
effect, causing the shares of the other founding members (France, Germany,
and the Benelux countries) in Italian exports to more than double from 21.2
percent in 1951 to 44.8 percent in 1971, a share they retained two decades later
(Vasta 2010, Table 8, 147). Given that land carriage was the dominant mode of
transport, the impact was felt more in the North than the South. We do not
have direct evidence on the incidence of transport costs from different locations,
but indirect evidence can be inferred from estimates of the effect of distance
on Italian exports. Frattiani and Marchionne (2008) estimate a gravity model
of exports from individual Italian provinces, and find that the elasticity with
respect to distance exceeds unity in all specifications. This means a doubling of
distance (e.g., comparing the distance to the German market from Milano and
from Bari) is associated with a 70 percent fall in predicted exports.
Opening to exports also means opening to imports, so the net regional
impact is, in principle, ambiguous. The North’s proximity to the European
Economic Community means that it is more vulnerable to foreign competition,
whereas the South is protected by its remoteness. It is therefore important that
the North was the location for the industries in which Italy had a comparative
advantage, rather its import-competing industries. Circa 1951, the North’s rela-
tive specialization was strongest in textiles, iron and steel, engineering, chemi-
cals and petroleum, and other manufactures, in all of which either εCP, εCI, or
both, exceeded unity (an arbitrary threshold) in absolute value. In these sectors
could be found most of the industries in which Italy had a revealed compara-
tive advantage in the early postwar decades: metal products, agricultural and
industrial machinery, mechanical and electromechanical equipment, electrical
machinery, cars, textiles, and oil refining.31 As Federico and Wolf (see Chapter
12) note, the story of the economic miracle of the 1950s and 1960s was the rise
of engineering (by that time easily the most important manufacturing sector by
employment) in which all two-digit SITC categories showed an Italian compar-
ative advantage, with motor vehicles the outstanding example.
Specialization along the lines of comparative advantage speeded the pro-
cess of structural change, which in turn made the economy more prone to geo-
graphic concentration. In 1951, agricultural employment was still roughly twice
that in manufacturing, and exceeded 50 percent of the labor force in almost
all of regions of the South and Center. The shift from an agricultural sector
tied to immobile natural resources to a relatively footloose manufacturing sec-
tor inevitably widened the scope for the agglomeration of economic activity.
Within manufacturing, the growing relative importance of engineering, cluster
prone because of its strong linkages with customers, worked in the same direc-
tion. In the Industrial Triangle regions, engineering’s share of CI manufactur-
ing employment grew in the half-century after 1951 from 29 to 47 percent in
Lombardia, from 33 to 55 percent in Piemonte, and from 41 to 56 percent in
Liguria; in the Northeast the increases were 23 to 44 percent in Veneto and 28
to 49 percent in Emilia-Romagna.
While these forces all strengthened concentration in the North, there are
also forces favoring deconcentration. The economic geography model depicted
in Figure 21.4 suggests that opening to international trade weakens centripetal
forces and disperses production, unless offset by asymmetric access to external
markets. In Italy, the balance between these forces seems to have tipped around
1960, following which some deconcentration occurred. Figure 21.7 summarizes
outcomes for manufacturing. The figure plots the elasticity of manufacturing’s
share of employment with respect to distance from Milano, with a larger negative
number indicating greater concentration in North (data from Table 21.3). A signif-
icant North-South gradient in manufacturing specialization is clear throughout,
increasing to maximum (largest negative value) at the beginning of the period
under discussion, in 1951 or 1961, then turning upward. This finding matches the
conclusions of De Robertis (2001), who finds that European integration promoted
dispersion of industrial employment within Italy over the period 1971–1991.
As a measure of the concentration of employment, distance elasticity has
the advantage of explicitly accounting for geography, rather than describing
the distribution of activity across units whose spatial relation to each other
is disregarded. It is worth noting, however, that alternative measures display
the same pattern as Figure 21.7. This is true of the coefficient of variation of
regional employment shares, the Theil index of inequality in the size of regional
manufacturing employment, and the similar Gini index. All indices reveal
increasing concentration to 1951 or 1961 followed by a period of deconcentration
lasting until 1981, beyond which little further change is observed.
Government policy was also working to address the Southern question.
Two important policy initiatives in the South were infrastructure investment
early and the siting of industrial plants later. Infrastructure investment included
significant improvements in the transportation network in the 1950s and 1960s.
From a New Economic Geography perspective, this would be expected to have
an ambiguous effect on industrial location; although it makes the South a bet-
ter location from which to reach national markets in other regions, it simulta-
neously makes the South more vulnerable to competition from those regions.
Policies enacted in the 1950s and 1960s mandating a majority of new invest-
ment by State-owned enterprises to be in Southern locations, and applying both
fiscal incentives and moral suasion to private enterprise to do the same, did
have results. The ILVA steel complex at Taranto, the Alfasud car plant near
Naples, and the petrochemical pole of ENI at Gela in Sicilia, are just a few of
the better-known examples. These efforts do leave traces in our estimates, for
metallurgy, engineering, and the chemical and petroleum industries are those
with the largest change in the North-South specialization gradient. Between
1961 and 2001, the elasticities of employment shares with respect to distance
from Milano (εCI) weaken from −1.71 to −0.79, from −1.09 to −0.55, and from
−1.12 to −0.51, respectively. These can be compared with a smaller change from
−0.72 to −0.45 for manufacturing as a whole.
–.2
Census of population Census of industry

–.4
–.6
–.8
–1
1860 1880 1900 1920 1940 1960 1980 2000
Year
Figure 21.7 Elasticity of manufacturing employment with respect to distance
from Milan.
As during the inward-oriented period that extended through the years of

Fascism, the centripetal force of higher wages in the North remained surpris-
ingly weak. In the earlier phase, we argued that the continuing presence of
low-cost labor in the Northern countryside and the continuing availability of
emigration as an outlet for Southern labor (until the mid-1920s, at least) con-
tributed to this outcome. In the post–World War II era, migration played a
similar role, although it was now internal migration from South to North. Net
South-North migration peaked at over 1 percent per annum in the early 1960s
and remained significant through the 1970s (Brunello, Lupi, and Ordine 2001;
Daveri and Faini 1998). Already in the 1960s there was substantial convergence
of hourly wages in manufacturing, which received a powerful boost when
unions successfully imposed the abolition of regional wage differences based
on local cost of living indices in 1969. In recent studies no large or statistically
significant North-South difference in manufacturing wages can be discerned
in micro data on earnings and occupations (Caponi 2008). Wage equalization
could be offset only partially by the government’s policy of reducing payroll
taxes for employers in the South, so that unit labor costs in the South were
just as high as in the North by the late 1970s (Bodo and Sestito 1991, 59). From
this period on, local labor market conditions in the South ceased to have much
impact on local wage determination (Brunello, Lupi, and Ordine 2001).
Summarizing, the changing pattern of regional economic specialization
since World War II has seen concentration of industrial employment in the
North increasing until the mid-1950s or 1960s, and thereafter declining some-
what. This process has been affected by government policy, labor market insti-
tutions, and other historically contingent features of the Italian economy, such
as industrial districts and organized crime. Yet, the overall path of concentra-
tion and incomplete deconcentration are consistent with a simple new economic
geography model of the effects of an outward opening that favors one region.
Concluding Comments
We have argued that the combination of changing external trade patterns and
internal geography have combined to repeatedly favor the North of Italy, with
the regional concentration of industry increasing steadily until the 1950s or
1960s and declining somewhat thereafter. How does this compare with experi-
ence elsewhere? A pattern of industrial concentration increasing then decreas-
ing with development was found by Williamson (1965) and confirmed by many
authors since. For example, Kim (1995) finds that regional specialization in the
United States increased from 1860 to the turn of the century and fell steadily
from 1930 onward. Two obvious comparator countries for Italy are France and
Spain, which share this pattern, if with somewhat different timing; the period
of maximum concentration may have been the 1930s in both countries, signifi-
cantly earlier than was the case in Italy.32
Italy is distinctive not only in timing, but also in the continuing dominance
of one area of the country. In Spain, the initial concentration of industrial activity
was in Catalonia in the late nineteenth century, but by the mid-twentieth century
separate, new industrial poles had emerged in the Basque Country (Guipuzcoa,
Zaragoza, and Biscay) and at Madrid (Paluzie, Pons, and Tirado 2003). In France
the contrast is even clearer. Combes et al. (2011) show maps of France giving the
distribution of manufacturing and income on a consistent basis for 1860, 1930,
and 2000. The pattern that emerges is of relatively dispersed and fluid distribu-
tions. Of the eighty-seven French departments, twenty-six fell in the top three
categories for share of manufacturing value-added in 1860; sixteen of these were
to the north of Paris and ten to the south; in 1930 seventeen departments were
in these categories, eight north of Paris and nine south; and in 2000 the num-
ber was twenty-eight departments, fourteen north of Paris and fourteen south.
Although Paris and Lyon were dominant throughout there is strong representa-
tion of Northern France (Normandy and Picardie) and other areas as dispersed
as Aquitaine, Provence-Alpes-Cotes-d’Azur, Midi-Pyrenees, and the south of
Rhone-Alpes, with the latter two regions gaining importance by 2000. The dis-
tribution of French value-added per capita shows a marked geographic shift as
dominance of Northern departments in 1860 is replaced by a shift south.
Italy is also distinctive in the consequences of the unequal distribution of
industry for living standards. The cross-regional variation of income per cap-
ita is much larger in Italy than in comparable countries. For example, the ratio
of income at the upper quartile of regions to that at the lower quartile was, in
2001, 1.60 for Italy, compared with 1.45 for Spain or just 1.12 for France.33 This
variability can in turn be traced back to variation in labor force participation,

employment rates, and productivity, all of which contribute to a North-South
gap that has refused to close over recent decades.
Throughout this paper we have focused on the roles of economic geography
and trade in shaping the regional structure of the Italian economy. Although
not denying the importance of other factors, in particular the role of institu-
tions, we have left them to one side of our analysis. However, institutions are
themselves endogenous to economic structure and to trade. International trade
places demands on institutions, and in many cases leads to institutional upgrad-
ing.34 In Italy, internal geography and external trade have systematically placed
the dynamic and the export-oriented sectors of the economy in the North. As a
consequence, the South of Italy now accounts for less than 10 percent of Italian
exports. The legacy is that lack of international exposure weakens the compet-
itive pressure to upgrade institutions and practice in business and in the wider
socioeconomic environment. This is a vicious circle which there seems little
prospect of breaking.
Acknowledgment
This paper is part of the “Italy and the World Economy 1861–2011” project
of the Bank of Italy. Thanks to Seda Koymen for research assistance and to
Francesco Caselli and other participants in the Bank of Italy seminars in Perugia
(December 2010) and Rome (October 2011) for useful comments.
Appendix
Final expenditure on manufactures in each region we take to be constant, Ei, i =
N, S, R. Consumer preferences for varieties of manufactures are CES, so util-
ity function Xi and dual expenditure function Gi, are X j ( ))//
= ∑ ni xij ( σ 1)/ σ
,
∑n (p t )
1− σ i
σ
G j1 i i ij , i, j = N,S,R, where ni is the number of varieties produced
i
in region i, pi is the price of such a variety, xij is the quantity of sales in mar-
ket j of a variety produced in i, tij is the trade cost factor in shipping from i
to j, tij = tji, and σ is the elasticity of substitution between varieties. Demand
for a region i variety in market j is, xij pi− σt i1j σ E j G σj −1 , so the total sales of
a single region i variety across all markets are pi− σ ∑ t i1j− σ E j G σj −1. Firms make
j
zero profits if they sell x units of output. Given exogenous expenditures and
prices (proportional to wages), equilibrium values of ni come from the equa-
⎡ ⎤
1 σ
⎢ t E ⎥
tions, x pi− σ ∑ ⎢
ij j
1− σ ⎥
, i, j = N,S,R. When these equations are satis-
j ⎢
⎢⎣ i
n ( )
∑ i i ij ⎥
p t ⎥
⎦
fied firms in each region each sell the quantity required to break even.
Parameter values: σ = 3: EN = 1.2, ES = 0.8, ER = 4: t NS = 1.25:
Endogenous variables, pR = 1.0, pN = 0.934, pS = 0.920, calculated such that
initial values of ni = Ei.
Simulations vary t NR, tSR, using the equation above for i = N, S, but holding
n R constant at its initial value (Italy small relative to rest of world).
Notes
1. We call this Italy’s misfortune, although conversely Italy has not had the “rustbelt”
problem of declining regions where activity has been based on mining and
associated heavy industry.
2. See the working paper version of this chapter, A’Hearn and Venables (2011), for
more detail.
3. Regional value-added figures for 1891–1951 kindly provided by Emanuele Felice.
These are updates of the estimates in Felice (2005a, 2005b, 2007). The estimates
for 1961–2001 are from the CRENOS database.
4. In this and other bivariate regressions with sixteen regions the 5 percent
significance level corresponds to an R 2 = 0.25.
5. The CP data are problematic in that respondents reported occupation, rather than
employment. Thus, unemployed, seasonally employed, and otherwise marginal
workers are included.
6. Figures report employment shares of each sector in each region (i.e., esit/Σsesit,
where esit is employment in sector s in region i at date t, and regressions are
on the same variable). Notice that results would be unchanged if we used the
double relative measure, R sit = (esit/Σsesit)/(Σiesit,/Σi Σse sit,), which would represent
specialization in sector s, relative to the national average, because the denominator
is constant in a cross-region regression.
7. Initially N has 50 percent more firms than S, hence the vertical axis levels of
output of 1.2 and 0.8.
8. The Northern economies were more trade intensive; Piemonte and Lombardia,
with about a quarter of Italian population, had half of Italian trade. Pescosolido
(1998, 99) reports exports on a per capita basis that range from twenty-four lire for
the mainland South to eighty-eight lire in Piemonte in the 1850s.
9. Traffic units are the sum of freight ton-kilometers and passenger-kilometers; data
are from Schram (1997, 71). GDP data are from Maddison (2001).
10. Engineering is meccanica in Italian. The sector includes shipbuilders and
manufacturers of machinery, armaments, automobiles, aircraft, locomotives, and
household appliances; but also blacksmiths, who predominated in employment in

the early decades.
11. Textile employment figures are affected by massive overcounting of women,
especially in the South. We follow Fenoaltea (2003) and Ciccarelli and Fenoaltea
(2010) and adjust female employment in textiles to be no greater than four times
male employment in the region.
12. Other Italian regions too had natural advantages. Sicilia had a near world
monopoly on pure sulfur deposits, and the climate of Southern coastal regions
favored citrus and olive cultivation. Assessment of the opportunities afforded by
these alternative endowments is beyond the scope of this study.
13. Federico and Tena (1998a, 93), “UNT” measure for total imports. General
Agreement on Tariffs and Trade estimates are from a 1953 study reported in Irwin
(1993).
14. Sugar tariffs called into being a domestic industry based on sugar-beet cultivation
and refining centered in the Northeast.
15. Federico and Tena (1998a, 93): “RNT” figures for 1889 aggregate product-specific
tariffs using as weights the shares in trade in 1877, before protection was imposed.
Basic iron and steel products actually received the highest rates of protection—
roughly 100 percent for steel plates and pipes.
16. Federico and Tena’s (1998b) estimates of effective protection vary widely according
to aggregation schemes and the input-output matrix used to weight protection
of inputs. The figures presented in the text are based on the 1911 Italian
input-output matrix (Table B2) and an unweighted average across the products of
the engineering industries. The finding of an increase in effective protection for
individual capital-producing industries from 1913 to 1926 is robust.
17. An RCA index value of 0.5 means that a given industry is only half as important
for a country’s exports as for all other countries. Vasta’s (2010, 141) estimates for
engineering range from 0.04 in agricultural equipment to 0.57 for vehicles and
aircraft in 1929. He reports higher estimates for some industries in 1937, but these
are inflated by exports to the colonies.
18. Gomellini and Pianta (2007, Table 4, 410) report ratios of export values to
value-added, a measure that overstates the share of exports in total output. Data in
the 1938 CI (Vol. 3, Table 15) indicate that VA was 44 percent of the value of output
in the meccanica industries. On this basis, using a round figure of one-half, we
double VA to estimate the value of output. This amounts to halving Gomellini and
Pianta’s figures. We apply the same coefficient to manufacturing as a whole.
19. Data on private consumption are from Rey (2002, Table 8, xxiii). Investment
shares are from Toniolo (1998, Table 2.1, 26).
20. Shah and Williamson (2004). The rates considered are nominal rates for coal to
Genoa, grain from the Black Sea, and ore from the Western Mediterranean.
21. Licensed trucks from Maggi (2009, Table 2.2, 106); for estimates of trucking’s
share of freight also see Maggi (2009, 55).
22. The dominance of agricultural exports over much of this period would be clearer
if raw silk were classified as an agricultural product.
23. Engineering here is an average of Federico and O’Rourke’s “military industrial
complex” and “other capital intensive industries” and includes metal-making.
Other industries here are an average of the authors’ textiles and other
categories. The 6 percent figure for agriculture results from aggregating four
subsectors.
24. These data were collected by the employers’ organization Confindustria and refer
to larger than average enterprises. We lack information on the size or sectoral
composition of the sample at the regional level.
25. This gives an elasticity of wages with respect to market access of 0.21 (elasticity of
wage with respect to distance of −0.1, divided by elasticity of market access with
respect to distance of −0.47, Table 2). This compares with recent international
evidence suggesting an elasticity of around 0.4 (Redding and Venables 2004; Head
and Mayer 2011), and evidence from national data suggesting elasticity of around
0.15 (Head and Mayer 2006).
26. The accident insurance scheme (INAIL) data are daily earnings, rather than
wages, for 1913–1928. The industries participating in the scheme varied over time,
as did the categories of workers who were insured. There is no information at the
regional level on such composition effects. Earnings elasticities with respect to
distance from Milan vary from near zero in 1913 to not quite −0.2 ca. 1920; in the
1920s they average −0.1.
27. The construction wages were published by the Ufficio del Lavoro in 1912 (Salari
ed orari nell’industria edilizia in Italia negli anni 1906–1910), and were kindly
furnished to the authors by Emanuele Felice. The agricultural wage data are from
Arcari (1936) and refer to the hourly wages of adult male day-laborers engaged in
“ordinary” work.
28. Italy, Statistiche dei trasporti, anno 1999 (publ. 2002), Table 6.50, 125, referring to
1998. The same source also gives data on internal freight shipments.
29. Data in current dollars on remittances and earnings from tourism are from
Battilani and Fauri (2008, Table 3.12, 147). Balance of payments and GNP are from
Masera.
30. Figures based on Gomellini and Pianta’s (2007, Table 4, 410) ratios of exports to
value-added, again relying on the assumption that value-added was half the total
value of output.
31. A review of studies of Italian RCA can be found in Vasta (2010), from which these
results are taken (Table 5, 142). Textiles, in the study cited, are aggregated together
with clothing and footwear.
32. For France see Combes et al. (2011), for Spain see Paluzie, Pons, and Tirado
(2002). Identifying the turning point is difficult because of infrequent observations
in the French case. For Spain, there is a sharp drop in concentration indices
between 1929 and 1955. Although there is a change in data sources over the
same interval, Paluzie et al. (2009, 247) believe there was a genuine change in
concentration. After 1955 there is a rise and then renewed fall in concentration,
but the level remains well below that in 1929.
33. Authors’ calculation using data from the Eurostat website. The four French
overseas departments are excluded from the calculation, as are the Spanish
autonomous cities of Ceuta and Melilla.
34. In history, this has been charted by Acemoglu, Johnson, and Robinson (2005b)
who point to the implications of Atlantic trade from 1500 in shaping North
European institutions. In the development context, Rodrik (2002) argues that
many of the benefits of trade liberalization come from the institutional reform
that it engenders; there is some evidence (e.g., Levchenko 2008) that international
trade is associated with a “race to the top” upgrading institutions.
DATA APPENDIX—
ITALY’S NATIONAL
ACCOUNTS (1861–2010)
Alberto Baffigi (Tables A1–A4),

Stephen N. Broadberry, Claire
Giordano, and Francesco Zollino
(Tables A5–A7)
Table of Contents
Supply at current prices (million euros, present-day boundaries) A1

Supply at constant prices (million euros, present-day boundaries) A2
Uses at current prices (million euros, present-day boundaries) A3
Consumption, investments, and balance of payments’ current A4
account (constant prices, million euros, present-day boundaries)
Number of workers (headcount; present-day boundaries) A5
Number of full-time equivalent workers (present-day boundaries) A6
Net capital stock in the total economy (present-day boundaries) A7
Note: For sources, methodologies, and caveats for the use of the data refer to
Chapters 6 and 7. Note that this Data Appendix does not take into account the recent
revisions to the national accounts series for the most recent years undertaken by Istat
(Istat 2011b).
Table A1 Supply at current prices (million euros, present-day boundaries)
Year Value-added: Value-added: Industry Value-added: Total Net Indirect GDP at Imports of Total Supply
Agriculture Services Value-added Taxes Market Goods and
Prices Services (1)
Mining, Construction Total
Manufacturing, Industry
Construction,
Public Utilities
1861 2.056 0.896 0.089 0.985 5.059
1862 2.062 0.864 0.103 0.967 1.230 4.259 0.236 4.494 0.625 5.119
1863 1.995 0.844 0.102 0.946 1.254 4.195 0.236 4.430 0.677 5.107
1864 1.917 0.860 0.101 0.960 1.272 4.149 0.292 4.441 0.744 5.185
1865 2.107 0.852 0.100 0.951 1.325 4.383 0.361 4.744 0.727 5.471
1866 2.160 0.945 0.092 1.037 1.454 4.652 0.403 5.055 0.656 5.711
1867 2.199 0.968 0.088 1.055 1.334 4.588 0.264 4.852 0.607 5.460
1868 2.344 0.960 0.089 1.049 1.403 4.796 0.322 5.118 0.612 5.731
1869 2.197 0.975 0.079 1.054 1.374 4.625 0.305 4.930 0.639 5.569
1870 2.299 0.968 0.082 1.050 1.408 4.758 0.283 5.040 0.612 5.652
1871 2.259 1.005 0.095 1.100 1.416 4.774 0.308 5.082 0.628 5.710
1872 2.394 1.099 0.113 1.212 1.514 5.120 0.311 5.431 0.764 6.195
1873 2.802 1.187 0.131 1.318 1.619 5.738 0.316 6.054 0.815 6.869
1874 2.956 1.090 0.139 1.229 1.666 5.851 0.316 6.166 0.815 6.981
1875 2.289 1.038 0.107 1.144 1.525 4.958 0.344 5.301 0.753 6.054
1876 2.176 1.041 0.098 1.139 1.546 4.860 0.357 5.218 0.807 6.025
1877 2.599 1.165 0.106 1.271 1.621 5.490 0.387 5.877 0.695 6.573
1878 2.633 1.100 0.106 1.206 1.636 5.474 0.375 5.849 0.656 6.505
1879 2.477 0.995 0.104 1.099 1.657 5.232 0.383 5.615 0.777 6.392
1880 2.710 1.029 0.123 1.152 1.724 5.586 0.381 5.968 0.739 6.707
1881 2.562 1.047 0.127 1.174 1.734 5.470 0.408 5.878 0.797 6.675
1882 2.639 1.105 0.144 1.249 1.763 5.651 0.411 6.063 0.800 6.863
1883 2.422 1.056 0.150 1.206 1.776 5.404 0.415 5.819 0.796 6.615
1884 2.213 1.024 0.152 1.175 1.795 5.183 0.451 5.634 0.769 6.403
1885 2.397 1.119 0.165 1.284 1.878 5.559 0.470 6.028 0.874 6.902
1886 2.576 1.193 0.164 1.358 1.968 5.901 0.464 6.366 0.842 7.207
1887 2.357 1.110 0.152 1.262 2.038 5.657 0.487 6.144 0.925 7.069
1888 2.288 1.085 0.154 1.239 2.058 5.585 0.515 6.100 0.675 6.775
1889 2.443 1.140 0.152 1.292 2.103 5.838 0.512 6.350 0.786 7.136
1890 2.714 1.157 0.161 1.318 2.143 6.175 0.488 6.663 0.724 7.386
1891 2.758 1.134 0.161 1.296 2.139 6.192 0.476 6.669 0.597 7.266
1892 2.451 1.087 0.154 1.241 2.128 5.820 0.448 6.267 0.613 6.880
1893 2.394 1.098 0.146 1.245 2.117 5.755 0.452 6.206 0.623 6.829
1894 2.318 1.039 0.145 1.183 2.109 5.610 0.469 6.080 0.607 6.687
1895 2.566 1.095 0.125 1.221 2.185 5.971 0.475 6.446 0.606 7.052
1896 2.558 1.132 0.123 1.255 2.262 6.075 0.491 6.567 0.601 7.168
(continued)
Table A1 Continued
Prices Services (1)
Construction,
Public Utilities
1897 2.576 1.118 0.128 1.245 2.295 6.116 0.478 6.594 0.608 7.202
1898 2.617 1.169 0.131 1.300 2.343 6.260 0.473 6.733 0.718 7.451
1899 2.694 1.292 0.133 1.425 2.387 6.506 0.483 6.989 0.769 7.758
1900 2.773 1.240 0.144 1.384 2.490 6.647 0.517 7.164 0.870 8.034
1901 2.829 1.292 0.159 1.451 2.521 6.802 0.521 7.323 0.884 8.207
1902 2.779 1.295 0.180 1.475 2.567 6.821 0.542 7.363 0.928 8.291
1903 2.937 1.317 0.195 1.512 2.688 7.137 0.544 7.682 1.036 8.718
1904 2.942 1.313 0.203 1.517 2.764 7.223 0.538 7.761 1.006 8.767
1905 3.011 1.447 0.213 1.660 2.886 7.557 0.586 8.143 1.152 9.294
1906 3.316 1.632 0.219 1.850 3.111 8.277 0.653 8.931 1.400 10.330
1907 3.579 1.892 0.241 2.133 3.268 8.980 0.617 9.597 1.609 11.206
1908 3.350 1.878 0.247 2.125 3.417 8.892 0.654 9.546 1.550 11.096
1909 3.425 1.975 0.305 2.280 3.536 9.240 0.689 9.929 1.653 11.582
1910 3.507 2.049 0.361 2.410 3.713 9.630 0.745 10.375 1.741 12.115
1911 4.113 2.181 0.362 2.542 4.035 10.690 0.834 11.524 1.815 13.339
1912 4.203 2.440 0.421 2.861 4.231 11.294 0.834 12.129 1.976 14.105
1913 4.484 2.465 0.446 2.912 4.416 11.812 0.861 12.673 1.945 14.619
1914 4.128 2.295 0.475 2.770 4.291 11.189 0.791 11.980 1.564 13.544
1915 4.622 2.353 0.410 2.764 5.052 12.438 0.882 13.320 2.487 15.806
1916 6.708 3.539 0.304 3.843 6.960 17.510 1.469 18.979 4.430 23.410
1917 9.374 5.548 0.317 5.865 9.897 25.136 1.991 27.127 7.339 34.467
1918 13.735 7.685 0.429 8.114 12.986 34.836 2.453 37.288 8.409 45.697
1919 14.979 7.165 1.030 8.194 14.220 37.394 3.010 40.404 8.601 49.005
1920 22.477 9.816 1.565 11.381 18.984 52.841 4.163 57.005 13.898 70.902
1921 22.185 9.326 2.076 11.403 19.679 53.267 4.215 57.482 10.764 68.247
1922 21.949 11.028 2.719 13.747 20.896 56.592 4.663 61.254 8.497 69.751
1923 22.695 12.592 2.971 15.563 22.915 61.173 5.095 66.268 8.995 75.264
1924 20.779 13.805 3.162 16.968 24.161 61.908 5.479 67.387 10.393 77.780
1925 27.739 17.378 4.052 21.430 28.795 77.965 5.526 83.491 13.644 97.135
1926 30.341 17.890 4.209 22.099 31.103 83.542 5.963 89.505 13.708 103.214
1927 23.707 15.931 3.660 19.591 28.391 71.690 6.922 78.612 10.878 89.490
1928 24.715 16.228 3.524 19.752 28.303 72.770 6.678 79.448 11.594 91.042
1929 24.204 16.709 4.571 21.280 29.035 74.519 6.575 81.094 11.302 92.396
1930 18.211 15.246 4.455 19.700 26.701 64.612 6.724 71.336 9.127 80.463
1931 15.998 12.601 3.352 15.954 24.679 56.631 6.934 63.565 6.162 69.727
(continued)
Table A1 Continued
Prices Services (1)
Construction,
Public Utilities
1932 16.636 10.263 2.950 13.213 23.194 53.043 6.621 59.665 4.232 63.897
1933 13.368 10.484 3.333 13.817 21.140 48.325 6.249 54.574 4.434 59.009
1934 13.269 10.587 3.357 13.945 21.129 48.343 6.303 54.646 3.921 58.567
1935 16.184 11.979 3.125 15.104 22.779 54.067 6.482 60.549 3.953 64.502
1936 15.600 13.694 2.371 16.066 24.269 55.935 6.828 62.763 3.072 65.835
1937 20.679 18.734 2.318 21.052 29.593 71.324 7.691 79.014 7.035 86.050
1938 22.113 21.107 2.403 23.510 31.822 77.446 8.652 86.097 6.193 92.290
1939 24.225 22.980 2.801 25.781 35.219 85.224 9.854 95.078 5.664 100.742
1940 28.683 27.341 3.255 30.596 43.567 102.847 9.797 112.643 6.325 118.968
1941 39.365 28.122 2.975 31.097 52.011 122.473 12.023 134.495 7.968 142.463
1942 60.052 27.672 2.965 30.637 62.806 153.495 14.062 167.557 8.828 176.385
1943 92.922 35.423 3.626 39.049 82.059 214.031 14.428 228.458 4.443 232.902
1944 224.212 57.898 5.564 63.462 143.442 431.117 15.934 447.050 4.743 451.793
1945 380.662 115.176 16.188 131.363 274.529 786.554 42.436 828.990 4.741 833.731
1946 737.180 398.307 88.814 487.122 523.524 1747.827 111.899 1859.725 34.943 1894.668
1947 1230.290 932.423 144.726 1077.149 1030.704 3338.143 258.490 3596.633 4.773 3601.406
1948 1295.730 1074.655 172.296 1246.951 1267.639 3810.321 423.961 4234.282 320.637 4554.919
1949 1190.981 1145.549 171.657 1317.206 1430.552 3938.739 535.668 4474.407 357.107 4831.514
1950 1296.767 1271.600 208.557 1480.158 1658.224 4435.148 626.628 5061.777 203.879 5265.655
1951 1358.431 1605.698 268.195 1873.893 2023.503 5255.827 755.243 6011.070 758.918 6769.988
1952 1362.814 1655.182 328.362 1983.545 2303.654 5650.013 845.727 6495.740 821.852 7317.592
1953 1557.057 1772.423 391.938 2164.362 2546.965 6268.383 939.951 7208.334 867.893 8076.227
1954 1507.318 1902.592 453.300 2355.892 2775.563 6638.772 1065.153 7703.925 858.759 8562.684
1955 1617.274 2077.830 533.259 2611.089 3139.719 7368.082 1133.594 8501.677 954.872 9456.549
1956 1654.581 2243.102 578.804 2821.906 3548.873 8025.360 1254.605 9279.965 1116.987 10396.952
1957 1650.584 2440.844 663.481 3104.326 3920.852 8675.761 1310.434 9986.195 1302.030 11288.225
1958 1827.442 2590.336 732.794 3323.131 4260.273 9410.845 1348.822 10759.667 1183.119 11942.786
1959 1753.919 2831.244 791.863 3623.107 4671.419 10048.445 1400.893 11449.339 1236.950 12686.289
1960 1661.303 3228.872 874.802 4103.673 5194.928 10959.905 1503.951 12463.856 1686.601 14150.457
1961 1909.400 3643.272 979.479 4622.751 5745.782 12277.933 1728.396 14006.330 1883.937 15890.267
1962 2083.888 4099.459 1181.725 5281.184 6543.701 13908.773 1826.793 15735.566 2183.167 17918.733
1963 2203.123 4757.371 1389.279 6146.650 7729.904 16079.677 2019.101 18098.778 2704.037 20802.816
1964 2328.460 5104.243 1600.914 6705.156 8742.470 17776.086 2137.207 19913.294 2618.452 22531.745
1965 2453.545 5409.819 1656.653 7066.472 9742.978 19262.995 2212.399 21475.394 2674.924 24150.318
1966 2530.925 5993.553 1728.398 7721.952 10843.435 21096.312 2339.231 23435.543 3093.085 26528.628
(continued)
Table A1 Continued
Prices Services (1)
Construction,
Public Utilities
1967 2755.039 6676.989 1946.824 8623.814 11997.059 23375.912 2636.799 26012.711 3503.969 29516.680
1968 2597.229 7376.327 2200.206 9576.533 13410.081 25583.843 2645.382 28229.225 3726.398 31955.623
1969 2856.663 8224.904 2604.146 10829.050 14764.747 28450.460 2755.866 31206.327 4503.348 35709.674
1970 2877.780 9664.850 2977.480 12642.330 16743.330 32263.440 3004.000 35267.440 5483.300 40750.740
1971 2970.100 10401.280 3112.790 13514.070 18871.290 35355.460 3131.000 38486.460 5936.000 44422.460
1972 2969.770 11305.150 3295.750 14600.900 21434.080 39004.750 3150.000 42154.750 6806.000 48960.750
1973 3831.180 14188.640 4080.110 18268.750 25155.290 47255.220 3656.000 50911.220 9518.200 60429.420
1974 4361.200 19058.460 5118.280 24176.740 31497.100 60035.040 4551.000 64586.040 14979.100 79565.140
1975 5296.260 21083.520 6138.280 27221.800 37912.440 70430.500 3545.000 73975.500 14376.200 88351.700
1976 6184.570 28196.420 6666.290 34862.710 46829.170 87876.450 5202.000 93078.450 20490.900 113569.350
1977 7264.230 33549.550 7848.160 41397.710 57565.420 106227.360 6873.000 113100.360 24053.800 137154.160
1978 8366.590 38615.460 9044.170 47659.630 69225.590 125251.810 7796.000 133047.810 27132.100 160179.910
1979 9979.870 47729.820 10693.700 58423.520 85892.220 154295.610 8463.000 162758.610 36131.900 198890.510
1980 11702.290 59345.690 13829.950 73175.640 107122.920 192000.850 11382.000 203382.850 48244.400 251627.250
1981 13189.990 68294.650 17434.720 85729.370 132004.070 230923.430 12709.000 243632.430 59897.400 303529.830
1982 14852.110 78856.480 19518.890 98375.370 158070.770 271298.250 16254.000 287552.250 67018.100 354570.350
1983 17513.840 88142.540 22006.790 110149.330 186001.730 313664.900 21168.000 334832.900 69213.500 404046.400
1984 18193.150 100822.570 24215.480 125038.050 215482.530 358713.730 24117.000 382830.730 85409.100 468239.830
1985 19216.940 111917.610 26265.820 138183.430 245191.430 402591.800 27057.000 429648.800 96272.400 525921.200
1986 20410.750 121085.710 27315.490 148401.200 275840.720 444652.670 30378.000 475030.670 86338.700 561369.370
1987 21456.750 131351.490 28665.280 160016.770 301481.070 482954.590 36696.000 519650.590 95093.000 614743.590
1988 21279.240 143202.440 31105.040 174307.480 335956.360 531543.080 45912.000 577455.080 105397.700 682852.780
1989 22804.080 158598.830 34661.290 193260.120 367471.010 583535.210 50486.000 634021.210 122342.200 756363.410
1990 23179.110 166291.700 39307.140 205598.840 411027.440 639805.390 61546.600 701351.990 133455.600 834807.590
1991 25745.150 173667.660 43147.650 216815.310 452673.630 695234.090 70572.000 765806.090 136349.600 902155.690
1992 26161.560 178527.930 45312.360 223840.290 479710.920 729712.770 75969.000 805681.770 148241.100 953922.870
1993 26095.860 181534.800 44823.230 226358.030 494526.180 746980.070 82778.000 829758.070 151161.300 980919.370
1994 27310.170 194581.070 44155.390 238736.460 522589.470 788636.100 89072.000 877708.100 170669.500 1048377.600
1995 29336.650 212671.680 45063.340 257735.020 559695.000 846766.670 100572.000 947338.670 207818.600 1155157.270
1996 31079.110 221790.710 47615.490 269406.200 599804.310 900289.620 103488.000 1003777.620 201381.600 1205159.220
1997 31213.650 229186.290 47739.400 276925.690 625256.150 933395.490 115371.000 1048766.490 224079.500 1272845.990
1998 30815.060 229974.180 46556.770 276530.950 632025.470 939371.480 151990.000 1091361.480 241285.400 1332646.880
1999 31484.710 232058.190 48007.270 280065.460 661226.910 972777.080 154314.000 1127091.080 254885.800 1381976.880
2000 31198.100 241052.420 51735.720 292788.140 705308.070 1029294.310 161763.000 1191057.310 311107.000 1502164.310
(continued)
Table A1 Continued
Prices Services (1)
Construction,
Public Utilities
2001 31290.870 247035.370 57494.470 304529.840 749843.390 1085664.100 162984.000 1248648.100 321125.200 1569773.300
2002 31414.180 250165.220 61209.600 311374.820 782708.720 1125497.720 169728.000 1295225.720 320776.200 1616001.920
2003 31633.610 248522.430 65676.640 314199.070 818300.040 1164132.720 171221.000 1335353.720 320512.200 1655865.920
2004 32437.850 255623.190 70904.520 326527.710 852777.600 1211743.160 179787.000 1391530.160 342790.600 1734320.760
2005 30420.860 256370.500 74845.200 331215.700 879550.700 1241187.260 188292.000 1429479.260 371907.500 1801386.760
2006 31060.670 267481.630 77705.010 345186.640 903129.030 1279376.340 206001.000 1485377.340 424216.300 1909593.640
2007 31120.870 283201.680 81399.160 364600.840 938759.680 1334481.390 211696.000 1546177.390 451936.200 1998113.590
2008 31394.310 282706.120 83602.630 366308.750 969078.800 1366781.860 200979.500 1567761.360 461272.600 2029033.960
2009 30709.990 250130.190 82447.850 332578.040 968790.200 1332078.230 187624.000 1519702.230 368681.800 1888384.030
2010 29682.100 258162.050 80354.180 338516.230 980986.840 1349185.170 199631.000 1548816.170 442162.800 1990978.970
(1) Imports of goods and services are obtained by interpolating estimates for 1871 by Baffigi et al. (2011); for 1891, 1911, 1938, and 1951 by Rey (2002); and for 1970 by Rey et al. (2011).
Table A2 Supply at constant prices (million euros, present-day boundaries) (1)
Year 1861–1911 at 1911 Prices
Value-added: Value-added: Industry Value-added: Total Net Indirect GDP At Imports (2) Total Supply
Agriculture Services Value-added Taxes Market
Industry Constructions Total
Prices
Including Industry
Energy
1861 2.421 0.665 0.151 0.816 1.881 5.118 0.285 5.404 0.427 5.831
1862 2.494 0.658 0.172 0.829 1.911 5.234 0.277 5.511 0.430 5.941
1863 2.570 0.665 0.178 0.843 1.965 5.378 0.304 5.682 0.464 6.146
1864 2.509 0.669 0.175 0.844 2.001 5.354 0.380 5.734 0.512 6.246
1865 2.679 0.688 0.176 0.865 2.071 5.615 0.511 6.125 0.495 6.621
1866 2.759 0.694 0.151 0.845 2.091 5.695 0.469 6.164 0.467 6.631
1867 2.529 0.696 0.138 0.834 1.994 5.356 0.325 5.681 0.440 6.121
1868 2.570 0.692 0.136 0.828 2.024 5.423 0.386 5.809 0.439 6.248
1869 2.646 0.710 0.133 0.844 2.061 5.550 0.359 5.909 0.460 6.369
1870 2.807 0.729 0.140 0.869 2.091 5.768 0.340 6.108 0.441 6.549
1871 2.675 0.741 0.145 0.886 2.080 5.641 0.369 6.009 0.469 6.478
1872 2.601 0.759 0.155 0.914 2.098 5.612 0.300 5.913 0.523 6.436
1873 2.560 0.781 0.171 0.952 2.117 5.628 0.287 5.916 0.531 6.447
1874 2.793 0.792 0.177 0.969 2.177 5.938 0.316 6.255 0.567 6.821
1875 2.739 0.795 0.154 0.949 2.213 5.901 0.405 6.307 0.573 6.879
(continued)
Table A2 Continued
Value-added: Value-added: Industry Value-added: Total Net Indirect GDP At Imports (2) Total Supply
Prices
Including Industry
Energy
1876 2.603 0.809 0.150 0.959 2.229 5.791 0.396 6.186 0.595 6.781
1877 2.641 0.818 0.154 0.972 2.252 5.865 0.416 6.281 0.563 6.844
1878 2.822 0.834 0.157 0.991 2.277 6.090 0.394 6.484 0.592 7.076
1879 2.814 0.836 0.161 0.996 2.321 6.131 0.409 6.539 0.687 7.227
1880 2.875 0.863 0.173 1.035 2.364 6.275 0.408 6.683 0.628 7.311
1881 2.931 0.912 0.179 1.091 2.421 6.443 0.450 6.893 0.714 7.607
1882 2.983 0.937 0.203 1.140 2.458 6.582 0.452 7.034 0.744 7.778
1883 3.004 0.970 0.216 1.186 2.497 6.686 0.463 7.149 0.781 7.930
1884 2.828 1.001 0.222 1.223 2.523 6.574 0.517 7.092 0.795 7.886
1885 2.911 1.038 0.227 1.266 2.562 6.739 0.527 7.265 0.960 8.225
1886 3.062 1.081 0.232 1.313 2.622 6.998 0.491 7.488 0.943 8.432
1887 3.097 1.121 0.228 1.348 2.703 7.149 0.570 7.718 1.058 8.776
1888 3.039 1.132 0.229 1.360 2.706 7.105 0.629 7.734 0.746 8.480
1889 2.900 1.118 0.220 1.338 2.717 6.955 0.583 7.538 0.851 8.389
1890 3.019 1.125 0.218 1.344 2.724 7.086 0.525 7.611 0.774 8.385
1891 3.175 1.115 0.214 1.329 2.742 7.246 0.511 7.757 0.669 8.426
1892 3.177 1.105 0.203 1.308 2.811 7.296 0.519 7.815 0.706 8.521
1893 3.286 1.126 0.195 1.321 2.859 7.467 0.519 7.986 0.724 8.710
1894 3.300 1.160 0.195 1.355 2.873 7.527 0.561 8.088 0.750 8.837
1895 3.369 1.192 0.168 1.360 2.923 7.653 0.548 8.201 0.765 8.967
1896 3.414 1.217 0.160 1.377 2.995 7.786 0.579 8.365 0.749 9.114
1897 3.423 1.250 0.162 1.412 3.024 7.860 0.567 8.426 0.760 9.187
1898 3.425 1.294 0.161 1.455 3.052 7.932 0.523 8.455 0.860 9.315
1899 3.426 1.357 0.163 1.520 3.104 8.050 0.542 8.593 0.894 9.487
1900 3.532 1.381 0.168 1.549 3.206 8.287 0.594 8.881 0.903 9.784
1901 3.598 1.415 0.177 1.592 3.261 8.450 0.614 9.063 0.988 10.051
1902 3.657 1.460 0.191 1.651 3.321 8.629 0.654 9.283 1.078 10.361
1903 3.732 1.518 0.201 1.719 3.378 8.829 0.621 9.450 1.190 10.640
1904 3.857 1.577 0.210 1.787 3.419 9.064 0.619 9.683 1.098 10.781
1905 3.927 1.666 0.224 1.891 3.486 9.303 0.670 9.973 1.295 11.268
1906 4.009 1.790 0.239 2.029 3.622 9.660 0.730 10.391 1.458 11.849
1907 4.157 1.903 0.252 2.154 3.699 10.010 0.656 10.666 1.608 12.273
1908 4.145 2.019 0.267 2.286 3.814 10.245 0.737 10.982 1.609 12.590
1909 4.144 2.097 0.305 2.402 3.876 10.421 0.745 11.166 1.700 12.867
1910 4.053 2.160 0.343 2.502 3.935 10.491 0.784 11.275 1.746 13.021
1911 4.113 2.181 0.362 2.542 4.035 10.690 0.834 11.524 1.815 13.339
(continued)
Table A2 Continued
1911–1951 at 1938 Prices
Year Value-added: Value-added: Industry Value-added: Total Net Indirect GDP at Imports (2) Total Supply
Prices
Including Industry
Energy
1911 18.101 12.016 1.505 13.522 21.108 52.730 4.183 56.914 7.636 64.550
1912 17.580 12.642 1.689 14.331 21.422 53.333 4.080 57.413 8.145 65.558
1913 19.768 12.577 1.768 14.345 22.006 56.118 4.287 60.405 8.001 68.406
1914 18.194 11.861 1.951 13.812 21.254 53.260 3.873 57.134 6.368 63.502
1915 16.658 11.473 1.477 12.950 21.572 51.180 3.873 55.053 7.305 62.358
1916 17.974 12.680 0.850 13.530 23.607 55.111 5.061 60.172 8.106 68.278
1917 17.992 12.531 0.571 13.102 24.022 55.117 5.165 60.281 7.428 67.710
1918 18.483 12.081 0.515 12.596 22.513 53.592 4.751 58.344 7.374 65.717
1919 16.828 10.429 1.148 11.577 22.040 50.445 4.596 55.041 7.425 62.466
1920 17.972 10.986 1.236 12.222 21.881 52.075 4.442 56.517 7.003 63.519
1921 17.682 10.368 1.484 11.852 21.098 50.631 4.235 54.866 6.499 61.366
1922 18.786 11.635 2.240 13.875 22.187 54.848 4.648 59.496 7.206 66.703
1923 20.626 12.991 2.700 15.691 23.649 59.967 5.061 65.028 7.371 72.399
1924 19.768 14.154 2.766 16.920 24.735 61.422 5.371 66.794 7.887 74.680
1925 21.102 16.511 2.751 19.261 26.447 66.810 4.596 71.406 9.014 80.420
1926 21.237 16.482 2.881 19.363 26.636 67.236 4.751 71.987 9.009 80.996
1927 19.368 15.811 2.807 18.618 26.356 64.342 6.301 70.643 8.730 79.373
1928 21.086 17.146 2.854 20.000 27.569 68.654 6.456 75.110 10.142 85.252
1929 21.967 18.291 3.780 22.071 28.273 72.310 6.559 78.869 10.247 89.116
1930 19.650 17.163 3.837 21.000 27.336 67.985 7.179 75.164 9.453 84.617
1931 20.477 15.325 3.102 18.426 27.272 66.176 8.212 74.388 8.072 82.460
1932 22.441 14.275 3.041 17.316 27.947 67.704 8.263 75.968 6.967 82.934
1933 20.368 15.314 3.778 19.092 27.241 66.701 8.367 75.068 8.071 83.139
1934 19.363 15.664 3.961 19.625 27.471 66.459 8.418 74.878 7.249 82.127
1935 21.181 17.416 3.627 21.043 28.456 70.681 8.263 78.944 7.117 86.061
1936 19.296 17.825 2.666 20.491 28.351 68.138 8.005 76.144 4.523 80.666
1937 21.841 20.488 2.422 22.910 30.802 75.553 8.160 83.713 6.663 90.376
1938 22.113 21.107 2.403 23.510 31.822 77.446 8.652 86.097 6.193 92.290
1939 23.276 22.961 2.600 25.561 33.117 81.953 9.530 91.483 5.851 97.335
1940 22.027 23.180 2.614 25.793 34.008 81.828 8.123 89.951 5.409 95.360
1941 21.325 21.694 2.399 24.093 34.585 80.002 8.505 88.508 5.840 94.347
1942 19.053 18.841 2.093 20.934 35.916 75.904 7.750 83.654 5.265 88.920
1943 16.597 14.690 1.635 16.325 32.696 65.618 5.312 70.931 1.835 72.766
1944 16.254 9.325 1.008 10.332 28.045 54.631 2.581 57.212 0.545 57.757
1945 15.399 6.889 0.946 7.835 25.084 48.318 3.015 51.333 0.246 51.579
(continued)
Table A2 Continued
Value-added: Value-added: Industry Value-added: Total Net Indirect GDP at Imports (2) Total Supply
Prices
Including Industry
Energy
1946 18.945 15.106 2.451 17.557 28.278 64.780 4.499 69.279 1.435 70.714
1947 20.160 19.280 2.901 22.181 34.028 76.369 6.199 82.568 0.110 82.678
1948 20.981 20.433 2.752 23.185 35.358 79.524 9.428 88.952 7.040 95.992
1949 22.212 21.860 2.758 24.618 37.557 84.387 12.204 96.592 7.785 104.377
1950 23.103 24.872 3.075 27.947 39.768 90.818 13.898 104.716 4.532 109.249
1951 24.699 28.329 3.375 31.704 42.814 99.217 15.636 114.853 14.248 129.102
1951–1970 at 1963 Prices
Year Value-added: Value-added: Industry Value-added: Total Net Indirect GDP at Imports (2) Total Supply
Prices
Including Industry
Energy
1951 1768.039 1706.970 443.336 2150.306 3768.347 7686.692 1187.578 8874.270 603.433 9477.702
1952 1730.123 1796.988 524.447 2321.434 3989.732 8041.289 1238.162 9279.451 667.163 9946.614
1953 1910.933 1951.604 610.078 2561.681 4216.045 8688.660 1258.901 9947.561 756.396 10703.957
1954 1797.348 2158.914 683.488 2842.401 4395.327 9035.076 1286.174 10321.251 778.039 11099.290
1955 1880.036 2363.356 770.138 3133.494 4686.918 9700.448 1333.135 11033.583 850.215 11883.798
1956 1873.088 2566.650 800.584 3367.233 4946.622 10186.943 1388.075 11575.017 966.475 12541.492
1957 1891.627 2761.755 884.525 3646.279 5246.477 10784.383 1445.180 12229.563 1070.752 13300.315
1958 2093.133 2856.010 961.479 3817.490 5493.632 11404.255 1507.323 12911.578 1107.101 14018.679
1959 2153.576 3191.824 1039.162 4230.986 5863.082 12247.644 1577.845 13825.489 1231.367 15056.856
1960 2039.614 3640.099 1105.808 4745.907 6304.965 13090.486 1725.937 14816.423 1681.551 16497.974
1961 2199.898 4027.769 1189.039 5216.807 6775.863 14192.569 1809.228 16001.796 1918.099 17919.895
1962 2167.520 4443.139 1305.545 5748.684 7243.653 15159.858 1908.291 17068.149 2220.652 19288.801
1963 2203.123 4757.371 1389.279 6146.650 7729.904 16079.677 2019.101 18098.778 2704.037 20802.816
1964 2282.233 4871.820 1399.181 6271.000 8103.591 16656.825 2121.253 18778.078 2553.646 21331.723
1965 2336.034 5171.351 1339.564 6510.915 8549.663 17396.612 2214.005 19610.616 2588.302 22198.919
(continued)
Table A2 Continued
Prices
Including Industry
Energy
1966 2399.355 5683.941 1364.716 7048.657 9129.377 18577.388 2330.234 20907.622 2929.054 23836.676
1967 2564.646 6269.738 1456.321 7726.059 9747.875 20038.580 2477.713 22516.293 3295.962 25812.255
1968 2475.061 6910.979 1601.842 8512.821 10563.283 21551.166 2588.835 24140.001 3526.242 27666.243
1969 2531.130 7424.767 1739.255 9164.021 11278.618 22973.769 2744.062 25717.831 4231.411 29949.242
1970 2484.776 8070.990 1733.695 9804.685 12102.633 24392.093 2888.051 27280.145 4947.490 32227.635
Prices
Including Industry
Energy
1970 20302.564 115509.103 75568.365 176100.570 399687.033 605509.411 109024.383 700634.756 96592.268 797182.098
1971 20186.510 116641.982 71579.141 175231.512 415471.054 616438.947 111159.867 713373.050 99472.438 812923.892
1972 18072.639 124652.843 71716.652 184571.742 434860.359 638931.038 115786.972 739700.206 109366.058 849720.296
1973 19313.845 141847.319 72117.913 204517.661 455799.678 685025.281 122769.845 792410.058 119917.006 913248.380
1974 19767.706 152898.174 75492.162 219029.557 481608.278 725769.950 122417.587 835994.005 123599.608 959984.250
1975 20348.971 144264.185 73137.107 207833.082 479954.910 711072.277 118807.735 818520.043 106108.965 918121.256
1976 19204.397 165830.885 71321.631 230733.674 509386.874 761819.957 127004.295 876842.773 120501.675 993159.882
1977 19250.230 172893.002 70859.012 238394.681 522888.095 782743.184 126266.733 899294.471 122372.339 1016783.472
1978 19469.094 179532.543 72378.189 246783.010 540763.989 808586.500 129157.842 928432.861 129667.224 1054580.915
1979 20619.868 196325.598 74193.691 266660.743 567061.807 858294.590 132945.434 983759.518 145217.962 1128202.861
1980 21477.112 208199.742 76770.631 281532.095 580585.904 890121.917 130762.980 1017502.759 153308.022 1171288.570
1981 21917.912 204486.396 79180.116 279129.811 591406.881 897596.776 131965.489 1026092.777 152068.386 1177465.129
1982 21317.088 201712.020 80621.504 277146.259 600876.402 902039.060 130561.312 1030336.555 151985.875 1181247.890
1983 23220.986 202503.812 80573.756 277985.738 607620.196 913338.892 130268.364 1042383.283 147327.972 1185606.057
1984 22893.100 209423.412 77180.304 283247.713 635629.985 943656.690 132664.064 1076009.072 166218.674 1243341.731
(continued)
Table A2 Continued
Prices
Including Industry
Energy
1985 23035.871 215587.370 75867.261 289036.758 658122.639 970737.204 134962.210 1106116.748 173326.587 1281483.843
1986 23712.888 221183.804 74808.850 294347.222 679481.801 997408.211 141080.577 1137751.314 182541.455 1323896.372
1987 24734.886 230161.163 75167.126 304354.589 700294.251 1029650.939 144743.619 1174067.907 204507.649 1384157.477
1988 24369.236 245327.288 76980.953 322132.588 726738.860 1073173.900 150193.988 1223312.731 216700.084 1445998.619
1989 24814.048 256448.717 80283.495 336596.016 748665.516 1110223.927 154170.340 1264763.252 235226.496 1506513.248
1990 24506.528 259597.222 82104.097 341356.341 767086.382 1132088.732 158816.918 1290723.507 257879.088 1555900.521
1991 26754.259 259083.840 84026.216 342338.161 779228.100 1148408.545 162774.452 1310519.785 263598.759 1581465.829
1992 27469.569 258517.390 83348.400 341189.072 787899.536 1156664.425 164899.270 1320649.366 281878.860 1608417.721
1993 27290.985 251924.258 78616.404 330327.769 792659.346 1149693.587 158911.744 1308919.139 249053.451 1567244.304
1994 27621.363 268470.455 74250.632 344094.834 804174.594 1175757.082 160680.798 1337085.684 268398.094 1614531.690
1995 28012.935 280272.466 75155.773 357199.415 822936.323 1208066.543 166346.983 1374884.611 293381.191 1677209.006
1996 28433.138 279779.269 76576.122 357861.051 834898.162 1220982.221 168536.890 1389944.810 291931.074 1690784.212
1997 29216.975 282543.586 74926.283 359409.210 851756.456 1240150.276 176125.496 1415968.057 319259.566 1743598.632
1998 29910.275 285191.074 75095.348 362336.183 863330.013 1255418.800 181017.978 1435810.375 349310.467 1792623.278
1999 31707.888 285454.658 75528.547 362966.590 874352.148 1269320.734 187661.799 1456834.649 366408.751 1830006.873
2000 30959.933 295420.530 79078.386 376390.649 909626.392 1316675.264 194148.738 1510638.276 402224.219 1918118.787
2001 30207.601 294648.890 83603.377 379386.946 931095.019 1339981.108 198273.770 1538104.937 409263.695 1952723.873
2002 29285.015 293529.910 85488.298 379833.083 939091.517 1347191.955 198063.555 1545088.707 410204.890 1960695.115
2003 27844.759 285314.576 87509.137 373057.113 942359.332 1341953.935 202914.378 1544827.221 415139.351 1965110.914
2004 31496.618 288059.261 88834.232 377076.513 957312.454 1365606.750 202839.278 1568491.210 432459.523 2005255.862
2005 30105.820 287574.788 90731.480 378328.786 967512.837 1375454.941 203277.084 1578778.497 441462.699 2024059.514
2006 29737.999 296631.015 92333.270 389060.021 984933.059 1403003.862 207859.865 1610922.905 467699.939 2081597.459
2007 29740.230 302191.005 92790.379 395144.458 1001409.987 1425494.746 209381.130 1634800.510 485401.074 2123098.878
2008 30180.329 291820.527 90159.459 382110.194 997051.629 1408775.355 204626.100 1613168.311 463907.444 2080096.027
2009 29440.450 246305.727 83227.580 329409.872 970797.958 1329607.726 199546.416 1529002.303 400262.763 1931364.856
2010 29682.100 258162.050 80354.180 338516.230 980986.840 1349185.170 199631.000 1548816.170 442162.800 1990978.970
(1) Reference years vary across subperiods and, in particular, 1861–1911 is based on 1911 prices; 1911–1951 on 1938 prices; 1951–1970 on 1963 prices; and 1970–2010 on 2010 prices
(see Chapter 6, section 3)
(2) Imports of goods and services are obtained by interpolating estimates for 1871 by Baffigi et al. (2011); for 1891, 1911, 1938, and 1951 by Rey (2002); and for 1970 by Rey et al.
(2011). See endnote 9.
652 appendix
Table A3 Uses at current prices (million euros, present-day boundaries)

Year Consumption Fixed Investments
Constructions
Public Private Total Housing Nonhousing Total
Consumption Consumption Consumption Constructions
1861 0.433 4.062 4.495 0.025 0.115 0.140

1862 0.480 3.973 4.453 0.039 0.135 0.174
1863 0.470 3.938 4.407 0.032 0.139 0.171
1864 0.483 4.016 4.499 0.037 0.137 0.173
1865 0.475 4.293 4.768 0.029 0.140 0.169
1866 0.696 4.292 4.988 0.024 0.121 0.145
1867 0.413 4.336 4.749 0.026 0.095 0.121
1868 0.428 4.533 4.961 0.023 0.099 0.122
1869 0.426 4.388 4.814 0.025 0.085 0.110
1870 0.454 4.478 4.931 0.022 0.096 0.118
1871 0.408 4.402 4.809 0.030 0.102 0.131
1872 0.430 4.667 5.098 0.034 0.131 0.165
1873 0.448 5.155 5.603 0.048 0.154 0.203
1874 0.434 5.279 5.713 0.058 0.165 0.223
1875 0.433 4.503 4.936 0.039 0.124 0.164
1876 0.444 4.422 4.866 0.035 0.114 0.150
1877 0.490 5.027 5.517 0.038 0.124 0.162
1878 0.481 4.932 5.414 0.035 0.124 0.159
1879 0.484 4.828 5.312 0.034 0.125 0.159
1880 0.459 5.061 5.520 0.038 0.144 0.182
1881 0.469 4.985 5.454 0.043 0.146 0.189
1882 0.493 5.073 5.566 0.052 0.171 0.223
1883 0.510 4.874 5.385 0.049 0.186 0.235
1884 0.532 4.681 5.213 0.050 0.189 0.239
1885 0.549 5.131 5.679 0.058 0.196 0.254
1886 0.549 5.437 5.987 0.060 0.199 0.259
1887 0.578 5.239 5.817 0.044 0.197 0.240
appendix 653
Inventory Total Exports of Total Uses

Variation Investments Goods and
Services (1)
Plants, Other Total Fixed
Machinery, Investments Investments
and Transport
Equipment
0.050 0.050 0.240 0.010 0.250 0.313 5.059
0.052 0.052 0.277 0.011 0.288 0.378 5.119
0.052 0.051 0.274 0.011 0.285 0.414 5.107
0.064 0.062 0.299 0.013 0.312 0.374 5.185
0.083 0.075 0.327 0.012 0.339 0.364 5.471
0.088 0.080 0.313 0.009 0.322 0.402 5.711
0.090 0.082 0.293 −0.014 0.279 0.432 5.460
0.092 0.084 0.298 0.009 0.307 0.462 5.731
0.086 0.079 0.274 0.009 0.283 0.472 5.569
0.099 0.088 0.305 −0.034 0.271 0.449 5.652
0.124 0.105 0.360 −0.075 0.285 0.615 5.710
0.160 0.130 0.456 −0.013 0.442 0.656 6.195
0.203 0.160 0.565 0.068 0.633 0.634 6.869
0.241 0.185 0.648 0.072 0.721 0.547 6.981
0.213 0.159 0.536 0.011 0.547 0.571 6.054
0.202 0.147 0.499 −0.007 0.492 0.667 6.025
0.213 0.153 0.528 0.007 0.535 0.521 6.573
0.213 0.150 0.522 −0.027 0.495 0.597 6.505
0.183 0.126 0.468 −0.038 0.430 0.650 6.392
0.218 0.144 0.544 −0.032 0.513 0.674 6.707
0.216 0.136 0.541 −0.015 0.527 0.695 6.675
0.218 0.131 0.573 0.045 0.618 0.678 6.863
0.208 0.120 0.562 −0.004 0.558 0.673 6.615
0.218 0.121 0.577 −0.004 0.574 0.616 6.403
0.212 0.113 0.579 0.023 0.602 0.621 6.902
0.263 0.136 0.657 −0.033 0.624 0.596 7.207
0.229 0.115 0.584 0.051 0.635 0.618 7.069
(continued)
654 appendix
Table A3 Continued
Constructions
1888 0.633 4.945 5.578 0.032 0.208 0.241

1889 0.653 5.289 5.941 0.035 0.200 0.235
1890 0.644 5.575 6.219 0.048 0.202 0.251
1891 0.632 5.604 6.235 0.054 0.193 0.247
1892 0.624 5.258 5.882 0.047 0.176 0.223
1893 0.634 5.178 5.811 0.052 0.153 0.205
1894 0.638 5.006 5.644 0.049 0.151 0.200
1895 0.619 5.325 5.944 0.048 0.110 0.158
1896 0.624 5.389 6.013 0.049 0.097 0.147
1897 0.609 5.476 6.084 0.050 0.099 0.149
1898 0.608 5.675 6.284 0.050 0.098 0.148
1899 0.613 5.649 6.262 0.051 0.102 0.154
1900 0.634 5.650 6.284 0.054 0.114 0.168
1901 0.641 5.923 6.564 0.061 0.122 0.182
1902 0.657 6.006 6.662 0.071 0.141 0.212
1903 0.664 6.325 6.989 0.083 0.150 0.233
1904 0.678 6.215 6.893 0.092 0.157 0.249
1905 0.697 6.422 7.119 0.101 0.176 0.277
1906 0.706 6.812 7.518 0.102 0.209 0.311
1907 0.715 7.323 8.038 0.115 0.245 0.360
1908 0.766 7.335 8.101 0.120 0.269 0.389
1909 0.828 8.044 8.872 0.151 0.353 0.503
1910 0.971 8.300 9.270 0.175 0.410 0.586
1911 1.096 9.277 10.373 0.181 0.453 0.634
1912 1.190 9.829 11.020 0.191 0.476 0.667
1913 1.227 10.262 11.489 0.188 0.470 0.658
1914 1.839 8.862 10.701 0.189 0.496 0.685
appendix 655

Services (1)
and Transport
Equipment
0.302 0.146 0.689 −0.031 0.657 0.540 6.775
0.279 0.131 0.645 0.023 0.668 0.527 7.136
0.258 0.119 0.627 0.038 0.665 0.502 7.386
0.232 0.106 0.586 −0.044 0.542 0.489 7.266
0.196 0.089 0.508 −0.030 0.478 0.520 6.880
0.199 0.089 0.493 −0.020 0.472 0.546 6.829
0.225 0.098 0.523 −0.027 0.496 0.546 6.687
0.252 0.109 0.519 0.041 0.560 0.548 7.052
0.289 0.124 0.560 0.038 0.598 0.557 7.168
0.320 0.134 0.603 −0.068 0.535 0.582 7.202
0.356 0.143 0.647 −0.118 0.530 0.638 7.451
0.414 0.162 0.729 0.006 0.735 0.761 7.758
0.460 0.177 0.806 0.231 1.037 0.714 8.034
0.536 0.204 0.923 −0.017 0.906 0.736 8.207
0.535 0.202 0.949 −0.109 0.840 0.789 8.291
0.542 0.204 0.979 −0.063 0.915 0.814 8.718
0.626 0.228 1.103 −0.092 1.011 0.862 8.767
0.866 0.303 1.446 −0.214 1.232 0.943 9.294
1.076 0.365 1.753 0.009 1.762 1.051 10.330
1.096 0.366 1.821 0.273 2.095 1.073 11.206
0.978 0.325 1.692 0.343 2.035 0.960 11.096
0.955 0.318 1.776 −0.120 1.656 1.053 11.582
0.892 0.301 1.778 −0.117 1.661 1.184 12.115
0.842 0.294 1.770 −0.058 1.712 1.254 13.339
0.783 0.245 1.695 0.020 1.715 1.370 14.105
0.729 0.238 1.626 0.041 1.667 1.463 14.619
0.731 0.235 1.650 −0.073 1.577 1.265 13.544
(continued)
656 appendix
Table A3 Continued
Constructions
1915 5.098 7.962 13.060 0.115 0.464 0.579

1916 9.243 10.968 20.211 0.043 0.374 0.417
1917 13.532 17.144 30.676 0.054 0.371 0.425
1918 17.441 24.326 41.767 0.081 0.479 0.560
1919 14.312 28.044 42.356 0.227 1.085 1.312
1920 10.336 47.775 58.111 0.347 1.649 1.996
1921 12.475 44.302 56.777 0.473 2.138 2.612
1922 9.967 47.393 57.360 0.722 2.570 3.292
1923 7.362 53.730 61.092 0.931 2.558 3.489
1924 7.065 53.907 60.973 1.228 2.384 3.613
1925 7.035 67.898 74.933 1.812 2.699 4.511
1926 7.921 71.964 79.885 1.680 2.898 4.578
1927 7.725 62.883 70.609 1.214 2.675 3.889
1928 7.382 65.097 72.479 1.216 2.446 3.662
1929 7.541 63.307 70.848 1.865 2.866 4.731
1930 7.801 53.390 61.191 2.009 3.250 5.259
1931 8.458 45.543 54.001 1.743 2.786 4.530
1932 8.613 43.211 51.825 1.329 2.548 3.877
1933 8.891 38.632 47.523 1.157 2.713 3.870
1934 8.731 38.282 47.014 1.486 2.789 4.275
1935 10.275 41.413 51.688 2.176 2.817 4.992
1936 14.167 38.650 52.817 2.171 2.673 4.844
1937 15.372 53.907 69.279 1.654 2.430 4.084
1938 15.270 58.899 74.169 1.340 2.188 3.528
1939 17.882 62.631 80.513 1.338 2.823 4.161
1940 21.971 73.072 95.043 1.202 3.645 4.847
1941 26.897 92.796 119.693 0.913 3.553 4.466
appendix 657

Services (1)
and Transport
Equipment
0.810 0.183 1.572 −0.260 1.312 1.435 15.806
0.941 0.116 1.475 −0.039 1.435 1.763 23.410
1.162 0.198 1.785 0.108 1.893 1.898 34.467
1.708 0.169 2.437 −0.425 2.012 1.918 45.697
2.210 0.214 3.736 −0.533 3.203 3.446 49.005
2.616 0.446 5.058 1.149 6.207 6.585 70.902
3.020 0.562 6.194 0.084 6.278 5.191 68.247
3.391 0.880 7.563 −0.436 7.127 5.264 69.751
3.839 1.079 8.407 −0.552 7.855 6.316 75.264
4.575 0.849 9.036 −0.448 8.588 8.219 77.780
5.108 0.975 10.593 1.016 11.610 10.592 97.135
5.470 1.141 11.189 1.141 12.329 10.999 103.214
5.806 0.990 10.685 −1.064 9.621 9.260 89.490
5.859 0.851 10.373 −0.573 9.800 8.764 91.042
5.673 0.800 11.204 1.337 12.542 9.006 92.396
5.376 0.641 11.276 0.731 12.006 7.266 80.463
4.799 0.617 9.946 −0.348 9.597 6.128 69.727
4.051 0.703 8.631 −0.667 7.965 4.107 63.897
3.639 0.676 8.185 −0.365 7.820 3.666 59.009
3.569 0.628 8.471 −0.203 8.268 3.286 58.567
3.930 0.736 9.658 −0.021 9.638 3.176 64.502
4.660 1.081 10.584 −0.949 9.635 3.382 65.835
5.645 0.820 10.549 −0.177 10.372 6.399 86.050
6.800 0.987 11.315 0.344 11.659 6.463 92.290
7.917 1.142 13.220 0.166 13.386 6.843 100.742
8.638 1.223 14.708 0.646 15.354 8.571 118.968
9.118 1.449 15.033 0.134 15.167 7.603 142.463
(continued)
658 appendix
Table A3 Continued
Constructions
1942 37.948 114.001 151.949 0.967 3.619 4.586

1943 60.636 148.419 209.054 1.199 4.372 5.570
1944 88.666 334.402 423.068 2.914 5.673 8.587
1945 145.530 617.088 762.619 9.465 16.987 26.452
1946 305.986 1187.761 1493.747 37.675 104.656 142.331
1947 438.879 2505.732 2944.611 40.826 184.651 225.477
1948 567.404 3184.117 3751.521 69.557 195.737 265.294
1949 510.702 2703.456 3214.157 83.265 196.012 279.276
1950 572.060 3219.710 3791.770 133.692 219.168 352.859
1951 677.075 4185.630 4862.705 182.146 277.849 459.995
1952 766.767 4522.003 5288.770 230.615 331.122 561.737
1953 823.423 4950.693 5774.116 283.700 396.299 679.999
1954 928.496 5137.480 6065.976 359.567 437.527 797.093
1955 1030.642 5592.685 6623.327 459.473 509.960 969.433
1956 1133.350 6072.011 7205.361 529.305 517.302 1046.607
1957 1205.643 6340.243 7545.886 624.690 581.808 1206.498
1958 1376.080 6902.963 8279.043 673.845 687.236 1361.081
1959 1507.983 7260.192 8768.175 746.371 765.351 1511.721
1960 1638.893 7696.898 9335.791 780.605 862.787 1643.392
1961 1818.655 8395.883 10214.538 895.547 957.495 1853.042
1962 2124.895 9316.060 11440.955 1125.148 1078.729 2203.876
1963 2462.662 10191.365 12654.028 1315.575 1123.061 2438.636
1964 3022.210 11841.070 14863.280 1698.694 1315.235 3013.930
1965 3707.705 13570.173 17277.878 1747.712 1449.246 3196.958
1966 3925.154 14567.197 18492.351 1728.442 1505.044 3233.486
1967 4087.593 15526.385 19613.978 1852.950 1681.339 3534.290
1968 4480.541 16394.927 20875.468 2159.212 1847.537 4006.749
appendix 659

Services (1)
and Transport
Equipment
9.659 1.287 15.531 −0.727 14.804 9.632 176.385
13.293 3.097 21.961 −4.141 17.819 6.028 232.902
15.269 5.685 29.542 −7.043 22.498 6.227 451.793
41.962 16.406 84.819 −20.099 64.721 6.392 833.731
201.464 43.317 387.112 −56.633 330.479 70.442 1894.668
312.362 49.664 587.504 62.505 650.009 6.787 3601.406
421.435 51.062 737.791 58.637 796.429 6.969 4554.919
517.117 49.419 845.812 −22.775 823.037 794.319 4831.514
592.979 90.224 1036.062 −25.504 1010.558 463.327 5265.655
664.290 109.782 1234.067 14.150 1248.217 659.066 6769.988
727.493 108.075 1397.305 24.236 1421.542 607.281 7317.592
802.947 106.749 1589.695 8.619 1598.315 703.796 8076.227
869.703 100.777 1767.574 −30.878 1736.695 760.013 8562.684
961.849 99.287 2030.568 −51.381 1979.188 854.034 9456.549
1018.686 95.441 2160.733 36.452 2197.185 994.406 10396.952
1067.876 92.707 2367.081 168.747 2535.827 1206.512 11288.225
1185.231 94.273 2640.585 −208.086 2432.499 1231.244 11942.786
1331.223 99.626 2942.570 −386.209 2556.362 1361.752 12686.289
1487.076 101.224 3231.692 −71.427 3160.265 1654.401 14150.457
1730.624 103.856 3687.522 103.095 3790.617 1885.112 15890.267
1887.876 99.508 4191.260 179.528 4370.788 2106.989 17918.733
1821.115 85.770 4345.522 1488.490 5834.012 2314.775 20802.816
1948.489 82.986 5045.405 −37.366 5008.038 2660.427 22531.745
2102.688 80.567 5380.213 −1694.376 3685.837 3186.603 24150.318
2117.114 73.459 5424.059 −943.144 4480.915 3555.361 26528.628
2237.382 69.638 5841.310 247.710 6089.019 3813.682 29516.680
2482.887 71.141 6560.777 171.670 6732.448 4347.708 31955.623
(continued)
660 appendix
Table A3 Continued
Constructions
1969 4931.485 17947.977 22879.462 2620.731 2221.703 4842.435

1970 5421.117 20596.645 26017.762 2951.932 2479.663 5431.595
1971 6467.049 22545.471 29012.520 3039.495 2525.878 5565.373
1972 7334.117 24803.997 32138.114 3096.489 2807.976 5904.464
1973 8502.971 29979.398 38482.369 3796.829 3536.706 7333.535
1974 10249.207 37644.761 47893.968 4946.679 4654.480 9601.159
1975 12075.068 44268.648 56343.715 5610.512 5543.465 11153.977
1976 14641.187 54759.701 69400.889 6242.416 6322.796 12565.212
1977 18134.853 66211.764 84346.617 7404.995 7662.352 15067.348
1978 22123.948 76255.911 98379.859 8552.491 9016.824 17569.315
1979 27194.943 94029.703 121224.646 10397.724 10523.489 20921.213
1980 34413.008 120058.927 154471.934 13542.021 13648.523 27190.543
1981 44506.131 143931.923 188438.053 16660.015 17790.399 34450.414
1982 52746.083 170373.367 223119.450 18565.998 20147.717 38713.716
1983 62778.990 195918.468 258697.458 22170.090 21898.202 44068.292
1984 70981.049 224328.356 295309.405 24342.561 23689.496 48032.056
1985 80312.919 251650.446 331963.365 25592.029 26615.986 52208.015
1986 87313.219 278285.599 365598.818 25781.831 29409.200 55191.031
1987 99383.241 303125.936 402509.177 26313.186 31362.147 57675.332
1988 112774.233 334081.092 446855.325 28647.236 34716.462 63363.697
1989 122587.008 370043.225 492630.233 31118.482 39002.665 70121.148
1990 141215.958 402051.280 543267.238 35651.121 45010.386 80661.507
1991 154898.682 441526.493 596425.175 39881.860 48433.262 88315.122
1992 161999.974 471886.940 633886.913 42333.080 48722.398 91055.477
1993 165630.100 481889.898 647519.998 42919.383 44212.868 87132.251
1994 168996.896 514382.363 683379.259 43994.096 41705.010 85699.105
1995 170150.973 553298.610 723449.583 45331.574 45962.899 91294.474
appendix 661

Services (1)
and Transport
Equipment
2717.944 69.051 7629.430 194.513 7823.944 5006.269 35709.674
3387.990 75.617 8895.202 264.176 9159.378 5573.600 40750.740
3794.414 168.450 9528.237 −367.697 9160.540 6249.400 44422.460
4076.120 223.733 10204.318 −548.982 9655.336 7167.300 48960.750
5566.680 197.329 13097.544 303.807 13401.351 8545.700 60429.420
7646.462 218.355 17465.976 1736.096 19202.072 12469.100 79565.140
7779.162 260.602 19193.741 −1628.156 17565.585 14442.400 88351.700
10220.101 301.804 23087.117 1636.245 24723.361 19445.100 113569.350
12505.729 350.999 27924.076 −318.033 27606.043 25201.500 137154.160
14012.059 427.547 32008.921 −269.870 31739.051 30061.000 160179.910
17816.440 532.810 39270.462 423.102 39693.564 37972.300 198890.510
24112.088 704.842 52007.473 2359.242 54366.716 42788.600 251627.250
27193.929 940.281 62584.623 −2505.447 60079.177 55012.600 303529.830
29764.529 1118.758 69597.002 −1441.402 68155.600 63295.300 354570.350
31188.460 1276.618 76533.370 −2140.428 74392.942 70956.000 404046.400
37211.521 1635.467 86879.045 2243.880 89122.925 83807.500 468239.830
41515.129 1985.601 95708.745 3708.890 99417.635 94540.200 525921.200
43832.674 3115.247 102138.952 1030.600 103169.552 92601.000 561369.370
50263.237 3806.810 111745.379 3088.733 114834.113 97400.300 614743.590
58347.444 4736.662 126447.803 3758.652 130206.455 105791.000 682852.780
64098.856 4907.335 139127.338 2249.139 141376.477 122356.700 756363.410
68859.983 5200.478 154721.969 1992.284 156714.252 134826.100 834807.590
71733.891 5824.137 165873.149 2758.066 168631.215 137099.300 902155.690
72973.305 6030.163 170058.946 2568.111 172627.057 147408.900 953922.870
63286.507 5891.797 156310.555 242.217 156552.772 176846.600 980919.370
70308.894 6344.141 162352.140 2178.301 164530.441 200467.900 1048377.600
82464.396 6827.167 180586.037 7317.850 187903.887 243803.800 1155157.270
(continued)
662 appendix
Table A3 Continued
Constructions
1996 183261.190 581253.716 764514.906 45694.761 49388.318 95083.079

1997 192080.431 613224.152 805304.583 45868.252 50649.631 96517.883
1998 197669.353 645974.379 843643.732 46315.236 52176.101 98491.337
1999 205468.519 674557.733 880026.252 47573.882 54829.988 102403.870
2000 219728.160 713699.159 933427.319 51365.709 60750.276 112115.985
2001 236857.030 737679.777 974536.807 53051.743 66466.562 119518.306
2002 248782.942 760322.503 1009105.444 56300.784 74871.357 131172.141
2003 262942.018 789025.889 1051967.907 59632.262 78452.656 138084.919
2004 276237.996 815813.681 1092051.677 63608.078 83138.605 146746.684
2005 290817.958 843977.394 1134795.352 70297.177 84003.334 154300.511
2006 299260.007 877443.967 1176703.973 75529.124 85465.941 160995.065
2007 304180.982 907545.720 1211726.702 79066.510 88443.429 167509.939
2008 316570.908 928956.202 1245527.110 80698.519 87355.992 168054.511
2009 326247.956 912300.300 1238548.256 73790.995 81464.823 155255.818
2010 328606.964 934901.945 1263508.909 73603.492 78943.057 152546.549
(1) Exports of goods and services are obtained by interpolating estimates for 1871 by Baffigi et al. (2011);
for 1891, 1911, 1938, and 1951 by Rey (2002); and for 1970 by Rey et al. (2011). See endnote 9.
appendix 663

Services (1)
and Transport
Equipment
86737.104 8331.989 190152.172 2242.542 192394.714 248249.600 1205159.220
93122.431 8738.809 198379.124 4638.583 203017.707 264523.700 1272845.990
102397.863 9660.018 210549.218 3589.930 214139.148 274864.000 1332646.880
108303.284 10591.385 221298.539 4811.289 226109.828 275840.800 1381976.880
118422.688 11489.942 242028.615 4460.876 246489.491 322247.500 1502164.310
122332.867 11926.911 253778.084 3194.909 256972.993 338263.500 1569773.300
126922.033 12794.643 270888.817 2788.458 273677.276 333219.200 1616001.920
121005.919 12685.364 271776.202 4208.711 275984.913 327913.100 1655865.920
126211.878 12509.268 285467.830 3950.953 289418.783 352850.300 1734320.760
129799.050 12275.777 296375.338 −619.729 295755.608 370835.800 1801386.760
139332.228 12997.904 313325.197 7733.270 321058.467 411831.200 1909593.640
146758.362 13639.629 327907.931 10242.157 338150.088 448236.800 1998113.590
143723.958 13728.594 325507.063 7456.787 332963.850 450543.000 2029033.960
121180.066 13243.610 289679.494 −2292.320 287387.174 362448.600 1888384.030
135046.932 13692.232 301285.713 11455.948 312741.661 414728.400 1990978.970
664 appendix
Table A4 Consumption, investments, and balance of payments’ current account

(constant prices, million euros, present-day boundaries) (1)
1861–1911 at 1911 Prices
Construction

Consumption Consumption Consumption Construction
1861 0.636 4.644 5.280 0.035 0.148 0.183
1862 0.701 4.598 5.299 0.053 0.170 0.223
1863 0.698 4.761 5.459 0.045 0.182 0.227
1864 0.722 4.846 5.568 0.051 0.175 0.227
1865 0.718 5.203 5.921 0.042 0.184 0.226
1866 1.029 4.913 5.941 0.032 0.146 0.178
1867 0.599 4.881 5.479 0.032 0.109 0.142
1868 0.613 4.948 5.560 0.027 0.110 0.137
1869 0.636 5.041 5.677 0.033 0.102 0.134
1870 0.669 5.225 5.894 0.028 0.114 0.142
1871 0.591 5.092 5.682 0.035 0.111 0.146
1872 0.541 5.010 5.551 0.036 0.126 0.161
1873 0.546 4.891 5.437 0.049 0.145 0.194
1874 0.532 5.216 5.748 0.057 0.150 0.207
1875 0.542 5.334 5.875 0.043 0.125 0.168
1876 0.558 5.252 5.810 0.040 0.118 0.158
1877 0.513 5.405 5.918 0.041 0.123 0.164
1878 0.498 5.565 6.063 0.039 0.127 0.166
1879 0.512 5.725 6.236 0.037 0.133 0.170
1880 0.487 5.709 6.196 0.040 0.149 0.189
1881 0.481 5.921 6.402 0.046 0.157 0.203
1882 0.504 5.958 6.462 0.057 0.188 0.245
1883 0.521 6.113 6.634 0.056 0.212 0.268
appendix 665
Inventory Total Exports of Total Supply

Services (2)
Plants, Other Investments
Machinery,
and Means
of Transport
Equipment
Total Fixed
Investments
0.045 0.060 0.288 0.010 0.298 0.25317 5.831
0.048 0.062 0.333 0.011 0.343 0.298 5.941
0.047 0.065 0.339 0.011 0.349 0.337 6.146
0.056 0.077 0.359 0.013 0.372 0.306 6.246
0.072 0.093 0.391 0.013 0.403 0.296 6.621
0.075 0.093 0.346 0.009 0.355 0.335 6.631
0.082 0.094 0.318 −0.014 0.303 0.338 6.121
0.087 0.094 0.317 0.009 0.326 0.361 6.248
0.086 0.093 0.313 0.009 0.322 0.370 6.369
0.091 0.106 0.339 −0.035 0.304 0.351 6.549
0.136 0.125 0.406 −0.084 0.322 0.474 6.478
0.177 0.144 0.483 −0.015 0.468 0.417 6.436
0.195 0.155 0.543 0.065 0.608 0.402 6.447
0.230 0.187 0.624 0.070 0.694 0.380 6.821
0.197 0.192 0.557 0.011 0.568 0.436 6.879
0.202 0.180 0.540 −0.008 0.532 0.439 6.781
0.200 0.170 0.533 0.007 0.540 0.386 6.844
0.217 0.174 0.557 −0.029 0.528 0.484 7.076
0.204 0.154 0.528 −0.044 0.485 0.506 7.227
0.250 0.167 0.606 −0.036 0.570 0.545 7.311
0.257 0.165 0.625 −0.017 0.608 0.597 7.607
0.264 0.158 0.666 0.054 0.720 0.596 7.778
0.265 0.153 0.686 −0.005 0.681 0.615 7.930
(continued)
666 appendix
Table A4 Continued
1861–1911 at 1911 Prices
Construction

1884 0.543 6.030 6.573 0.059 0.223 0.282

1885 0.563 6.305 6.867 0.069 0.229 0.297
1886 0.563 6.496 7.059 0.070 0.235 0.305
1887 0.611 6.669 7.280 0.053 0.239 0.292
1888 0.652 6.335 6.987 0.038 0.249 0.287
1889 0.667 6.328 6.995 0.040 0.234 0.274
1890 0.655 6.419 7.074 0.054 0.224 0.277
1891 0.642 6.589 7.232 0.060 0.213 0.273
1892 0.640 6.687 7.327 0.053 0.198 0.252
1893 0.655 6.815 7.470 0.061 0.182 0.243
1894 0.714 6.787 7.501 0.059 0.183 0.242
1895 0.739 6.838 7.577 0.058 0.134 0.192
1896 0.752 6.893 7.646 0.059 0.117 0.177
1897 0.734 7.021 7.755 0.059 0.119 0.179
1898 0.730 7.117 7.847 0.060 0.117 0.176
1899 0.740 6.985 7.725 0.061 0.121 0.181
1900 0.757 6.983 7.740 0.063 0.132 0.195
1901 0.770 7.312 8.081 0.071 0.143 0.215
1902 0.766 7.601 8.366 0.083 0.164 0.247
1903 0.749 7.794 8.543 0.097 0.174 0.270
1904 0.769 7.701 8.470 0.108 0.184 0.292
1905 0.787 7.875 8.662 0.119 0.206 0.325
1906 0.797 7.882 8.679 0.117 0.239 0.355
1907 0.800 8.111 8.911 0.123 0.261 0.384
appendix 667

Services (2)
Machinery,
and Means
of Transport
Equipment
Total Fixed
Investments
0.285 0.159 0.725 −0.005 0.720 0.593 7.886

0.268 0.141 0.707 0.029 0.735 0.623 8.225
0.344 0.165 0.814 −0.041 0.773 0.600 8.432
0.330 0.149 0.770 0.070 0.840 0.656 8.776
0.451 0.191 0.929 −0.045 0.884 0.609 8.480
0.372 0.160 0.806 0.030 0.836 0.558 8.389
0.325 0.140 0.743 0.047 0.790 0.521 8.385
0.305 0.128 0.707 −0.055 0.652 0.543 8.426
0.283 0.118 0.653 −0.042 0.611 0.583 8.521
0.282 0.123 0.648 −0.028 0.620 0.620 8.710
0.331 0.140 0.713 −0.039 0.674 0.662 8.837
0.350 0.146 0.687 0.056 0.743 0.647 8.967
0.391 0.165 0.733 0.050 0.783 0.685 9.114
0.423 0.178 0.780 −0.089 0.691 0.741 9.187
0.441 0.184 0.802 −0.146 0.655 0.812 9.315
0.477 0.204 0.863 0.007 0.870 0.891 9.487
0.515 0.223 0.934 0.265 1.199 0.846 9.784
0.621 0.257 1.093 −0.019 1.074 0.896 10.051
0.668 0.262 1.178 −0.137 1.041 0.954 10.361
0.697 0.257 1.225 −0.080 1.144 0.952 10.640
0.824 0.289 1.405 −0.119 1.286 1.025 10.781
1.071 0.378 1.774 −0.264 1.510 1.096 11.268
1.221 0.428 2.004 0.010 2.014 1.156 11.849
1.164 0.410 1.958 0.293 2.251 1.111 12.273
(continued)
668 appendix
Table A4 Continued
Consumption Fixed Investments
Construction

1908 0.838 8.456 9.294 0.129 0.290 0.418

1909 0.859 9.123 9.982 0.152 0.356 0.508
1910 0.975 9.065 10.039 0.179 0.418 0.597
1911 1.096 9.277 10.373 0.181 0.453 0.634
appendix 669

Services (2)
Machinery,
and Means
of Transport
Equipment
Total Fixed
Investments
1.046 0.380 1.844 0.373 2.218 1.079 12.590

0.967 0.364 1.840 −0.125 1.714 1.170 12.867
0.960 0.331 1.889 −0.126 1.762 1.219 13.021
0.842 0.294 1.770 −0.058 1.712 1.254 13.339
(continued)
670 appendix
Table A4 Continued
Constructions

1911 4.455 46.721 51.176 0.760 2.158 2.917
1912 4.801 47.178 51.979 0.772 2.186 2.958
1913 4.947 49.869 54.816 0.753 2.127 2.880
1914 7.475 43.594 51.069 0.804 2.244 3.048
1915 19.530 32.920 52.450 0.423 1.821 2.245
1916 32.557 27.880 60.437 0.122 1.127 1.249
1917 41.801 20.061 61.862 0.100 0.723 0.824
1918 44.074 17.251 61.325 0.099 0.624 0.723
1919 29.211 26.169 55.381 0.258 1.308 1.567
1920 14.957 38.977 53.934 0.280 1.408 1.688
1921 16.114 36.335 52.449 0.347 1.663 2.009
1922 12.473 44.423 56.895 0.602 2.274 2.876
1923 8.481 52.238 60.719 0.852 2.488 3.341
1924 7.646 53.885 61.531 1.090 2.245 3.335
1925 7.148 58.217 65.366 1.260 1.991 3.251
1926 7.787 58.265 66.052 1.167 2.136 3.304
1927 8.029 56.752 64.781 0.927 2.225 3.152
1928 8.101 61.150 69.251 0.954 2.217 3.172
1929 8.115 61.405 69.520 1.523 2.626 4.149
1930 8.016 57.559 65.575 1.730 3.017 4.747
1931 9.523 55.970 65.494 1.582 2.860 4.442
1932 9.886 58.239 68.126 1.365 2.809 4.174
1933 10.421 57.477 67.898 1.341 3.161 4.502
1934 10.555 55.625 66.180 1.829 3.280 5.109
appendix 671

Services
Machinery,
and
Transport
Equipment
Total Fixed
Investments
4.066 1.472 8.455 −0.281 8.174 5.200 64.550
3.709 1.163 7.830 0.097 7.927 5.652 65.558
3.425 1.150 7.454 0.196 7.650 5.939 68.406
3.464 1.147 7.659 −0.348 7.311 5.122 63.502
2.852 0.742 5.838 −0.939 4.899 5.009 62.358
2.003 0.293 3.545 −0.084 3.461 4.380 68.278
1.618 0.240 2.681 0.147 2.829 3.019 67.710
1.681 0.127 2.530 −0.410 2.120 2.272 65.717
2.374 0.201 4.141 −0.567 3.575 3.511 62.466
2.329 0.360 4.377 1.010 5.388 4.198 63.519
2.614 0.467 5.091 0.071 5.162 3.754 61.366
2.647 0.833 6.355 −0.351 6.004 3.803 66.703
2.939 1.047 7.327 −0.441 6.886 4.794 72.399
3.312 0.849 7.497 −0.340 7.157 5.993 74.680
3.579 0.832 7.662 0.732 8.394 6.660 80.420
3.549 0.926 7.779 0.764 8.543 6.401 80.996
4.681 0.897 8.730 −0.869 7.861 6.731 79.373
5.584 0.797 9.553 −0.546 9.007 6.995 85.252
5.661 0.780 10.590 1.330 11.920 7.676 89.116
5.811 0.700 11.257 0.789 12.046 6.996 84.617
5.313 0.776 10.531 −0.392 10.139 6.827 82.460
5.019 0.974 10.167 −0.831 9.336 5.473 82.934
4.600 1.037 10.138 −0.477 9.662 5.579 83.139
4.627 0.922 10.659 −0.270 10.389 5.558 82.127
(continued)
672 appendix
Table A4 Continued
Constructions

1935 12.421 56.586 69.007 2.556 3.344 5.900

1936 16.432 48.350 64.782 2.452 3.061 5.514
1937 16.111 56.819 72.931 1.735 2.550 4.285
1938 15.270 58.899 74.169 1.340 2.188 3.528
1939 17.062 60.253 77.315 1.261 2.660 3.922
1940 18.715 57.162 75.878 0.938 2.841 3.779
1941 20.638 56.920 77.557 0.672 2.616 3.287
1942 27.304 45.961 73.266 0.648 2.424 3.072
1943 36.796 25.533 62.329 0.507 1.851 2.358
1944 28.097 23.589 51.686 0.334 1.146 1.480
1945 17.823 28.103 45.926 0.346 1.313 1.659
1946 17.107 37.725 54.832 0.874 3.694 4.567
1947 12.923 53.735 66.659 0.644 3.953 4.597
1948 13.636 66.212 79.849 0.923 3.603 4.525
1949 11.476 58.765 70.241 1.142 3.597 4.739
1950 12.518 67.098 79.616 1.809 3.950 5.759
1951 13.846 80.037 93.883 2.092 4.527 6.618
appendix 673

Services
Machinery,
and
Transport
Equipment
Total Fixed
Investments
5.149 1.002 12.050 −0.026 12.024 5.031 86.061

5.533 1.359 12.405 −1.136 11.269 4.615 80.666
6.116 0.856 11.257 −0.192 11.065 6.380 90.376
6.800 0.987 11.315 0.344 11.659 6.463 92.290
7.940 1.098 12.960 0.167 13.127 6.893 97.335
7.139 0.957 11.875 0.533 12.408 7.075 95.360
7.007 0.880 11.174 0.110 11.284 5.505 94.347
6.930 0.511 10.513 −0.481 10.032 5.622 88.920
7.056 0.590 10.004 −1.943 8.061 2.377 72.766
4.885 0.593 6.958 −1.454 5.503 0.568 57.757
4.280 0.925 6.863 −1.490 5.374 0.279 51.579
9.218 1.457 15.242 −2.456 12.787 3.096 70.714
8.483 1.107 14.188 1.657 15.845 0.175 82.678
9.126 1.076 14.727 1.264 15.991 0.152 95.992
11.484 1.084 17.307 −0.505 16.803 17.333 104.377
13.084 1.886 20.729 −0.557 20.171 9.462 109.249
13.217 2.119 21.955 0.283 22.238 12.980 129.102
(continued)
674 appendix
Table A4 Continued
Constructions

1951 1415.111 5988.229 7403.340 263.747 381.712 645.459
1952 1478.312 6226.349 7704.661 328.042 445.501 773.543
1953 1533.319 6605.486 8138.804 400.339 521.982 922.321
1954 1617.856 6678.049 8295.905 486.879 572.765 1059.643
1955 1691.007 7041.088 8732.095 608.285 647.488 1255.773
1956 1758.141 7300.552 9058.693 681.646 639.634 1321.280
1957 1813.343 7489.022 9302.365 785.101 713.194 1498.295
1958 1976.072 8023.725 9999.797 840.752 830.305 1671.057
1959 2118.363 8517.137 10635.500 933.931 920.065 1853.996
1960 2218.277 8956.705 11174.981 952.515 1019.667 1972.182
1961 2326.318 9443.230 11769.548 1046.242 1086.036 2132.277
1962 2468.792 9966.685 12435.477 1223.457 1173.373 2396.830
1963 2462.662 10191.365 12654.028 1315.575 1123.061 2438.636
1964 2787.136 11284.970 14072.105 1532.483 1188.523 2721.006
1965 3191.529 12564.038 15755.568 1585.420 1274.497 2859.917
1966 3255.877 13057.082 16312.959 1551.021 1286.833 2837.854
1967 3308.122 13418.591 16726.714 1600.717 1379.124 2979.842
1968 3493.143 14043.465 17536.608 1823.636 1484.736 3308.372
1969 3684.497 14995.230 18679.727 2039.530 1659.899 3699.429
1970 3871.246 16398.311 20269.557 1996.433 1661.599 3658.032
appendix 675

Services
Machinery,
and
Transport
Equipment
Total Fixed
Investments
730.234 165.299 1540.992 14.727 1555.719 518.643 9477.702
777.103 155.388 1706.034 26.108 1732.143 509.810 9946.614
861.386 148.719 1932.426 9.220 1941.646 623.507 10703.957
966.108 136.585 2162.336 −35.474 2126.862 676.523 11099.290
1074.433 130.180 2460.386 −58.924 2401.462 750.240 11883.798
1123.675 119.211 2564.165 40.626 2604.791 878.007 12541.492
1133.981 112.931 2745.206 182.620 2927.826 1070.124 13300.315
1258.318 112.313 3041.688 −225.694 2815.994 1202.888 14018.679
1461.120 118.787 3433.903 −431.266 3002.638 1418.719 15056.856
1632.448 119.241 3723.871 −79.943 3643.928 1679.064 16497.974
1845.942 117.985 4096.205 110.582 4206.786 1943.561 17919.895
1985.569 107.350 4489.750 189.580 4679.330 2173.994 19288.801
1821.115 85.770 4345.522 1488.490 5834.012 2314.775 20802.816
1923.579 78.719 4723.304 −36.822 4686.482 2573.136 21331.723
2071.702 73.902 5005.521 −1638.674 3366.847 3076.504 22198.919
2045.710 65.125 4948.690 −892.339 4056.351 3467.367 23836.676
2128.486 59.609 5167.937 232.720 5400.658 3684.884 25812.255
2355.512 60.230 5724.114 172.239 5896.352 4233.282 27666.243
2530.227 57.029 6286.684 193.049 6479.733 4789.781 29949.242
2920.196 59.544 6637.772 239.300 6877.072 5081.005 32227.635
(continued)
676 appendix
Table A4 Continued
Constructions

1970 146803.729 399953.339 546440.565 73124.360 64901.648 138476.149
1971 153584.702 415061.548 568040.522 72103.430 62383.547 134972.653
1972 161873.098 428799.544 589484.163 70074.891 66382.824 136825.919
1973 167084.203 453645.217 620176.314 69363.498 70259.698 139897.667
1974 172409.361 467918.786 639745.409 70357.608 73334.626 143888.461
1975 178953.145 469367.017 646497.913 67450.561 72886.295 140398.945
1976 186704.076 490406.807 675268.088 62152.750 69877.673 131971.786
1977 193194.915 505027.573 696105.655 62170.011 71489.316 133521.614
1978 201344.576 518274.151 716751.894 61876.321 73316.650 134947.240
1979 206206.231 553307.615 758198.165 63791.738 71566.471 135327.457
1980 211620.140 586459.091 797900.387 66698.616 71305.268 138143.798
1981 218728.874 595890.393 813844.562 66604.406 72972.391 139667.849
1982 225162.076 601714.681 825573.857 63487.970 71753.007 135302.289
1983 233426.471 600635.733 831606.949 66661.389 69487.894 136322.765
1984 237140.978 618362.164 853405.420 67173.109 68785.232 136164.232
1985 243886.271 636090.636 877826.273 65081.364 70609.820 135796.739
1986 249886.785 661942.158 910096.263 62990.654 75275.920 138233.235
1987 261746.770 686043.107 945634.531 61653.626 76557.529 138116.683
1988 272044.606 714090.455 983935.121 62887.499 79064.744 141837.365
1989 273450.976 742436.229 1014419.084 64560.483 83636.592 148036.892
1990 279868.610 757765.748 1036076.612 67033.144 87872.329 154723.160
1991 285187.889 778459.908 1062135.131 69092.582 87560.919 156518.165
1992 287909.067 791330.940 1077767.629 69898.341 83741.900 153598.633
1993 283495.140 766877.219 1048751.336 68977.654 73264.819 142375.324
appendix 677

Services
Machinery,
and
Transport
Equipment
Total Fixed
Investments
43846.786 1461.538 166761.548 — 166299.139 86101.411 797182.098
46743.592 2749.898 169631.188 — 154738.108 92509.274 812923.892
49772.800 3219.351 175881.281 — 161313.051 100342.971 849720.296
57596.603 2519.159 188370.832 — 187351.027 106353.217 913248.380
59395.404 2468.069 193822.408 — 205056.444 113952.276 959984.250
52640.084 2570.185 181687.942 — 160377.554 115868.676 918121.256
57880.402 2538.982 182651.173 — 187659.508 129720.865 993159.882
60993.153 2525.016 188153.765 — 176210.220 143524.776 1016783.472
61750.599 2707.709 190455.313 — 175321.656 159108.247 1054580.915
70798.531 2918.134 203163.638 — 192718.282 171513.619 1128202.861
79626.359 3183.417 217159.654 — 214183.981 157175.913 1171288.570
75664.579 3579.354 213768.911 — 195730.239 167924.027 1177465.129
72622.749 3808.354 206562.216 — 192407.001 165730.220 1181247.890
69424.522 3866.062 203588.725 — 184706.413 172028.174 1185606.057
75842.980 4523.238 211700.004 — 203151.013 185278.194 1243341.731
77653.541 4908.642 213888.300 — 209800.765 191901.407 1281483.843
79222.978 7106.747 219843.858 — 217419.562 195132.708 1323896.372
87365.765 8165.496 230439.755 — 233161.653 203160.457 1384157.477
97679.608 9335.053 247004.695 — 245564.565 213701.407 1445998.619
102309.567 9353.265 257835.238 — 256339.584 231923.728 1506513.248
106679.352 9502.176 268923.103 — 267013.996 247829.015 1555900.521
108223.005 9604.855 272379.130 — 271981.690 242567.344 1581465.829
107422.589 9363.643 268562.661 — 267551.589 259094.740 1608417.721
89174.214 8689.236 237792.937 — 236283.906 281628.821 1567244.304
(continued)
678 appendix
Table A4 Continued
Constructions

1994 278803.594 778708.432 1056353.112 68112.706 66808.920 135129.929

1995 269703.924 790123.111 1059482.221 68451.651 71363.005 139957.730
1996 271831.109 797628.232 1069144.322 67065.843 74760.042 141904.985
1997 273114.157 823101.858 1096314.085 65499.001 74391.586 139948.458
1998 274145.012 851582.274 1126187.034 64854.218 74754.642 139652.160
1999 277940.909 873472.566 1152006.888 65685.741 77727.465 143436.219
2000 284130.027 894044.421 1178793.355 68707.121 83064.455 151774.624
2001 295308.293 900265.488 1195981.874 69707.925 88725.286 158392.093
2002 302428.423 901993.353 1204727.906 71223.216 96532.668 167671.454
2003 308292.501 910863.327 1219413.201 73655.068 98123.113 171705.497
2004 315131.212 918036.707 1233377.286 75806.502 99689.490 175428.722
2005 321112.385 928660.802 1249961.685 79853.707 96406.140 176214.987
2006 322585.802 940329.542 1263112.435 83114.055 94926.826 178020.719
2007 325505.256 950502.417 1276209.284 83765.967 94877.157 178626.340
2008 327293.482 943108.590 1270533.931 82877.874 90450.423 173332.040
2009 330539.820 925946.892 1256493.399 75237.238 83090.313 158327.150
2010 328607.000 934902.048 1263509.048 73603.500 78943.066 152546.566
(1) Reference years vary across subperiods and, in particular, 1861–1911 is based on 1911 prices; 1911–1951
on 1938 prices; 1951–1970 on 1963 prices; and 1970–2010 on 2010 prices (see Chapter 6, section 3)
(2) Exports of goods and services are obtained by interpolating estimates for 1871 by Baffigi et al. (2011);
for 1891, 1911, 1938, and 1951 by Rey (2002); and for 1970 by Rey et al. (2011). See endnote 9.
appendix 679

Services
Machinery,
and
Transport
Equipment
Total Fixed
Investments
96118.793 8966.668 238831.276 — 248233.111 308680.518 1614531.690

106918.906 9352.399 255358.378 — 269076.471 346957.641 1677209.006
108950.950 11229.277 261308.113 — 267772.263 352170.464 1690784.212
114262.709 11385.692 265477.238 — 275345.175 370288.581 1743598.632
123760.674 12354.019 276557.223 — 285158.285 379537.128 1792623.278
129696.964 13157.479 287339.262 — 297818.724 378071.389 1830006.873
138400.103 13953.407 305337.112 — 315172.112 423164.194 1918118.787
140091.514 14194.581 313580.475 — 321691.091 434184.539 1952723.873
142556.660 14592.701 325305.692 — 332898.929 421770.116 1960695.115
135600.850 14279.702 321328.994 — 330474.520 413329.377 1965110.914
139699.840 13685.591 328569.856 — 337438.851 433453.264 2005255.862
142063.143 13166.147 331237.897 — 334779.856 438197.108 2024059.514
149243.732 13753.306 340949.339 — 353125.952 465447.902 2081597.459
153836.875 14275.106 346748.107 — 360945.820 486651.754 2123098.878
146062.187 14103.893 333481.941 — 344056.492 465739.606 2080096.027
122200.727 13488.924 293909.499 — 294009.541 380060.691 1931364.856
135046.947 13692.233 301285.746 — 312741.695 414728.400 1990978.970
680 appendix
Table A5 Number of workers (headcount; present-day boundaries) (*)

Year Industry
Agriculture, Mining and Manufacturing Construction Public Total
Forestry, and Quarrying Utilities Industry
Fishing
1861 8,615,517 25,189 2,080,548 199,769 2,237 2,307,743

1862 8,684,944 27,080 2,056,114 207,587 2,299 2,293,080
1863 8,754,371 28,972 2,031,680 215,405 2,360 2,278,418
1864 8,823,798 30,864 2,007,246 223,223 2,422 2,263,756
1865 8,893,226 32,756 1,982,812 231,041 2,484 2,249,093
1866 8,962,653 34,648 1,958,378 238,860 2,546 2,234,431
1867 9,032,080 36,540 1,933,944 246,678 2,607 2,219,769
1868 9,101,507 38,432 1,909,510 254,496 2,669 2,205,107
1869 9,170,934 40,324 1,885,076 262,314 2,731 2,190,444
1870 9,240,362 42,215 1,860,642 270,132 2,792 2,175,782
1871 9,309,789 41,063 1,836,208 277,950 2,854 2,158,076
1872 9,322,070 49,869 1,896,934 311,481 2,933 2,261,217
1873 9,334,350 54,338 1,957,660 345,012 3,011 2,360,021
1874 9,346,631 51,294 2,018,387 378,542 3,090 2,451,313
1875 9,358,912 55,474 2,079,113 412,073 3,168 2,549,828
1876 9,371,193 54,749 2,139,839 445,604 3,247 2,643,439
1877 9,383,474 57,423 2,200,565 479,134 3,326 2,740,448
1878 9,395,755 57,156 2,261,291 512,665 3,404 2,834,516
1879 9,408,035 63,543 2,322,018 546,196 3,483 2,935,239
1880 9,420,316 61,988 2,382,744 579,726 3,561 3,028,020
1881 9,432,597 66,566 2,443,470 613,257 3,640 3,126,933
1882 9,495,010 76,818 2,385,964 609,695 4,710 3,077,188
1883 9,557,424 77,069 2,859,709 606,134 5,780 3,548,692
1884 9,619,837 77,336 2,684,952 602,572 6,850 3,371,710
1885 9,682,250 76,421 2,510,251 599,010 7,920 3,193,603
1886 9,744,664 72,776 2,335,551 595,449 8,990 3,012,765
1887 9,807,077 69,680 2,160,850 591,887 10,060 2,832,477
1888 9,869,490 72,835 2,241,696 588,325 11,130 2,913,986
appendix 681
Services Total
Economy
Wholesale Transport, Finance, Community, Government Total
and Retail Storage, and Insurance, Social, and Services Services
Trade, Communication and Real Personal
Hotels and Estate Services
Restaurants
672,819 238,015 6,631 864,378 162,144 1,943,986 12,867,246
683,342 239,115 7,152 868,761 167,582 1,965,952 12,943,976
693,866 246,215 7,673 873,143 173,020 1,993,918 13,026,707
704,390 246,315 8,195 877,526 178,458 2,014,883 13,102,437
714,913 239,350 8,716 881,908 183,896 2,028,783 13,171,102
725,437 264,442 9,237 886,291 189,334 2,074,741 13,271,825
735,960 272,942 9,758 890,673 194,772 2,104,106 13,355,955
746,484 283,187 10,280 895,056 200,210 2,135,216 13,441,829
757,007 288,146 10,801 899,438 205,648 2,161,041 13,522,420
767,531 293,922 11,322 903,821 211,086 2,187,682 13,603,825
778,054 294,518 11,843 908,203 216,524 2,209,144 13,677,008
790,224 310,368 12,919 926,214 223,786 2,263,511 13,846,798
802,393 330,281 13,995 944,224 231,048 2,321,941 14,016,313
814,563 350,614 15,070 962,234 238,310 2,380,791 14,178,735
826,732 369,880 16,146 980,244 245,572 2,438,574 14,347,314
838,902 388,657 17,221 998,255 252,834 2,495,868 14,510,500
851,071 400,246 18,297 1,016,265 260,096 2,545,974 14,669,896
863,241 413,610 19,372 1,034,275 267,358 2,597,856 14,828,127
875,410 339,727 20,448 1,052,285 274,620 2,562,491 14,905,766
887,580 373,843 21,523 1,070,296 281,882 2,635,124 15,083,460
899,749 383,161 22,599 1,088,306 289,144 2,682,959 15,242,489
906,420 395,312 22,805 1,087,040 291,349 2,702,926 15,275,124
913,091 410,369 23,011 1,085,774 293,553 2,725,798 15,831,914
919,762 419,577 23,217 1,084,508 295,758 2,742,823 15,734,369
926,433 406,545 23,424 1,083,242 297,963 2,737,606 15,613,459
933,104 399,388 23,630 1,081,976 300,167 2,738,265 15,495,693
939,775 425,608 23,836 1,080,710 302,372 2,772,301 15,411,855
946,446 446,144 24,042 1,079,444 304,577 2,800,652 15,584,129
(continued)
682 appendix
Table A5 Continued
Year Industry
Fishing
1889 9,931,903 72,764 2,529,478 584,763 12,200 3,199,207

1890 9,994,317 78,860 2,381,454 581,202 13,270 3,054,786
1891 10,056,730 84,290 2,089,698 577,640 14,341 2,765,969
1892 10,119,143 85,735 1,888,696 574,078 15,411 2,563,920
1893 10,181,557 83,093 1,690,473 570,517 16,481 2,360,563
1894 10,243,970 77,104 1,795,187 566,955 17,551 2,456,796
1895 10,306,383 67,705 1,904,661 563,393 18,621 2,554,380
1896 10,368,797 71,494 2,050,925 559,832 19,691 2,701,941
1897 10,431,210 79,069 2,290,566 556,270 20,761 2,946,666
1898 10,493,623 96,884 2,271,858 552,708 21,831 2,943,281
1899 10,556,036 107,766 2,461,207 549,146 22,901 3,141,020
1900 10,618,450 112,492 2,608,685 545,585 23,971 3,290,732
1901 10,680,863 112,987 2,665,214 577,640 25,041 3,380,882
1902 10,666,608 111,807 2,550,050 592,796 26,184 3,280,837
1903 10,652,353 113,518 2,617,182 607,952 27,327 3,365,979
1904 10,638,098 115,228 2,684,314 623,108 28,470 3,451,121
1905 10,623,843 116,939 2,751,446 638,264 29,613 3,536,263
1906 10,609,588 118,650 2,818,578 653,421 30,756 3,621,405
1907 10,595,333 120,309 2,944,405 668,577 31,898 3,765,189
1908 10,581,078 120,673 3,342,378 683,733 33,041 4,179,824
1909 10,566,823 121,482 3,283,291 698,889 34,184 4,137,847
1910 10,552,568 121,176 3,229,762 714,045 35,327 4,100,310
1911 10,538,313 124,294 3,309,253 729,201 36,470 4,199,218
1912 10,608,846 122,761 3,271,286 744,045 37,170 4,175,262
1913 10,679,378 122,258 3,502,703 758,890 37,871 4,421,722
1914 10,749,911 117,025 3,481,670 773,734 38,571 4,411,001
1915 10,820,443 98,500 3,104,640 788,579 39,272 4,030,990
1916 10,890,976 93,924 3,088,973 803,423 39,972 4,026,292
appendix 683
Services Total
Economy
Restaurants
953,117 448,701 24,248 1,078,178 306,781 2,811,025 15,942,135
959,788 455,488 24,454 1,076,912 308,986 2,825,628 15,874,731
966,459 437,646 24,660 1,075,646 311,191 2,815,602 15,638,301
973,130 440,338 24,867 1,074,380 313,395 2,826,109 15,509,172
979,801 461,406 25,073 1,073,114 315,600 2,854,994 15,397,113
986,472 466,538 25,279 1,071,848 317,804 2,867,941 15,568,707
993,143 464,599 25,213 1,070,582 320,009 2,873,545 15,734,309
999,814 472,379 25,857 1,069,316 322,214 2,889,580 15,960,317
1,006,485 483,000 29,624 1,068,050 324,418 2,911,578 16,289,453
1,013,156 479,853 30,269 1,066,784 326,623 2,916,685 16,353,589
1,019,827 480,120 30,450 1,065,518 328,828 2,924,743 16,621,799
1,026,498 488,585 30,814 1,064,252 331,032 2,941,181 16,850,363
966,459 496,668 30,219 1,062,986 333,237 2,889,569 16,951,314
969,197 503,088 32,043 1,065,206 336,543 2,906,077 16,853,521
971,935 463,185 35,681 1,067,426 339,848 2,878,075 16,896,406
974,673 517,998 37,209 1,069,646 343,154 2,942,679 17,031,898
977,411 528,879 39,808 1,071,866 346,459 2,964,423 17,124,529
980,149 538,172 41,254 1,074,086 349,765 2,983,425 17,214,418
982,886 533,288 43,173 1,076,306 353,070 2,988,724 17,349,246
985,624 591,961 45,758 1,078,526 356,376 3,058,244 17,819,147
988,362 591,777 48,144 1,080,746 359,681 3,068,710 17,773,380
991,100 578,910 53,227 1,082,966 362,987 3,069,190 17,722,067
993,838 600,580 55,524 1,085,186 366,292 3,101,420 17,838,951
1,006,642 612,627 54,835 1,086,923 376,897 3,137,924 17,922,032
1,019,446 623,416 55,807 1,088,661 387,501 3,174,830 18,275,931
1,032,250 640,243 57,827 1,090,398 398,106 3,218,824 18,379,735
1,045,054 653,869 57,693 1,092,135 408,710 3,257,462 18,108,895
1,057,858 668,875 57,112 1,093,873 419,315 3,297,031 18,214,299
(continued)
684 appendix
Table A5 Continued
Year Industry
Fishing
1917 10,961,509 101,167 2,614,170 818,267 40,672 3,574,277

1918 11,032,041 95,098 3,151,706 833,112 41,373 4,121,288
1919 11,102,574 98,287 3,395,422 847,956 42,073 4,383,738
1920 11,173,106 118,544 3,738,755 862,801 42,774 4,762,873
1921 11,243,639 104,868 3,258,825 877,645 43,474 4,284,812
1922 11,164,213 98,175 3,521,930 661,180 45,827 4,327,112
1923 11,084,786 106,002 3,495,144 622,096 48,179 4,271,422
1924 11,005,360 112,585 3,830,309 743,590 50,532 4,737,016
1925 10,925,933 129,289 4,240,488 792,636 52,885 5,215,298
1926 10,846,507 103,223 4,300,312 838,703 55,238 5,297,476
1927 10,767,080 98,750 4,500,952 772,922 57,590 5,430,214
1928 10,687,654 134,107 4,522,555 944,081 59,943 5,660,686
1929 10,608,227 142,191 4,601,948 1,234,126 62,296 6,040,561
1930 10,528,801 135,142 4,289,208 1,121,816 72,568 5,618,734
1931 10,449,374 117,155 3,730,804 1,025,827 66,297 4,940,083
1932 10,460,082 106,486 3,226,581 953,710 60,993 4,347,770
1933 10,470,790 101,504 3,219,113 975,468 60,459 4,356,545
1934 10,481,497 107,403 3,370,821 1,014,998 65,216 4,558,438
1935 10,492,205 116,513 3,948,100 1,147,395 66,685 5,278,693
1936 10,502,913 126,552 3,926,449 1,042,646 70,270 5,165,917
1937 10,401,424 151,052 4,361,175 1,316,743 72,038 5,901,008
1938 10,299,936 164,890 4,537,101 1,295,790 73,806 6,071,586
1939 10,198,447 166,015 4,536,520 1,309,402 75,574 6,087,510
1940 10,096,958 167,139 4,535,939 1,323,014 77,342 6,103,434
1941 9,995,470 168,264 4,535,358 1,336,627 79,110 6,119,358
1942 9,893,981 169,388 4,534,777 1,350,239 80,878 6,135,281
1943 9,792,492 170,512 4,534,196 1,363,851 82,646 6,151,205
1944 9,691,004 171,637 4,533,615 1,377,463 84,413 6,167,129
appendix 685
Services Total
Economy
Restaurants
1,070,662 636,164 54,776 1,095,610 429,919 3,287,131 17,822,916
1,083,466 637,728 53,026 1,097,347 440,524 3,312,091 18,465,420
1,096,270 682,607 57,689 1,099,084 451,128 3,386,778 18,873,090
1,109,074 719,988 68,250 1,100,822 461,733 3,459,866 19,395,845
1,121,878 730,156 71,580 1,102,559 472,337 3,498,510 19,026,961
1,178,241 767,769 75,132 1,114,434 494,801 3,630,378 19,121,702
1,234,604 747,399 77,483 1,126,309 517,265 3,703,060 19,059,268
1,290,966 736,691 82,165 1,138,184 539,729 3,787,736 19,530,112
1,347,329 756,325 86,616 1,150,059 562,194 3,902,524 20,043,754
1,403,692 714,761 92,589 1,161,934 584,658 3,957,634 20,101,616
1,460,055 727,194 99,309 1,173,809 596,801 4,057,168 20,254,462
1,428,790 737,457 101,882 1,185,684 601,792 4,055,605 20,403,944
1,397,525 748,019 105,094 1,197,559 592,017 4,040,215 20,689,003
1,366,261 760,510 107,282 1,209,434 607,634 4,051,120 20,198,655
1,334,996 743,859 109,149 1,221,309 626,018 4,035,331 19,424,788
1,392,553 717,242 106,172 1,261,350 716,413 4,193,730 19,001,582
1,450,111 702,427 103,814 1,301,391 694,885 4,252,627 19,079,961
1,507,668 700,080 102,694 1,341,432 681,912 4,333,786 19,373,721
1,565,226 703,538 105,465 1,381,473 684,032 4,439,733 20,210,631
1,622,783 708,012 97,904 1,421,514 688,858 4,539,071 20,207,901
1,625,173 701,677 103,127 1,406,801 730,936 4,567,714 20,870,147
1,627,564 735,014 108,350 1,392,089 800,337 4,663,353 21,034,875
1,629,954 733,319 113,573 1,377,376 858,470 4,712,692 20,998,649
1,632,344 738,008 118,795 1,362,664 1,016,972 4,868,783 21,069,176
1,634,735 742,696 124,018 1,347,951 1,176,060 5,025,459 21,140,287
1,637,125 747,384 129,241 1,333,238 1,341,437 5,188,426 21,217,688
1,639,515 752,072 134,464 1,318,526 1,490,407 5,334,984 21,278,682
1,641,906 756,760 139,687 1,303,813 1,365,345 5,207,511 21,065,644
(continued)
686 appendix
Table A5 Continued
Year Industry
Fishing
1945 9,589,515 172,761 4,533,034 1,391,076 86,181 6,183,053

1946 9,488,026 173,886 4,532,453 1,404,688 87,949 6,198,976
1947 9,386,538 175,010 4,531,873 1,418,300 89,717 6,214,900
1948 9,285,049 176,135 4,531,292 1,431,912 91,485 6,230,824
1949 9,183,560 177,259 4,530,711 1,445,525 93,253 6,246,748
1950 9,082,072 178,384 4,530,130 1,459,137 95,021 6,262,671
1951 8,980,583 179,508 4,529,549 1,472,749 96,789 6,278,595
1952 8,775,887 184,490 4,536,603 1,657,233 99,335 6,477,660
1953 8,572,146 177,172 4,613,822 1,852,140 101,845 6,744,979
1954 8,431,163 169,934 4,751,143 1,952,716 105,342 6,979,135
1955 8,125,602 162,776 4,764,293 2,016,764 107,775 7,051,608
1956 7,843,681 154,660 4,924,808 1,952,516 107,139 7,139,123
1957 7,505,408 147,702 5,095,301 1,959,372 108,512 7,310,887
1958 7,375,837 137,950 5,084,199 1,954,256 107,864 7,284,269
1959 7,259,322 132,190 5,130,560 1,948,219 109,202 7,320,172
1960 6,979,535 130,820 5,199,498 2,038,843 109,528 7,478,690
1961 6,613,058 125,698 5,301,283 2,138,683 112,785 7,678,449
1962 6,205,192 116,506 5,343,087 2,203,807 115,020 7,778,419
1963 5,668,929 114,456 5,408,083 2,243,450 115,280 7,881,269
1964 5,330,680 98,364 5,370,298 2,232,114 120,343 7,821,119
1965 5,331,761 88,816 5,230,390 2,035,211 123,420 7,477,837
1966 5,025,434 81,024 5,166,041 1,925,439 127,399 7,299,904
1967 4,925,124 72,356 5,261,289 1,918,219 133,209 7,385,072
1968 4,602,131 66,958 5,311,445 1,893,003 142,689 7,414,095
1969 4,369,860 61,640 5,375,586 1,906,955 146,440 7,490,621
1970 4,008,200 50,600 5,499,800 1,970,400 146,500 7,667,300
1971 4,004,000 50,800 5,592,600 1,861,200 150,800 7,655,400
1972 3,680,200 51,500 5,561,900 1,883,600 146,500 7,643,500
appendix 687
Services Total
Economy
Restaurants
1,644,296 761,449 144,910 1,289,101 1,240,283 5,080,038 20,852,606
1,646,686 766,137 150,133 1,274,388 1,115,221 4,952,565 20,639,568
1,649,077 770,825 155,356 1,259,675 1,134,304 4,969,237 20,570,674
1,651,467 775,513 160,578 1,244,963 1,153,386 4,985,908 20,501,781
1,653,857 780,202 165,801 1,230,250 1,174,770 5,004,880 20,435,188
1,656,248 784,890 171,024 1,215,538 1,115,948 4,943,647 20,288,390
1,658,638 789,578 176,247 1,200,825 1,194,314 5,019,602 20,278,780
1,761,515 797,068 176,203 1,223,232 1,253,831 5,211,849 20,465,396
1,858,127 803,988 182,816 1,244,808 1,310,397 5,400,136 20,717,262
1,969,250 809,103 187,338 1,266,385 1,361,483 5,593,558 21,003,856
2,056,451 834,362 190,771 1,277,173 1,418,111 5,776,867 20,954,076
2,165,643 836,893 194,996 1,304,559 1,470,043 5,972,133 20,954,937
2,267,244 850,712 199,067 1,336,094 1,531,241 6,184,359 21,000,653
2,348,539 848,587 204,788 1,381,737 1,579,078 6,362,729 21,022,835
2,376,990 850,643 205,856 1,358,501 1,641,243 6,433,232 21,012,725
2,390,894 892,532 212,116 1,312,028 1,729,918 6,537,488 20,995,712
2,454,817 949,056 213,811 1,297,920 1,824,621 6,740,225 21,031,732
2,445,904 969,528 219,686 1,248,958 1,940,017 6,824,094 20,807,705
2,439,327 986,580 228,731 1,209,954 2,047,690 6,912,280 20,462,479
2,553,939 981,510 231,614 1,306,219 2,149,785 7,223,066 20,374,865
2,536,045 983,168 230,217 1,215,763 2,229,245 7,194,439 20,004,036
2,585,627 976,046 232,033 1,235,680 2,304,508 7,333,894 19,659,232
2,696,304 965,541 230,504 1,266,385 2,399,654 7,558,388 19,868,585
2,787,519 954,733 235,269 1,309,538 2,489,384 7,776,443 19,792,669
2,879,974 945,520 236,688 1,326,966 2,607,414 7,996,562 19,857,043
2,981,400 951,000 237,000 1,381,071 2,712,629 8,263,100 19,938,600
2,880,800 960,300 242,100 1,360,710 2,841,790 8,285,700 19,945,100
3,013,600 976,900 254,600 1,394,845 2,929,755 8,569,700 19,893,400
(continued)
688 appendix
Table A5 Continued
Year Industry
Fishing
1973 3,571,200 52,800 5,666,000 1,874,200 148,500 7,741,500

1974 3,458,000 54,600 5,860,400 1,833,200 149,700 7,897,900
1975 3,276,300 55,700 5,933,700 1,762,700 150,300 7,902,400
1976 3,237,400 56,400 5,955,400 1,689,400 151,000 7,852,200
1977 3,084,200 58,300 6,022,700 1,678,400 152,600 7,912,000
1978 3,031,200 59,400 6,040,400 1,643,300 154,200 7,897,300
1979 2,941,200 61,000 6,132,600 1,638,600 153,900 7,986,100
1980 2,856,600 62,400 6,218,700 1,709,900 155,400 8,146,400
1981 2,670,500 64,100 6,082,200 1,740,100 157,600 8,044,000
1982 2,488,600 65,300 5,969,900 1,727,600 156,500 7,919,300
1983 2,466,300 60,200 5,826,000 1,707,700 157,400 7,751,300
1984 2,311,100 56,000 5,592,600 1,601,300 162,100 7,412,000
1985 2,168,800 53,600 5,494,700 1,583,300 166,700 7,298,300
1986 2,091,800 56,000 5,458,700 1,553,200 171,900 7,239,800
1987 2,002,400 56,700 5,389,100 1,532,100 176,100 7,154,000
1988 1,871,300 57,800 5,467,300 1,510,300 177,400 7,212,800
1989 1,764,200 58,800 5,529,400 1,486,200 179,700 7,254,100
1990 1,689,900 57,200 5,591,600 1,511,400 183,300 7,343,500
1991 1,642,700 51,700 5,562,100 1,558,700 184,900 7,357,400
1992 1,568,900 44,700 5,194,400 1,613,300 269,800 7,122,200
1993 1,447,300 43,100 5,013,800 1,573,200 265,600 6,895,700
1994 1,365,600 40,300 4,934,100 1,523,200 259,900 6,757,500
1995 1,307,400 38,900 4,909,600 1,500,800 252,900 6,702,200
1996 1,243,300 37,600 4,850,400 1,491,000 256,100 6,635,100
1997 1,220,900 37,800 4,833,500 1,508,100 250,600 6,630,000
1998 1,167,000 38,300 4,915,100 1,492,300 252,800 6,698,500
1999 1,105,600 38,400 4,877,000 1,530,700 255,800 6,701,900
2000 1,095,500 37,100 4,851,000 1,576,800 260,500 6,725,400
appendix 689
Services Total
Economy
Restaurants
3,094,800 1,009,700 272,400 1,475,950 3,009,450 8,862,300 20,175,000
3,214,900 1,031,400 293,900 1,541,788 3,050,812 9,132,800 20,488,700
3,307,900 1,043,900 314,800 1,576,766 3,082,234 9,325,600 20,504,300
3,412,000 1,067,600 342,300 1,633,114 3,166,886 9,621,900 20,711,500
3,431,000 1,068,200 363,200 1,664,768 3,251,932 9,779,100 20,775,300
3,456,000 1,076,400 396,700 1,738,974 3,247,626 9,915,700 20,844,200
3,553,300 1,087,800 428,300 1,814,316 3,264,784 10,148,500 21,075,800
3,648,600 1,094,200 454,500 1,918,549 3,261,551 10,377,400 21,380,400
3,739,600 1,114,600 478,900 2,021,818 3,293,782 10,648,700 21,363,200
3,879,200 1,129,400 506,000 2,179,287 3,304,613 10,998,500 21,406,400
3,986,000 1,130,800 519,600 2,319,034 3,302,766 11,258,200 21,475,800
4,166,200 1,120,000 541,600 2,551,113 3,372,987 11,751,900 21,475,000
4,233,100 1,133,100 561,400 2,872,409 3,411,091 12,211,100 21,678,200
4,278,200 1,169,300 564,200 3,039,122 3,444,878 12,495,700 21,827,300
4,353,600 1,174,800 561,300 3,136,791 3,496,609 12,723,100 21,879,500
4,356,900 1,187,600 568,000 3,359,359 3,559,341 13,031,200 22,115,300
4,326,700 1,184,600 586,000 3,560,541 3,590,459 13,248,300 22,266,600
4,378,400 1,182,800 594,900 3,800,976 3,631,024 13,588,100 22,621,500
4,465,600 1,184,900 611,100 4,108,504 3,673,796 14,043,900 23,044,000
4,418,300 1,468,500 699,000 4,256,581 3,331,819 14,174,200 22,865,300
4,304,500 1,428,600 690,900 4,159,558 3,324,542 13,908,100 22,251,100
4,229,300 1,394,700 686,100 4,141,858 3,309,942 13,761,900 21,885,000
4,196,500 1,384,500 682,300 4,269,751 3,298,349 13,831,400 21,841,000
4,202,700 1,440,400 673,500 4,491,317 3,278,983 14,086,90021,965,300
4,170,700 1,467,000 671,700 4,625,790 3,249,010 14,184,200 22,035,100
4,199,100 1,497,200 678,800 4,754,333 3,257,067 14,386,500 22,252,000
4,279,600 1,556,200 678,200 4,917,526 3,255,074 14,686,60022,494,100
4,388,300 1,623,100 679,700 5,168,671 3,249,029 15,108,800 22,929,700
(continued)
690 appendix
Table A5 Continued
Year Industry
Fishing
2001 1,102,500 36,800 4,838,700 1,676,100 259,800 6,811,400

2002 1,072,300 40,500 4,876,500 1,718,900 261,100 6,897,000
2003 1,002,600 38,600 4,912,200 1,773,100 259,900 6,983,800
2004 1,015,800 37,400 4,867,200 1,810,000 257,500 6,972,100
2005 1,011,600 37,800 4,830,100 1,888,200 264,200 7,020,300
2006 1,032,000 37,100 4,879,400 1,912,600 274,900 7,104,000
2007 1,007,000 36,700 4,914,400 1,972,700 272,600 7,196,400
2008 986,300 35,800 4,873,900 1,981,000 272,200 7,162,900
2009 960,400 34,500 4,660,500 1,956,700 272,800 6,924,500
2010 976,000 33,700 4,481,200 1,928,800 275,900 6,719,600
(*) Sources and methodology are reported in Chapter 7, note 6. The economic classification of sectors is
the one adopted by Istat in the population census of 1961, as in Vitali (1970) and Zamagni (1987).
appendix 691
Services Total
Economy
Restaurants
4,530,200 1,655,300 692,300 5,316,487 3,285,713 15,480,000 23,393,900
4,586,100 1,659,200 703,800 5,570,065 3,305,235 15,824,400 23,793,700
4,670,100 1,669,000 711,200 5,829,948 3,283,252 16,163,500 24,149,900
4,684,700 1,653,500 721,100 5,950,730 3,257,570 16,267,600 24,255,500
4,692,500 1,659,100 720,300 6,047,116 3,244,784 16,363,800 24,395,700
4,835,300 1,686,400 741,800 6,231,785 3,243,215 16,738,500 24,874,500
4,912,300 1,704,900 767,000 6,391,804 3,208,196 16,984,200 25,187,600
4,929,400 1,717,900 770,100 6,484,607 3,204,593 17,106,600 25,255,800
4,832,100 1,698,700 650,000 6,375,903 3,282,997 16,839,700 24,724,600
4,829,000 1,667,000 647,600 6,614,541 3,203,959 16,962,100 24,657,700
692 appendix
Table A6 Number of full-time equivalent workers (present-day boundaries) (*)

Sector Agriculture, Industry
Forestry, and
Mining Manufacturing Construction Public Total
Fishing
and Utilities Industry
Quarrying
1861 5,339,576 18,474 1,442,496 29,853 2,176 1,492,999

1862 5,397,387 19,862 1,425,555 31,021 2,236 1,478,674
1863 5,455,199 21,249 1,408,614 32,189 2,296 1,464,349
1864 5,513,010 22,637 1,391,674 33,358 2,357 1,450,025
1865 5,570,822 24,024 1,374,733 34,526 2,417 1,435,700
1866 5,628,633 25,412 1,357,792 35,694 2,477 1,421,375
1867 5,686,445 26,800 1,340,851 36,863 2,537 1,407,050
1868 5,744,256 28,187 1,323,911 38,031 2,597 1,392,725
1869 5,802,067 29,575 1,306,970 39,199 2,657 1,378,400
1870 5,859,879 30,962 1,290,029 40,367 2,717 1,364,076
1871 5,917,690 30,117 1,273,089 41,536 2,777 1,347,518
1872 5,944,368 36,576 1,315,191 46,546 2,853 1,401,167
1873 5,971,046 39,853 1,357,294 51,557 2,930 1,451,635
1874 5,997,723 37,621 1,399,397 56,568 3,006 1,496,592
1875 6,024,401 40,686 1,441,500 61,579 3,083 1,546,848
1876 6,051,078 40,155 1,483,603 66,589 3,159 1,593,507
1877 6,077,756 42,116 1,525,706 71,600 3,236 1,642,658
1878 6,104,434 41,920 1,567,809 76,611 3,312 1,689,652
1879 6,131,111 46,605 1,609,912 81,621 3,389 1,741,527
1880 6,157,789 45,465 1,652,015 86,632 3,465 1,787,577
1881 6,184,467 48,822 1,694,118 91,643 3,541 1,838,124
1882 6,187,413 56,341 1,654,248 91,110 4,583 1,806,282
1883 6,190,360 56,525 1,982,707 90,578 5,624 2,135,434
1884 6,193,307 56,721 1,861,543 90,046 6,665 2,014,975
1885 6,196,254 56,050 1,740,419 89,514 7,706 1,893,689
1886 6,199,201 53,376 1,619,295 88,981 8,747 1,770,400
1887 6,202,148 51,106 1,498,171 88,449 9,788 1,647,514
1888 6,205,095 53,420 1,554,223 87,917 10,829 1,706,389
appendix 693
Services Total
Economy
Restaurants
645,697 121,456 6,108 697,573 140,832 1,611,667 8,444,242
655,796 122,018 6,588 701,110 145,555 1,631,068 8,507,129
665,895 125,641 7,069 704,647 150,279 1,653,531 8,573,079
675,995 125,692 7,549 708,184 155,002 1,672,421 8,635,456
686,094 122,138 8,029 711,721 159,725 1,687,707 8,694,228
696,193 134,942 8,509 715,257 164,449 1,719,351 8,769,358
706,292 139,279 8,989 718,794 169,172 1,742,528 8,836,022
716,392 144,507 9,470 722,331 173,895 1,766,595 8,903,576
726,491 147,038 9,950 725,868 178,619 1,787,965 8,968,433
736,590 149,985 10,430 729,405 183,342 1,809,752 9,033,706
746,690 150,289 10,910 732,941 188,065 1,828,896 9,094,105
758,369 158,377 11,901 747,476 194,373 1,870,496 9,216,031
770,048 168,539 12,892 762,011 200,680 1,914,169 9,336,849
781,726 178,914 13,883 776,546 206,988 1,958,057 9,452,372
793,405 188,745 14,873 791,080 213,295 2,001,400 9,572,648
805,084 198,327 15,864 805,615 219,603 2,044,493 9,689,079
816,763 204,241 16,855 820,150 225,910 2,083,919 9,804,333
828,442 211,060 17,846 834,684 232,218 2,124,250 9,918,336
840,121 173,359 18,837 849,219 238,525 2,120,061 9,992,699
851,800 190,768 19,827 863,754 244,833 2,170,982 10,116,348
863,479 198,292 20,818 878,289 251,140 2,212,018 10,234,609
866,680 211,965 21,008 877,267 253,055 2,229,975 10,223,671
869,881 235,923 21,198 876,245 254,970 2,258,217 10,584,011
873,082 247,523 21,388 875,223 256,885 2,274,101 10,482,383
876,283 260,498 21,578 874,202 258,800 2,291,360 10,381,303
879,484 273,473 21,768 873,180 260,715 2,308,620 10,278,220
882,685 286,449 21,958 872,158 262,629 2,325,879 10,175,541
885,886 299,424 22,148 871,137 264,544 2,343,139 10,254,622
(continued)
694 appendix
Table A6 Continued
Forestry, and
Fishing
Quarrying
1889 6,208,042 53,368 1,753,750 87,385 11,870 1,906,373

1890 6,210,988 57,839 1,651,121 86,852 12,911 1,808,723
1891 6,213,935 61,822 1,448,840 86,320 13,952 1,610,934
1892 6,216,882 62,881 1,309,479 85,788 14,993 1,473,142
1893 6,219,829 60,943 1,172,047 85,256 16,034 1,334,280
1894 6,222,776 56,550 1,244,648 84,724 17,076 1,402,997
1895 6,225,723 49,657 1,320,549 84,191 18,117 1,472,514
1896 6,228,670 52,436 1,421,957 83,659 19,158 1,577,210
1897 6,231,617 57,992 1,588,106 83,127 20,199 1,749,424
1898 6,234,564 64,211 1,575,136 82,595 21,240 1,743,181
1899 6,237,510 70,430 1,706,416 82,062 22,281 1,881,189
1900 6,240,457 76,649 1,808,666 81,530 23,322 1,990,167
1901 6,243,404 82,869 1,847,859 86,320 24,363 2,041,411
1902 6,265,339 80,320 1,768,013 88,585 25,475 1,962,393
1903 6,287,274 80,432 1,814,557 90,850 26,587 2,012,426
1904 6,309,209 80,544 1,861,102 93,115 27,699 2,062,459
1905 6,331,144 80,656 1,907,646 95,380 28,811 2,112,492
1906 6,353,079 80,768 1,954,190 97,645 29,923 2,162,525
1907 6,375,014 80,334 2,041,429 99,909 31,035 2,252,707
1908 6,396,949 79,069 2,317,353 102,174 32,147 2,530,743
1909 6,418,884 76,726 2,276,387 104,439 33,259 2,490,811
1910 6,440,820 75,176 2,239,274 106,704 34,371 2,455,525
1911 6,462,755 75,767 2,294,387 108,969 35,483 2,514,606
1912 6,570,199 76,242 2,268,064 124,665 36,812 2,505,782
1913 6,677,644 77,341 2,428,511 140,361 38,141 2,684,355
1914 6,785,088 75,390 2,413,928 156,058 39,470 2,684,845
1915 6,892,532 64,606 2,152,524 171,754 40,799 2,429,683
1916 6,999,977 62,709 2,141,661 187,450 42,128 2,433,948
appendix 695
Services Total
Economy
Restaurants
889,087 300,577 22,337 870,115 266,459 2,348,576 10,462,990
892,288 304,275 22,527 869,093 268,374 2,356,558 10,376,270
895,489 299,842 22,717 868,072 270,289 2,356,409 10,181,278
898,690 295,410 22,907 867,050 272,204 2,356,261 10,046,285
901,891 290,977 23,097 866,028 274,119 2,356,113 9,910,222
905,092 291,131 23,287 865,007 276,034 2,360,550 9,986,323
908,293 280,996 23,226 863,985 277,949 2,354,449 10,052,686
911,494 290,761 23,820 862,963 279,863 2,368,902 10,174,781
914,696 303,569 27,290 861,941 281,778 2,389,274 10,370,314
917,897 303,704 27,883 860,920 283,693 2,394,097 10,371,842
921,098 305,990 28,051 859,898 285,608 2,400,644 10,519,344
924,299 316,506 28,386 858,876 287,523 2,415,590 10,646,214
927,500 326,472 27,838 857,855 289,438 2,429,102 10,713,917
930,127 334,222 29,569 859,646 292,309 2,445,873 10,673,605
932,755 338,499 32,977 861,438 295,180 2,460,848 10,760,548
935,382 346,448 34,436 863,229 298,051 2,477,547 10,849,215
938,010 354,396 36,711 865,021 300,922 2,495,060 10,938,696
940,637 362,345 38,095 866,813 303,793 2,511,683 11,027,288
943,265 407,878 39,915 868,604 306,664 2,566,327 11,194,048
945,892 444,614 42,352 870,396 309,535 2,612,789 11,540,481
948,520 449,696 44,606 872,187 312,406 2,627,415 11,537,111
951,147 449,083 49,361 873,979 315,277 2,638,848 11,535,192
953,775 448,203 51,149 875,771 318,148 2,647,046 11,624,406
966,063 446,812 50,538 877,173 327,359 2,667,944 11,743,926
978,351 447,344 51,458 878,575 336,570 2,692,297 12,054,295
990,639 455,343 53,347 879,977 345,780 2,725,085 12,195,019
1,002,926 465,742 53,251 881,379 354,991 2,758,288 12,080,503
1,015,214 496,875 52,786 882,781 364,202 2,811,858 12,245,782
(continued)
696 appendix
Table A6 Continued
Forestry, and
Fishing
Quarrying
1917 7,107,421 68,740 2,213,253 203,146 43,457 2,528,596

1918 7,214,866 65,747 2,284,844 218,842 44,786 2,614,219
1919 7,322,310 69,128 2,356,435 234,539 46,115 2,706,216
1920 7,429,755 84,801 2,428,027 250,235 47,444 2,810,506
1921 7,537,199 76,584 2,116,350 265,931 48,773 2,507,638
1922 7,558,031 70,836 2,287,216 281,627 50,102 2,689,781
1923 7,578,863 75,601 2,269,821 264,979 51,431 2,661,832
1924 7,599,695 79,402 2,487,484 316,729 52,760 2,936,376
1925 7,620,527 90,207 2,753,863 337,620 54,089 3,235,779
1926 7,641,359 92,587 2,792,715 357,242 55,418 3,297,962
1927 7,662,191 97,099 2,570,014 329,223 56,747 3,053,083
1928 7,683,023 93,450 2,582,349 400,304 45,773 3,121,875
1929 7,703,855 98,378 2,627,682 520,902 34,799 3,281,761
1930 7,724,687 92,858 2,449,110 471,330 40,537 3,053,835
1931 7,745,519 81,344 2,130,265 429,019 37,034 2,677,661
1932 7,613,711 75,969 1,842,357 402,459 32,224 2,353,008
1933 7,481,904 74,406 1,838,092 415,426 30,299 2,358,223
1934 7,350,097 80,897 1,924,716 436,310 31,156 2,473,079
1935 7,218,289 90,176 2,254,339 497,931 30,369 2,872,815
1936 7,086,482 100,681 2,351,026 457,148 30,513 2,939,368
1937 7,046,109 121,685 2,611,325 574,595 31,954 3,339,560
1938 7,005,737 133,700 3,255,920 561,710 41,174 3,992,504
1939 6,965,364 132,543 3,270,620 559,429 45,158 4,007,749
1940 6,924,991 131,386 3,285,319 557,148 49,142 4,022,995
1941 6,884,619 130,230 3,300,019 554,866 53,125 4,038,240
1942 6,844,246 129,073 3,314,718 552,585 57,109 4,053,486
1943 6,803,873 127,916 3,329,418 550,304 61,093 4,068,731
1944 6,763,501 126,759 3,344,117 548,023 65,077 4,083,977
appendix 697
Services Total
Economy
Restaurants
1,027,502 500,999 50,655 884,183 373,412 2,836,751 12,472,769
1,039,790 506,228 49,139 885,585 382,623 2,863,365 12,692,451
1,052,078 567,813 54,155 886,987 391,834 2,952,867 12,981,393
1,064,366 622,664 64,913 888,389 401,044 3,041,376 13,281,637
1,076,654 640,560 65,940 889,791 410,255 3,083,199 13,128,036
1,140,554 671,402 69,204 899,374 429,767 3,210,301 13,458,113
1,204,454 602,620 71,361 908,958 449,278 3,236,672 13,477,366
1,268,354 520,499 75,666 918,541 468,790 3,251,850 13,787,921
1,332,254 528,360 79,757 928,125 488,301 3,356,797 14,213,103
1,396,155 519,643 85,248 937,708 507,813 3,446,567 14,385,888
1,460,055 510,160 91,484 947,291 518,360 3,527,350 14,242,624
1,415,336 499,849 91,859 956,875 522,695 3,486,613 14,291,511
1,370,618 490,408 92,783 966,458 514,205 3,434,472 14,420,087
1,325,899 482,791 92,783 976,042 527,769 3,405,283 14,183,805
1,281,180 457,710 92,508 985,625 543,737 3,360,760 13,783,940
1,336,418 433,953 89,985 1,017,939 638,329 3,516,624 13,483,344
1,381,066 417,175 87,986 1,050,253 635,570 3,572,050 13,412,178
1,417,244 409,068 87,037 1,082,567 640,699 3,636,615 13,459,790
1,446,645 404,556 89,385 1,114,881 660,693 3,716,161 13,807,265
1,557,366 401,510 94,083 1,147,195 683,935 3,884,090 13,909,940
1,559,660 397,918 98,780 1,135,322 722,127 3,913,808 14,299,476
1,561,954 416,823 103,478 1,123,448 786,805 3,992,509 14,990,749
1,564,248 415,862 108,175 1,111,575 839,827 4,039,688 15,012,801
1,566,542 421,743 112,873 1,099,702 990,045 4,190,905 15,138,891
1,568,836 435,582 117,570 1,087,828 1,139,374 4,349,191 15,272,050
1,571,130 449,422 122,268 1,075,955 1,293,328 4,512,102 15,409,834
1,573,424 463,261 126,965 1,064,081 1,430,061 4,657,792 15,530,397
1,575,718 477,100 131,663 1,052,208 1,305,002 4,541,690 15,389,168
(continued)
698 appendix
Table A6 Continued
Forestry, and
Fishing
Quarrying
1945 6,723,128 125,603 3,358,817 545,742 69,061 4,099,222

1946 6,682,756 124,446 3,373,516 543,461 73,045 4,114,468
1947 6,642,383 123,289 3,388,216 541,180 77,029 4,129,713
1948 6,602,010 122,132 3,402,915 538,898 81,012 4,144,959
1949 6,561,638 120,976 3,417,615 536,617 84,996 4,160,204
1950 6,521,265 119,819 3,432,314 534,336 88,980 4,175,450
1951 6,480,892 118,662 3,447,014 532,055 92,964 4,190,695
1952 6,419,634 117,599 3,507,728 642,015 96,007 4,363,349
1953 6,356,680 115,874 3,612,270 767,444 98,731 4,594,319
1954 6,331,345 115,903 3,765,327 864,187 103,242 4,848,659
1955 6,167,263 114,001 3,831,513 951,575 106,357 5,003,446
1956 6,029,329 110,013 4,007,146 982,788 107,710 5,207,657
1957 5,830,010 107,111 4,191,701 1,048,089 110,295 5,457,196
1958 5,778,456 102,023 4,243,293 1,109,587 110,757 5,565,660
1959 5,746,385 98,132 4,338,092 1,172,241 112,614 5,721,079
1960 5,618,578 96,456 4,477,977 1,296,616 117,356 5,988,404
1961 5,351,478 92,595 4,637,108 1,436,683 119,839 6,286,225
1962 5,213,085 88,222 4,739,886 1,561,972 121,911 6,511,990
1963 4,818,471 83,617 4,871,167 1,676,167 123,895 6,754,845
1964 4,656,816 79,126 4,892,406 1,756,347 126,323 6,854,202
1965 4,618,681 74,831 4,834,167 1,688,426 129,443 6,726,866
1966 4,420,910 70,583 4,850,519 1,681,050 133,162 6,735,314
1967 4,394,577 66,599 5,015,302 1,759,413 138,103 6,979,417
1968 4,120,993 61,924 5,140,928 1,824,986 142,462 7,170,300
1969 3,975,651 56,382 5,282,564 1,930,812 145,568 7,415,325
1970 3,725,700 50,800 5,458,800 1,968,300 146,400 7,624,300
1971 3,708,900 50,800 5,540,300 1,860,700 150,500 7,602,300
1972 3,413,100 51,300 5,442,500 1,854,800 145,800 7,494,400
appendix 699
Services Total
Economy
Restaurants
1,578,012 490,939 136,360 1,040,334 1,179,943 4,425,588 15,247,939
1,580,306 504,778 141,058 1,028,461 1,054,884 4,309,487 15,106,710
1,582,600 518,617 145,755 1,016,588 1,064,650 4,328,209 15,100,305
1,584,894 532,456 150,453 1,004,714 1,074,415 4,346,932 15,093,901
1,587,188 546,295 155,150 992,841 1,089,261 4,370,735 15,092,577
1,589,482 560,134 159,848 980,967 1,074,575 4,365,006 15,061,720
1,591,776 573,973 164,545 969,094 1,097,209 4,396,597 15,068,184
1,699,020 587,450 164,672 998,861 1,163,658 4,613,661 15,396,645
1,798,664 600,203 171,379 1,028,311 1,227,924 4,826,481 15,777,480
1,916,141 614,031 176,026 1,058,201 1,287,500 5,051,899 16,231,902
2,031,365 641,869 180,519 1,091,764 1,352,366 5,297,883 16,468,593
2,180,072 654,391 187,809 1,145,097 1,414,506 5,581,874 16,818,860
2,320,266 677,028 194,105 1,201,444 1,488,729 5,881,572 17,168,777
2,430,337 686,753 201,749 1,265,895 1,546,147 6,130,882 17,474,998
2,482,618 699,397 203,699 1,265,584 1,617,992 6,269,290 17,736,753
2,557,999 746,753 214,916 1,261,414 1,718,258 6,499,340 18,106,321
2,654,004 801,191 217,215 1,253,638 1,804,418 6,730,467 18,368,170
2,700,604 830,714 222,327 1,160,209 1,909,002 6,822,857 18,547,931
2,755,067 861,577 230,408 1,082,217 2,004,385 6,933,654 18,506,970
2,850,147 875,749 233,111 1,198,518 2,096,161 7,253,686 18,764,704
2,856,609 895,331 231,968 1,095,795 2,182,624 7,262,327 18,607,874
2,886,685 907,359 233,165 1,135,772 2,278,519 7,441,500 18,597,723
2,994,920 917,072 231,782 1,198,914 2,380,847 7,723,535 19,097,529
3,074,824 921,129 235,962 1,288,208 2,487,564 8,007,687 19,298,980
3,207,225 936,537 236,996 1,313,134 2,596,029 8,289,921 19,680,897
3,307,700 954,100 238,000 1,388,445 2,710,855 8,599,100 19,949,100
3,192,800 962,800 243,200 1,373,708 2,844,092 8,616,600 19,927,800
3,327,000 988,400 253,900 1,408,105 2,931,195 8,908,600 19,816,100
(continued)
700 appendix
Table A6 Continued
Forestry, and
Fishing
Quarrying
1973 3,355,700 52,800 5,594,100 1,850,600 147,900 7,645,400

1974 3,285,900 54,700 5,779,300 1,812,000 149,200 7,795,200
1975 3,160,900 55,700 5,758,000 1,748,900 149,900 7,712,500
1976 3,156,700 56,600 5,820,700 1,667,900 150,700 7,695,900
1977 3,043,600 58,600 5,953,400 1,660,700 152,500 7,825,200
1978 3,044,700 59,400 5,926,800 1,625,900 154,200 7,766,300
1979 2,995,000 61,400 6,034,400 1,611,700 153,900 7,861,400
1980 2,942,800 62,900 6,132,300 1,700,000 155,400 8,050,600
1981 2,795,500 64,000 5,927,700 1,724,500 157,500 7,873,700
1982 2,635,900 65,800 5,797,300 1,722,900 156,500 7,742,500
1983 2,666,700 60,900 5,594,000 1,711,200 157,400 7,523,500
1984 2,574,800 56,300 5,360,600 1,608,200 162,000 7,187,100
1985 2,440,600 53,500 5,307,900 1,592,300 166,500 7,120,200
1986 2,392,000 55,600 5,299,600 1,574,200 171,500 7,100,900
1987 2,318,100 56,800 5,264,400 1,560,200 175,600 7,057,000
1988 2,189,300 57,900 5,372,800 1,550,200 176,900 7,157,800
1989 2,069,400 58,700 5,436,100 1,533,700 178,900 7,207,400
1990 2,018,700 56,700 5,472,800 1,561,800 182,500 7,273,800
1991 1,994,600 51,100 5,377,400 1,611,500 184,200 7,224,200
1992 1,948,900 44,000 5,009,000 1,670,700 268,400 6,992,100
1993 1,799,300 41,600 4,783,500 1,622,400 261,200 6,708,700
1994 1,732,900 38,900 4,764,700 1,576,600 256,700 6,636,900
1995 1,690,500 38,100 4,797,300 1,552,000 251,400 6,638,800
1996 1,640,600 36,600 4,727,900 1,541,000 254,200 6,559,700
1997 1,617,100 36,600 4,727,800 1,568,900 248,800 6,582,100
1998 1,570,800 37,100 4,813,200 1,547,200 249,700 6,647,200
1999 1,499,600 37,100 4,767,200 1,584,300 252,100 6,640,700
2000 1,483,800 36,200 4,752,800 1,635,600 255,900 6,680,500
appendix 701
Services Total
Economy
Restaurants
3,418,400 1,038,300 272,000 1,498,905 3,014,095 9,241,700 20,242,800
3,559,100 1,078,000 294,000 1,575,162 3,058,538 9,564,800 20,645,900
3,660,300 1,107,400 315,300 1,619,934 3,092,566 9,795,500 20,668,900
3,775,500 1,149,800 343,400 1,688,038 3,179,662 10,136,400 20,989,000
3,800,200 1,169,000 364,700 1,731,818 3,266,782 10,332,500 21,201,300
3,823,300 1,195,600 399,200 1,820,205 3,265,995 10,504,300 21,315,300
3,930,800 1,226,900 431,500 1,909,684 3,285,516 10,784,400 21,640,800
4,038,700 1,252,500 458,900 2,032,436 3,285,464 11,068,000 22,061,400
4,141,000 1,297,900 484,900 2,150,514 3,315,486 11,389,800 22,059,000
4,290,100 1,341,400 514,300 2,332,898 3,324,702 11,803,400 22,181,800
4,402,700 1,369,900 528,800 2,503,277 3,332,123 12,136,800 22,327,000
4,583,300 1,366,500 555,200 2,742,929 3,404,771 12,652,700 22,414,600
4,632,900 1,373,100 572,700 3,034,604 3,441,696 13,055,000 22,615,800
4,684,900 1,411,000 575,100 3,173,740 3,473,160 13,317,900 22,810,800
4,760,000 1,427,300 574,000 3,264,272 3,527,928 13,553,500 22,928,600
4,762,000 1,443,600 578,200 3,448,833 3,590,967 13,823,600 23,170,700
4,717,600 1,458,500 591,600 3,587,123 3,616,077 13,970,900 23,247,700
4,742,200 1,440,300 597,000 3,758,134 3,647,166 14,184,800 23,477,300
4,796,600 1,432,800 610,000 3,924,531 3,682,669 14,446,600 23,665,400
4,745,400 1,712,400 722,900 4,025,880 3,329,320 14,535,900 23,476,900
4,598,400 1,686,700 711,200 3,911,386 3,320,714 14,228,400 22,736,400
4,551,700 1,679,700 705,400 3,883,589 3,305,211 14,125,600 22,495,400
4,513,000 1,647,800 702,100 4,003,993 3,291,507 14,158,400 22,487,700
4,515,500 1,709,600 694,800 4,174,971 3,268,329 14,363,200 22,563,500
4,502,500 1,731,400 691,900 4,301,439 3,234,561 14,461,800 22,661,000
4,564,700 1,773,600 698,700 4,382,575 3,232,525 14,652,100 22,870,100
4,589,400 1,830,800 697,000 4,508,485 3,228,715 14,854,400 22,994,700
4,726,900 1,885,300 697,900 4,719,661 3,217,639 15,247,400 23,411,700
(continued)
702 appendix
Table A6 Continued
Forestry, and
Fishing
Quarrying
2001 1,497,900 36,100 4,726,300 1,733,100 254,600 6,750,100

2002 1,449,700 39,800 4,753,200 1,770,000 256,300 6,819,300
2003 1,381,800 37,700 4,758,200 1,821,000 253,900 6,870,800
2004 1,381,000 36,600 4,713,300 1,849,900 252,100 6,851,900
2005 1,338,400 36,900 4,657,900 1,922,800 258,000 6,875,600
2006 1,354,200 36,200 4,708,100 1,945,800 268,300 6,958,400
2007 1,313,900 35,600 4,750,100 2,003,900 265,700 7,055,300
2008 1,287,100 34,900 4,682,900 2,005,600 265,100 6,988,500
2009 1,254,000 33,300 4,236,600 1,978,700 264,900 6,513,500
2010 1,274,200 32,600 4,081,600 1,957,000 267,800 6,339,000
(*) Sources and methodology are reported in Chapter 7, note 6. The number of full-time equivalent
workers is a standard measurement unit of the amount of work supplied by workers, obtained by
converting part-time and temporary jobs into full-time equivalents.
The economic classification of sectors is the one adopted by Istat in the population census of 1961.
appendix 703
Services Total
Economy
Restaurants
4,812,000 1,937,500 709,700 4,873,857 3,246,943 15,580,000 23,828,000
4,890,800 1,976,600 721,000 5,012,950 3,261,950 15,863,300 24,132,300
4,987,000 1,981,400 726,400 5,102,656 3,232,844 16,030,300 24,282,900
5,009,400 1,965,000 737,100 5,229,165 3,199,435 16,140,100 24,373,000
4,985,900 1,985,500 731,600 5,318,381 3,176,219 16,197,600 24,411,600
5,062,400 2,033,500 756,800 5,454,375 3,169,025 16,476,100 24,788,700
5,077,200 2,059,300 785,200 5,604,865 3,130,635 16,657,200 25,026,400
5,048,100 2,071,300 787,600 5,637,271 3,118,629 16,662,900 24,938,500
4,940,100 2,035,600 779,800 5,509,673 3,190,227 16,455,400 24,222,900
4,929,700 2,011,100 783,000 5,592,394 3,117,906 16,434,100 24,047,300
Table A7 Net capital stock in the total economy (million euros, constant 2010 prices) (*)
Plants, Machinery, Means of Construction
and Equipment Transport
Housing Nonhousing Total Construction Total Capital Stock Total Capital Stock
(**) Net of Housing (**)
1861 3,417 652 20,617 67,253 90,211 72,346 47,571
1862 3,451 659 21,110 68,044 91,496 73,310 48,113
1863 3,490 667 21,438 69,053 92,872 74,365 48,795
1864 3,600 695 21,866 69,858 94,114 75,602 49,576
1865 3,817 748 22,100 70,753 95,285 77,193 50,715
1866 4,038 802 22,098 70,938 95,478 78,175 51,477
1867 4,265 856 22,106 70,547 95,057 78,700 51,883
1868 4,492 908 22,014 70,177 94,571 79,134 52,262
1869 4,691 951 22,061 69,764 94,159 79,502 52,529
1870 4,938 1,005 22,029 69,610 93,960 80,227 53,108
1871 5,388 1,109 22,151 69,429 93,866 81,803 54,283
1872 6,015 1,257 22,320 69,597 94,191 84,075 55,987
1873 6,706 1,416 22,717 69,957 94,924 86,739 57,898
1874 7,572 1,617 23,349 70,536 96,100 90,343 60,441
1875 8,281 1,771 23,668 70,711 96,563 92,969 62,354
1876 8,894 1,896 23,962 70,869 96,985 95,301 64,048
1877 9,409 1,992 24,230 70,989 97,344 97,289 65,481
1878 9,940 2,091 24,457 71,198 97,763 99,362 66,998
1879 10,301 2,142 24,660 71,594 98,364 100,923 68,128
1880 10,818 2,233 24,909 72,248 99,285 103,239 69,834
1881 11,303 2,313 25,296 72,992 100,423 105,555 71,480
1882 11,738 2,379 25,876 74,180 102,211 108,123 73,236
1883 12,106 2,428 26,458 75,901 104,578 110,861 75,126
1884 12,509 2,488 27,111 77,804 107,204 113,896 77,217
1885 12,746 2,508 27,932 79,688 109,956 116,471 78,864
1886 13,283 2,611 28,735 81,543 112,661 120,039 81,304
1887 13,647 2,673 29,211 83,663 115,366 123,030 83,445
1888 14,505 2,868 29,343 86,002 118,007 127,636 87,026
1889 14,921 2,950 29,480 87,816 120,084 130,374 89,132
1890 15,055 2,960 29,906 89,398 122,162 132,191 90,367
1891 15,047 2,935 30,493 90,817 124,203 133,513 91,134
1892 14,901 2,876 30,985 92,158 126,078 134,280 91,506
1893 14,755 2,818 31,676 93,175 127,774 134,934 91,693
1894 14,816 2,816 32,337 94,264 129,523 136,290 92,453
1895 14,955 2,836 32,880 94,193 129,910 136,992 92,755
1896 15,277 2,903 33,434 93,786 129,942 138,093 93,366
1897 15,723 3,003 33,975 93,409 129,995 139,653 94,345
(continued)
Table A7 Continued
1898 16,225 3,117 34,491 92,949 129,936 141,342 95,438

1899 16,886 3,274 34,979 92,505 129,871 143,625 97,010
1900 17,688 3,467 35,520 92,279 130,086 146,632 99,128
1901 18,900 3,766 36,235 92,256 130,674 151,388 102,539
1902 20,195 4,081 37,228 92,662 131,969 156,887 106,408
1903 21,475 4,385 38,524 93,239 133,715 162,497 110,230
1904 23,194 4,792 40,103 94,039 135,949 169,911 115,342
1905 25,931 5,445 41,886 95,213 138,766 181,274 123,471
1906 29,186 6,210 43,485 96,823 141,892 194,806 133,377
1907 31,957 6,824 45,199 98,813 145,531 206,919 142,111
1908 33,997 7,228 47,089 101,427 149,998 216,858 149,063
1909 35,543 7,490 49,345 104,979 155,801 225,854 155,114
1910 36,764 7,658 52,129 109,511 163,126 234,680 160,781
1911 37,362 7,660 54,684 114,148 170,363 241,285 164,796
1912 37,044 7,427 57,136 118,557 177,259 244,472 166,162
1913 36,563 7,161 59,490 122,768 183,854 246,995 167,037
1914 36,089 6,910 62,060 127,328 191,010 249,996 168,184
1915 34,260 6,326 62,532 129,790 194,136 245,549 164,481
1916 31,343 5,491 61,553 129,499 193,013 234,084 155,965
1917 28,512 4,721 60,437 127,777 190,177 221,543 146,705
1918 25,554 3,967 59,306 125,753 186,991 208,679 137,184
1919 22,902 3,344 58,721 125,400 186,113 199,405 130,155
1920 20,760 2,902 58,201 125,262 185,529 192,350 124,828
1921 19,162 2,641 58,070 126,291 186,563 188,529 121,861
1922 18,483 2,645 59,095 129,464 190,924 190,028 122,560
1923 18,464 2,833 61,196 133,334 196,926 194,560 125,178
1924 18,133 2,939 64,456 136,691 203,275 198,036 126,499
1925 18,061 3,103 68,242 138,996 208,865 202,012 127,987
1926 18,397 3,354 71,645 141,794 214,698 207,662 130,890
1927 19,206 3,699 73,997 144,903 220,037 214,560 135,250
1928 20,112 4,031 76,303 147,722 225,013 221,359 139,554
1929 21,177 4,361 81,263 152,047 233,794 231,281 145,033
1930 22,112 4,611 87,501 158,075 245,504 242,738 151,124
1931 23,138 4,842 93,066 163,635 256,147 253,552 157,047
1932 25,063 5,268 97,830 169,409 266,385 266,807 165,307
1933 27,087 5,688 102,549 176,622 278,198 281,355 174,614
(continued)
Table A7 Continued
1934 28,655 5,971 109,182 183,450 291,105 295,243 182,538

1935 30,823 6,400 118,812 189,946 306,030 312,349 191,715
1936 34,594 7,241 127,618 195,205 318,904 333,207 204,127
1937 36,155 7,501 132,484 198,193 326,076 343,058 209,684
1938 38,358 7,932 135,583 200,055 330,570 353,167 216,212
1939 41,333 8,562 138,265 203,387 336,377 366,882 225,712
1940 42,974 8,842 139,271 206,894 341,039 375,192 231,753
1941 44,200 9,013 138,888 209,098 343,128 380,354 235,945
1942 43,264 8,652 137,056 208,266 340,633 375,264 232,776
1943 43,703 8,679 133,608 204,146 333,137 371,364 231,233
1944 47,160 9,487 129,954 199,276 324,636 375,608 236,249
1945 51,247 10,419 127,453 196,741 319,696 380,615 243,102
1946 55,604 11,374 128,229 202,627 326,846 395,708 256,908
1947 57,022 11,562 128,161 209,860 334,831 404,438 264,617
1948 57,409 11,494 129,374 216,052 342,671 410,716 269,208
1949 57,984 11,492 131,743 222,575 351,805 418,553 274,406
1950 62,013 12,399 136,842 229,599 363,681 438,686 288,351
1951 66,107 13,316 143,148 238,388 378,496 461,167 303,551
1952 70,488 14,092 151,613 249,397 397,689 487,217 320,457
1953 75,320 15,180 162,482 263,070 421,940 518,714 340,498
1954 80,865 16,386 176,212 278,361 450,712 555,368 363,139
1955 87,366 17,538 193,996 296,150 486,079 599,030 389,074
1956 93,707 18,840 214,148 313,351 523,309 644,016 414,550
1957 99,874 19,959 237,790 333,150 566,654 692,954 441,076
1958 106,953 21,035 262,480 356,491 614,492 747,292 471,563
1959 115,705 22,624 289,685 382,403 667,389 810,185 507,782
1960 125,529 25,124 317,503 412,044 724,519 880,452 549,977
1961 137,084 28,076 348,413 443,918 786,985 959,399 597,593
1962 149,125 31,041 385,306 478,705 858,479 1,046,363 648,036
1963 158,539 34,002 427,586 513,373 935,394 1,132,335 693,525
1964 166,050 37,015 473,839 547,093 1,015,471 1,217,134 734,948
1965 171,937 40,489 517,791 580,528 1,092,774 1,297,845 774,072
1966 178,213 42,765 561,369 615,124 1,170,729 1,377,853 813,090
1967 185,026 45,630 608,316 654,672 1,256,899 1,466,533 857,441
1968 193,515 48,937 662,287 697,340 1,353,296 1,567,624 907,618
1969 203,150 52,064 723,121 745,937 1,462,496 1,681,398 963,935
(continued)
Table A7 Continued
1970 216,808 55,360 781,059 793,429 1,567,729 1,799,902 1,026,482

1971 232,591 58,431 836,891 837,462 1,667,379 1,917,357 1,089,512
1972 249,918 61,349 889,642 884,490 1,766,778 2,037,070 1,157,137
1973 272,532 63,966 940,641 934,331 1,867,097 2,166,100 1,234,803
1974 295,142 66,022 991,580 986,135 1,969,194 2,295,517 1,313,082
1975 309,760 67,363 1,038,604 1,036,388 2,065,648 2,406,024 1,376,902
1976 326,797 69,569 1,079,404 1,082,580 2,151,661 2,512,599 1,442,357
1977 344,373 72,267 1,119,296 1,129,308 2,237,190 2,620,175 1,509,608
1978 362,122 73,615 1,157,977 1,176,760 2,322,089 2,725,657 1,575,978
1979 385,414 76,297 1,197,626 1,221,388 2,405,313 2,839,573 1,649,734
1980 413,177 80,719 1,239,192 1,264,688 2,489,256 2,962,313 1,730,386
1981 433,519 86,037 1,279,686 1,308,578 2,572,628 3,074,221 1,801,461
1982 449,792 89,972 1,316,137 1,350,192 2,649,614 3,172,762 1,863,293
1983 462,448 92,063 1,354,786 1,388,524 2,725,588 3,263,381 1,915,547
1984 479,133 94,633 1,392,966 1,425,150 2,799,378 3,357,816 1,971,934
1985 495,489 97,112 1,428,108 1,462,570 2,870,786 3,449,544 2,028,511
1986 512,855 99,268 1,460,248 1,503,553 2,942,581 3,542,634 2,089,164
1987 535,462 102,338 1,490,162 1,544,696 3,012,218 3,641,565 2,157,586
1988 565,254 106,199 1,520,405 1,587,188 3,083,478 3,752,201 2,237,043
1989 594,837 111,395 1,551,392 1,633,022 3,158,746 3,867,354 2,320,296
1990 625,230 116,694 1,583,887 1,681,797 3,238,406 3,987,641 2,407,156
1991 655,397 120,355 1,617,449 1,728,972 3,317,541 4,104,372 2,489,890
1992 681,490 123,798 1,650,813 1,771,105 3,391,491 4,210,521 2,562,575
1993 690,895 123,004 1,682,271 1,801,711 3,452,137 4,280,496 2,601,202
1994 705,097 122,475 1,711,893 1,824,916 3,503,580 4,347,328 2,638,550
1995 723,997 125,728 1,740,882 1,851,663 3,557,823 4,426,054 2,688,299
1996 743,607 129,274 1,767,536 1,880,742 3,611,959 4,506,021 2,741,497
1997 766,116 132,417 1,791,703 1,908,397 3,662,123 4,585,072 2,796,203
1998 792,486 138,639 1,814,318 1,935,361 3,709,990 4,669,735 2,857,944
1999 819,020 147,593 1,836,847 1,964,199 3,759,589 4,759,280 2,924,568
2000 850,574 156,800 1,861,438 1,997,196 3,815,349 4,860,690 3,000,956
2001 878,496 167,363 1,886,060 2,034,591 3,875,457 4,963,595 3,078,791
2002 904,584 178,419 1,911,208 2,078,414 3,942,440 5,071,683 3,161,161
2003 924,246 185,109 1,937,769 2,122,430 4,011,006 5,169,165 3,231,790
2004 944,226 191,482 1,965,434 2,166,600 4,080,802 5,267,802 3,302,525
2005 964,276 196,229 1,996,045 2,206,139 4,148,901 5,363,071 3,367,075
(continued)
Table A7 Continued
2006 988,413 201,013 2,028,774 2,242,886 4,216,320 5,461,821 3,433,069

2007 1,014,690 205,049 2,061,013 2,278,288 4,281,878 5,560,105 3,499,098
2008 1,031,842 207,207 2,091,246 2,308,053 4,339,793 5,639,507 3,548,264
2009 1,029,156 203,326 2,112,852 2,329,384 4,380,632 5,675,736 3,562,871
2010 1,035,625 201,408 2,131,878 2,345,580 4,413,753 5,715,525 3,583,647
(*) Sources and methodology are reported in Chapter 7, note 19. The underlying investment series are the ones presented in Table A3.
(**) The totals are obtained as the sum of components properly calculated to take into account nonadditivity given the presence of chained values.
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Index
Note: Material in figures or tables is indicated by italic page numbers. Endnotes

are indicated by n. after the page number.
absorptive capacity, 397, 399, 408–409, 412–413, employment, 6, 189–190

414 and innovation, 382
Abulafia, David, 147 production growth, 1897–1913, 16
Abyssinia, 64, 360 labor productivity, 28, 190–197, 204–207
Ackley, Gardner, 147, 149, 153 labor productivity, international comparison,
administrative districts, 576, 597 n. 4 207–210
administrative system in Italy, 13, 98–99, 533–538, land reform, 110, 111
540–549, 560–561, 566–567 national accounts, methodology, 176–178,
“Charter for Public Services” (Cassese), 565 182–183, 185
Civil Code of 1865, 13, 559 regional disparities, 604–613
Commercial Code of 1882, 13 South, 141, 576–577, 583, 585, 587
corruption, 538, 561–562 value added, 10, 166, 167
education of public administration employees, See also silk industry; tariffs
549 allocation of resources by banks, 513–514,
enti pubblici autonomi, 542, 562–563 487–489, 492, 495–513
infrastructure and public works investment, institutional distortions, 488–489, 514 n. 3
539 real credit by sectors, 1948–1982, 495–496,
international comparisons, 98–99, 537–538 497
Law 4/68 (self–certification enforcement), real credit by sectors, 1983–2009, 496, 498
565 See also banking system; growth opportunities
Law 29/93 (rules for public employees), 565 (GOs); price/earnings (PE) ratios
Law 142/90 (local administrations), 564–565 Ansaldo, 16, 443, 458, 476
Law 142/90 (local autonomy), 565 Atkinson index of per capita income, 233, 234–
Law 241/90 (administrative procedures), 236, 237
565 autarky in 1930s, xi, 19–20, 57, 246, 383, 328, 461,
lawyers in administration, role of, 548–549 583, 600, 615
number of laws passed yearly, 560, 561 decreased foreign direct investments, 383
number of pages per law, 560, 561 exports, 422, 423
parallel administrations, 542, 562–564, 566 Institute for Industrial Reconstruction (IRI),
political influence over bureaucracy, 546–548, 58–60
566 patenting, 389
reforms, 544–545, 564–566 trade liberalization after autarky, 20–21
“Report on the Main Problems of State trade sanctions against Italy, 360, 373
Administration” (Giannini), 564
performance measures, 538–540 backwardness (Italian), 23, 24, 32, 55, 56
rule of law indicators, 98–99, 123, 538 effect on convergence, 5–6, 8–9, 32–33, 64,
See also civil justice system 112–113, 199–200
ageing index, 229 Banca Commerciale Italiana (Comit), 52, 56–58,
Agnelli, Giovanni, 142, 477, 478 423, 492, 597 n. 5
agriculture Banca d’Italia. See Bank of Italy
and competitive advantage, 457 Banca Generale, 52, 56
and education, 252–253 Banca Nazionale nel Regno, 52, 489
structural change, 76, 79, 188–190 Banca Romana, 15, 52, 489
impact on growth, 151 (Romeo), Banco di Napoli, 63, 286
774 index
banking system, 14, 19, 31, 35, 58, 114, 373, civic capital, North–South differences in, 304,
485–486, 490, 501 305, 319–320
banking crisis of 1931–1933, 19, 35, 58, 490 civicness, effect on voting, 311–312, 314–315
banking law of 1927, 584, 490 enfranchisement of 1912, 304–305 310
banking law of 1936, 59, 445 n. 6, 490, 491, 493 heterogeneity in enfranchisement rates,
banking law of 1893, 15, 35, 52–53, 65, 489–490 315–317
banking reforms of 1931–1938, 490, 491 hierarchical government in South before 1861,
banking reforms of 1990–1993, 31, 492 306, 307, 320
banks of issue, 15, 51–52, 489 mutual aid societies (voluntary associations),
Country Study, effects of, 144 308, 309, 314–315, 323 n. 2
IRI takeover of banks, 19, 59, 490 preunification institutions and civic traditions,
regulation changes in 1960s and 1970s, 491 306–308
remittance transfers, 63, 285–286 private rent-seeking behavior, effect on voting,
special credit institutions, 445, 490, 491, 511, 305, 311
513 reallocation of power in democratization
universal banking model, 11, 19, 57, 65, reform, 305–306, 318–319
485–486, 489 role of institutions, 303–304
See also allocation of resources by banks socialist and communist parties in North and
Bank of Italy (Banca d’Italia), x, 15, 35, 52, South, 305, 318–319, 320
489–491 from unification to the enfranchisement of
macroeconomic policy, 21, 430 1912, 309–311
repeal of agreement with the Treasury, 25–26, voter participation, North-South differences in,
90, 117 304–305, 310–311, 312–317, 319–321
Bassanini, Franco, 565 willingness of nonelites to participate, 305–306,
Bastogi, Pietro, 476 318–319, 321
Beneduce, Alberto, 479 civicness. See civic capital
Bocciardo, Arturo, 478 Civil Code of 1865, 13, 559
Bonnefon Craponne, Louis, 141–142, 153 civil justice system, 550–559
Borbone, Carlo di, 138 Corte di Cassazione, 550, 556, 558
Breda, Vincenzo Stefano, 55–56, 140, 476, 483 n. Civil Code of 1865, 559
10 Courts of Appeal, 550, 551, 554, 556, 558, 568
Bretton Woods breakdown and aftermath, 24, 195, n. 6
362–363, 430 geographic differences, 551–552, 553–554, 555,
Brunetta, Renato, 566 558, 559, 567
Bureaucracy, political influence over, 546–548 judges, 557–558
length of proceedings, 539, 540, 550–551, 552
capitalism measures of output of civil justice system,
and administrative system, 534 550–553
fourth capitalism, 442, 448, 480–481 Preture, 550, 551, 553–554, 556, 558, 568 n. 6
mid-sized firms, 88, 96, 102, 442, 448, 477, Tribunali, 550, 551, 553–554, 556, 558, 568 n. 6
480–481 Uffici di conciliazione, 550, 551, 553, 556, 559,
managerial capitalism, 478 568 n. 6
scarcity of capitals, 55 See also administrative system in Italy; litigation
state intervention, 55, 56, 59, 305, 311, 476–477 Cobden, Richard, 136, 327
See also entrepreneurship Cobden–Chevalier treaty, 10, 38, 40
Casati Act, 241, 251–254, 252, 253, 254, 266, 579 Comit, see Banca Commerciale Italiana
Cassa per il Mezzogiorno. See Southern Italy Common Market. See European Common
Development Fund Market.
Cassese, Sabino, 565 communes in the North, 307–308
catch-up growth. See convergence comparative advantage, 71, 99, 115, 328, 338–339,
Cavour (Camillo Benso, Count of Cavour), 38, 39, 616, 629 n. 17
40, 136, 139 See also foreign trade
census districts, 576, 597 n. 4 competition
child labor, 7, 15, 17, 231–232, 246 in banking sector, 97, 446
child mortality, 15, 33, 237, 238, 239, 537 comparative advantage, 71, 99, 115, 328, 338–
Chiovenda, Giuseppe, 559 339, 616, 629 n. 17
civic capital, 303–308, 321–322 competitive impact of high wages in North,
city–state evolution in North before 1861, 600, 620–621, 625
307–308, 320 effect of EMU membership, 100–101, 102
index 775
effects on economic outcomes in Italy, in Japan, 130

Germany, and Japan, 114, 117, 120 in 1920s, 53, 421, 477, 490
ICT investment and competitiveness, 93, 96 and return to gold standard, 57, 58
international competition after 1861, 38, 42 De Gasperi, Alcide, 78, 143–144, 360
international competition, 1947–1973, 20–21, Destra storica, 136, 150–151
22, 77, 103, 114 Doing Business indicators, 104, 105
international competition: emerging countries, domestic market access, 602–603
100, 103, 328, 456, 463, 466 during Golden Age, 79
innovation and international competitiveness, effect of remittances, 615, 616–617
86, 90 effect on industrial location, 600
policy in 1990s, 96–97, 123 from 1860 to 1890, 613–614
regulation, 81, 84, 93, 96–97 from 1890 to 1950, 615–621
See also multinational firms; protectionism; real impact of tariffs, 615–616
exchange rates (RER); regional differences in See also regional differences in geography and
geography and trade; trade policies trade
Congress of Vienna, 138, 308, 309
consumption. See private consumption; standards Economic Freedom Index, 118
of living. economic geography model, 605, 611–612, 624,
convergence, x–xi, 5–9, 16–26, 65–74, 103–106 626, 627–628
corporate social contract and wage moderation, “economic miracle.” See Golden Age (1950–1973)
79, 102, 114 education and literacy, 3–4, 12, 249–257
effect of backwardness, 5–6, 8–9, 32–33, 64, adult literacy vs. normalized GDP per capita,
112–113, 199–200 243–244
end of catch-up growth, 92 avviamento al lavoro, 254
in first age of globalization, 16–18 attainment of young adults, 260–261
GDP growth rate by country, 1953–1973, 112, Casati Act, 241, 251, 252, 253, 254, 266, 579
113 completion in Golden Age, 97
GDP per person, levels and growth rates, 22, Coppino law, 252
71–72, 73, 75–76, 462 Daneo-Credaro Act, 253, 579
North–South convergence, 1951–1973, 246, and economic stagnation, 1990–2009, 268–270
585–590, 625 emigrant literacy, by age and gender, 278–279
North–South convergence, end of, 1974–1999, engineering, students enrolled in, 397, 398, 416
590–594 n. 11
productivity, 220–221 enrollment rates vs. normalized GDP per
standards of living, 239, 242, 245 capita, 244–245
See also Golden Age (1950–1973); stagnation Esame di Stato, 254, 257
(mid-1990s to 2011); slowdown (1973–1992) expenditure and enrollment data since 1881,
Coppino law, 252 257–258
Corbino, Epicarmo, 144 Gentile reforms, 253, 254, 397, 398
corruption, 538, 561–562 ginnasi, in 1860, 251
Corte di Cassazione, 550, 556, 558 Human Development index, 240–242, 243, 247
Courts of Appeal, 550, 551, 554, 556, 558, 568 n. 6 n. 4
credit allocation by banks. See allocation of illiteracy rates, 3, 241, 243–244, 259, 278
resources by banks International Adult Literacy Survey, 264–265
Credito Italiano international comparisons, 261–265, 269
formation, 52, 56, 68 n. 8, 497 n. 5 istituti tecnici, 252, 254, 255, 399, 416 n. 13
insolvency, 58 students’ test performance at difference ages
privatization, 492 and times, 263, 264
rescue of Ilva steel trust, 57 licei, establishment, 251–254, 260
Credito Mobiliare, 52, 56 literacy rates, ages 15–19, 14, 21
and localized growth in early Italy, 266–267
Daneo–Credaro Act, 253, 579 migration effect on Italy’s education gap, 261
debt. See public debt military education, 259
deflation North-South gap, 574, 580–581, 586
in 2011, 120 Orlando law, 253
after World War II, 144–145 and the postwar boom, 267–268
and European Monetary Union membership, primary education, 1860–1900, 13–14, 251–256
100 primary education, comparison to other
in Great Depression, 57–58, 65 countries, 251–252
776 index
education and literacy, (Cont.) European Monetary Union (EMU), 93, 100–101,
primary education, long–run dynamics, 103, 117, 120
257–259 European Recovery Program (ERP). See Marshall
primary education across regions, 1871 to Plan
present, 258–259 exchange rate. See Real Exchange Rate
quality gap between Italy and other countries, export. See Fiat; firm size; foreign trade; trade
263–264, 269 policies
quality of students’ competencies, by country,
263 Falck, Giorgio Enrico, 477
scuola complementare, 254 Falck (steel industry), 16, 458
scuola materna, 254 Fauser, 383, 424, 428
scuola media, 254, 255, 260 Ferdinand II (King of the Two Sicilies), 138
scuole commerciali, 253 Fiat
scuole professionali, 252–253, 268, 269 domestic market in 1950s, 429
scuole reggimentali, 259 export business, 421–422, 477
scuole tecniche, 252–253 Fiat 500 and 600, 23, 429–430
secondary education, 251–256 , 259–260 as “first mover”, 16, 458
teacher careers, organization since 1970, foreign subsidiaries, 421–422, 448 n. 5
256–257, 262 imitation of Ford manufacturing model, 478
technical education, 252, 254, 255, 397–399, Lingotto plant, 461, 478
411, 416 n. 13 production agreements with foreign companies,
tertiary education (universities), 1860–1900, 421, 430–431, 441–442
251, 253–255 Finmeccanica, 443
years of schooling, international comparison, Firm. See firm size; multinational firms
21–22, 33, 76, 113, 240, 259–260–262, firm size, 467–474, 470–472, 473, 474
265–266 by country and sector, 2008, 467, 468, 468,
Einaudi, Luigi, 62, 77, 143–144, 360 469
emigration. See migration characteristics of exporting firms, 465–466
employment, See labor and employment downsizing of large Italian companies, 30,
ENEL (Ente Nazionale per l’ Energia Elettrica), 472–474, 475, 476
440, 444 effect on growth, 456–457, 464–467, 481
enfranchisement of 1912. See civic capital effect on ICT diffusion, 95–96, 465
ENI (Ente Nazionale Idrocarburi), 80, 146, employees, 468–471
443–444, 624 employment shift to medium- and small-scale
entrepreneurship, 474, 476–481, 482 firms in 1970s, 88, 119, 120, 468–470
among emigrants, 261, 278 export shares of low-, medium-, and high-
decrease in older people, 125, 133 nn. 21–22 technology goods, 336–337, 345, 346–347,
fourth capitalism and mid-sized firms, 480–481 350 n. 5
innovative medium-sized exporting firms, 410, fourth capitalism and mid-sized firms, 480–481
411, 414 growth of medium-size multinational
political connections, 305, 311, 476–477 companies, 442–444, 446
Esame di Stato examinations, 254, 257 impact on innovation and research, 464–465
Ethiopia, 59, 333, 337, 360, 478 number of workers per plant, by sector,
European Common Market, 79, 102, 345, 622–623 1911–2007
See European Economic Community (EEC) and organizational structure, 95–96, 465
European Economic Community (EEC), xi, and productivity, 466–467
70–71, 621, 623 small firms and the “Third Italy,” 152–153, 588,
European integration. See European Common 594
Market; European Economic Community value added per hour worked by firm size,
(EEC); European Monetary System (EMS); 466–467
European Monetary Union (EMU) fiscal policy. See monetary and fiscal policy
European Monetary System (EMS) flexible-specialization model, 86, 88
crisis in 1992, 92, 363 foreign direct investments (FDI), 16, 381,
establishment in 1979, 363, 446 383–384, 407–409, 437–440
euro introduction in 1999, 363, 446 as channel for technology transfer, 380, 395
Exchange Rate Mechanism, 363 cost-saving strategy, 418
Italian exit, 92, 100 effect of state-owned enterprises (SOEs), 445,
Italian participation, 25, 89, 90, 102, 117, 447
363 in 1890s, 16, 381
index 777
foreign subsidiaries founded by Italian firms, trade war with France in 1880s, 14–15, 42, 193,
1900–1981, 420 337, 343, 615
horizontal FDIs, 418 undervaluation and export, 352–353, 366–368,
impact on Italian innovation, 407–409, 413–414 369–373
Italian-owned manufacturing firms abroad, See also real exchange rate (RER); regional
1986–2009, 436–437 differences in geography and trade; tariffs;
Italian shareholdings abroad in 2009, 437–438, trade policies
439, 440, 450 nn. 15–18 fourth capitalism and mid–sized firms, 480–481
motivations, 418, 437 Franco–Italian treaty, 63
nonequity investments, 418, 437
as percentage of GDP, 2010, 437, 438, 463 Garibaldi expedition, 3, 309
as percentage of world total, 2010, 437, 438 Gentile, Giovanni, 63, 253, 254, 397–398
overregulated economies and, 122 Germany, 39, 40
vertical FDIs, 418 Gastarbeiterprogramm, 280
See also multinational firms; technology GDP growth, 1930s, 19–20
transfer immigration of refugees after the war, 116
foreign technology transfer. See technology regional income differences, 125–127, 129
transfer Soziale Marktwirtschaft, 21, 111
foreign trade, 327–329, 334–337, 345, 348–349 trade with Eastern Europe, 120–121
comparative advantage, 338–342 See also Italy, Germany, and Japan (IGJ) after
empire trade, 60, 61, 333, 337 World War II
exporting firms, 465–466 Gerschenkron, Alexander, 43, 55, 140, 142–143,
exports and economic growth, 328–329 150–152, 169
export shares in GDP, by sector, 1862–1938, Giannini, Massimo S., 563, 564
616, 618–619 Giannini Plan, 564
export shares of low-, medium-, and high- Gini index of per capita income, 3, 4, 234–237
technology goods, 336–337, 345, 346–347, Giolitti, Giovanni, 16, 310, 526
350 n. 5 Giolittian era (1900–1913)
exports in GDP, 1948 to present, 621, 622 exports, 328, 339, 348
geographic reorientation of trade, 337–338, foreign investment in Italy, 381, 383, 387,
342–345, 621, 623 395–396, 413
Italian trade with Eastern Europe, 1990–2010, GDP growth rate, 26–27
121 income distribution, 236
low-technology and labor–intensive Italian industrial development, 168–169, 170
exports, 99, 121, 463 investments in plants and equipment, 171, 394,
machinery exports, 402–403, 416 n. 16 412
machinery imports, 382, 384, 393–395, 402– liberal democracy, 18
403, 412 patenting, 381, 386, 387, 389, 396, 412
macro-trends, 1862–2009, 330–338 productivity growth rate, 16, 193–194
manufactures as share of imports and exports, “parallel administrations”, 562
1862–2009, 333, 334 technical human capital, 397, 409
manufacturing exports 1862–2009, 335–336, undervaluation of Italian currency, 372
342–345 globalization, first, 38–40, 457–458
openness ratios, 330, 331 convergence of Italy, 16–18
revealed comparative advantage (RCA) index, globalization backlash, 18
71, 99, 115, 328, 338–339, 616, 629 n. 17 and unification of Italy, 9–10, 38
share in world trade relative to share in world See also industrial revolution
GDP, 331–332, 622 globalization, second (1990–2011), 26–36, 70–74
share of Italian exports since mid-1990s, 46 declining global share of Italian exports since
share of world trade relative to share of world mid–1990s, 463
income, 600, 622 divergence in, 26–36
shares in world trade, by country, 330–331, 332 gross domestic product (GDP) per person, 26, 94
shares of world output and world exports of ICT and high-technology industries, 463
manufactures, 71, 73 competitive pressures from low–wage
specialization, 348–349 countries, 100, 103, 456, 463, 466
technologic balance of payments (TBP), 396– trade costs after World War II, 70–72
397, 405–406, 412 total factor productivity (TFP) slowdown, 27, 28
technology exports, 345, 346–347 See also stagnation (mid-1990s to 2011); third
trade balance, 330, 331, 458, 617 industrial revolution
778 index
Gobbato, Ugo, 478 stagnation (mid-1990s to 2011), productivity,

Golden Age (1950–1973), 22–23, 75–82, 102, backwardness
461–462 growth opportunities (GOs), 493–494, 496
education, 97, 267–268 and credit, 492–495
exports and imports of manufacturers price/earnings (PE) ratios as proxy for, 486,
foreign direct investments, 383–384 493–494, 496, 507
GDP growth rate by country, 1953–1973, 112, and realized growth, 496, 498, 501, 503–506,
113 507–508, 509
GDP per person, 22, 71–72, 73, 75–76, 462 See also price/earnings (PE) ratios
industry growth, 461–462 growth theory
Italy, Germany, and Japan (IGJ) after World Keynesian growth model, 146, 521
War II, 111–116 neoclassical growth model, 211–217
international capital mobility, 71, 72 Palmerton on industry–led development or
macroeconomic program (programmazione), balanced growth, 136–139
78, 81–82 Smith on natural and unnatural development,
North-South regional convergence, 585–590 135–136
productivity growth, 22, 76, 195 Gualino, Riccardo, 422, 477
reduced trade costs after World War II, 70–72
special development policy (l’intervento Hamilton, Alexander, 136
straordinario), 78–79, 82, 88, 91–92, 104 Heckscher–Ohlin model of trade, 41, 45
total factor productivity (TFP), 22, 76, 214 high schools. See education and literacy: licei,
trade, 79, 71, 73 secondary education, technical education,
undervaluation of Italian currency, 361–362, ginnasi
372 Hirschman, Albert, 144
wage moderation, 79, 102, 114, 361 “hot autumn” (autunno caldo) of 1969
See also convergence causes, 119, 362
gold standard, 51–54, 58, 60, 359, 360 changes in labor market regulation, 115
bimetallic system, 51, 359 economic effects, 79, 82, 86, 418, 425, 450 n.
convertibility of the lira, 14–15, 51, 359 22, 592
deflation and return to gold standard, 57, 58, 360 political effects, 24
governance, measures of good, 97, 98–99, Human capital. See education; Giolittian Age
536–538 Human Development Index (HDI), 240–242, 243,
gross domestic product (GDP), 3–6, 8, 16, 24, 26, 247 n. 4
83–84, 93, 94 hydroelectric power development, 18, 57, 59, 193,
distributionally adjusted GDP per capita, 458, 619
236–237
effect of migration on North–South differential ICT. See information and communications
in GDP per capita, 578, 585 technologies (ICT)
G10 in 1870 and 1998, shares in world GDP, 12 import. See foreign trade
GDP growth rate by country, 1861–2007, 8, 216 income, 228–231
GDP growth rate by country, 1953–1973, 112, Atkinson index of per capita income, 234–236,
113 237
GDP per capita and per equivalent person, data problems, 234–235
1861–2011, 165–166, 229–231 distribution of income, 3, 4, 29, 233–237
GDP per capita gaps between regions, 7, 574, Gini index of per capita income, 3, 4, 234–237
576, 580, 582,583, 585, 586 government debt and per capital income
GDP per capita in selected countries, 1861– growth, 521–523, 530 nn. 9–11
2011, 228, 229 and human development in the Mezzogiorno,
GDP per hour worked, 1995–2007, 93, 94–95 7, 595, 596
Golden Age (1950–1973), 22, 71–72, 73, 75–76 inequality, long–run dynamics of, 235–237
Italy, Germany, and Japan, 1946–2011, 108, 109 and Italian Household Budget Database, 234
school years of population vs. GDP per capita, regional income differences, 125–129, 601–602,
265–266 626–627
See also national accounts; productivity; See also gross domestic product (GDP) per
standards of living; backwardness person; standards of living
growth income inequality
“big push,” 141–143, 150–152 Atkinson index, 234–236, 237
See also gross domestic product (GDP), Golden Gini index, 3, 4, 234–237
Age (1950–1973), slowdown (1973–1992), long–run dynamics, 20, 25, 235–237, 246
index 779
and social welfare, 233–234 See also North-South gap; regional differences
See also inequality in geography and trade
industrial districts, x, 22, 34, 77, 86, 96, 99, 121, infant mortality, 15, 33, 237, 238, 239, 537
132 n. 19, 140, 152–153, 268, 410, 443, 448, inflation, 21, 24–26, 53, 74, 80–81, 100–101, 102,
464, 480, 576, 594, 625 112, 117–119, 144, 356–357, 360–363
industrial policy, 18–19, 54–60 information and communications technologies
convergence, 64–67 (ICT), 32, 34 74, 92–93, 95–96
flexible-specialization model, 86, 88 firm size, effect on ICT diffusion, 95–96, 465
German developmental model, 39–40, 55, 56 human capital, effect on ICT diffusion, 32–33,
hydroelectric power , 57, 59, 193, 458, 619 34, 93, 465
industrial districts, 152–153, 480 and investment in intangible capital, 95–96
iron and steel tariffs, 41, 43, 49 labor productivity in US services, 207, 220, 462
legacy after World War II, 60, 62 regulation, effect on ICT diffusion, 32, 34, 93,
machinery industry, 402–404 95
protectionism, 18–19, 41, 46 infrastructure. See investment; railways.
small-scale firms, 152–153, 588, 594 innovation, 378–393
steel industry, 55–56, 57 designs and models, 391–392
industrial revolution, 17, 187, 266, 267, 457–458 determinants of Italian technologic innovation,
composition and size of firms, 470–472, 473, 407–411
474, 475 engineering industry, 382
industries, 455 firm size, 464–465
leading regions in Italy, 266–267 impact of foreign technology on innovation,
transportation and communication advances, 407–411, 413
455–456 human capital, 33, 34, 76, 99, 397–399, 416 n.
See also globalization, first age of; second 11
industrial revolution; third industrial machinery industry, 402–404
revolution, Institute for Industrial national absorptive capacity, 397, 399, 408–409,
Reconstruction (IRI) 412–413, 414
industry national innovative capacity, 391, 404, 406
and employment, 189–190, 604–605, 606–607, research and development (R&D), 76, 378, 384,
628 n. 6 396–397, 399–401, 406
engineering industry, 382 state-owned enterprises (SOEs), 401
industrial policy, 64, 78 trademarks, 392–393
labor productivity, 190–197, 204–207 See also absorptive capacity; patents and
labor productivity, international comparison, patenting; technology transfer
207–210 Institute for Industrial Reconstruction (IRI), 19,
machinery industry, 402–404 21, 22, 31, 60, 62, 110, 479, 490
See also domestic market access; Golden Age banking and industrial system bailout, 584
(1950–1973); industrial districts; industrial Economic Recovery Administration and
policy; industrial revolution; Institute for postwar reconstruction, 145–146
Industrial Reconstruction (IRI); North– industrial policy, 64, 78
South gap; second industrial revolution; silk managerial capitalism, 479
industry; slowdown (1973–1992); stagnation takeover of banks, 19, 59, 490
(mid–1990s to 2011); tariffs takeover of industries, 19, 60, 479, 490
inequality International Adult Literacy Survey, 264–265
caloric intake vs. other countries in 1861, 3 International Committee of the Red Cross, 38–39
distributionally adjusted GDP per capita, International Postal Congress, Paris, 1863, 38
236–237 international monetary system, 51–54, 71–72, 77,
dynamics of equality vs. GDP per capita, 244, 143, 147
245 investment, 164–165
effect of educational policies, 250 infrastructure and public works investment,
income inequality, Atkinson index, 233, 539
234–236 in intangible capital and ICT, 95–96
income inequality, Gini index, 3, 4, 234–237 in plant, machinery, and transport equipment,
income inequality, long-run dynamics of, 20, 1911–1951, 172–173, 174
25, 235–237, 246 in plant and equipment, 1861–1911, 171
income inequality and social welfare, 233–234 See also railways
regional inequality in GDP per capita, by IRI. See Institute for Industrial Reconstruction
country, 573, 580, 595 (IRI)
780 index
istituti tecnici, 252, 254, 255, 399, 416 n. 13 costs, 556

Istituto di Ricostruzione Industriale (IRI). See geographic differences, 553–554
Institute for Industrial Reconstruction (IRI) incoming cases, 553
Istituto Mobiliare Italiano, 490 number of lawyers, 555
“Italy and the World Economy, 1861–2011” quality of judgement, 556
project, x rates in appeal, 556, 557
See also civil justice system
Japan, 116, 121 Lutz, Friederich, 142, 147
bursting of Japanese bubble, 119, 120, 124 Lutz, Vera, 140, 143, 147–150
catch-up growth, 26–27, 71
fiscal stabilization plan in 1949, 110 map: diffusion of mutual aid societies, 309
high-tech activities, 115 map: Italy, 1848, xii
regional income differences, 125–127 map: Italy, present day, xiii
zaibatsu dissolution, 110 markets
under autarky, 461
Keynesian growth model, 146, 521 capital market, 56
Kingdom of Italy, 3, 11, 12, 38–40, 309 foreign market access, 1950 to present, 621–626
conversion to single currency after 1861, 13, liberal market economies in 1950s and 1960s, 74
613 market seeking strategy, 418, 437
democratization, 309–311 market unification after 1861, 12, 13, 14, 35, 546
Destra storica, 136, 150–151 regulation, 1973–1992, 84, 85, 86
education, 251–253 See also autarky; domestic market access;
market unification, 12, 13, 14, 35, 546 European Common Market; foreign trade;
pre-unification institutions and civic traditions, regional differences in geography and trade;
306–308 trade policies
railroads, 13 Marshall Plan 21, 78, 383–384
state budget, 525–526, 527 economic effects, 20, 77, 484 n. 17, 584
Italy Country Study (Economic Recovery
labor and employment Administration), 143–147
child labor, 7, 15, 17, 231–232, 246 technology transfer, 383, 394–396
employment and firm size, 470–472 See also postwar settlement
employment protection, 84, 85, 93 mass production
employment shares by region and industry and autarky, 461
sector, 604–605, 606–607, 628 n. 6 in 1950s and 1960s, 384
“hot autumn” and changes in labor market and labor productivity, 207, 210
regulation, 115 motor vehicles, 501
agriculture, movement out of , 76, 79, 189–190 second industrial revolution, 456
employment by country and sector, 6, 189–190, steel, 16, 458, 461
200, 201–202, 203–204, 459–460 Menichella, Donato, 78, 144, 148
unemployment rates, 587–588, 591, 592 Mezzogiorno. See North-South gap, productivity,
labor productivity. See productivity regional differences in geography and trade.
Latin Monetary Union, 51, 359 migration, 271–274, 282–290, 298–299
Law 4/68 (self–certification enforcement), 565 anti-immigrant attitudes in United States
Law 29/93 (rules for public employees), 565 attitudes to immigration, 271, 277, 280, 284,
Law 142/90 (local administrations), 564–565 290–291, 293, 294–295, 297–298
Law 142/90 (local autonomy), 565 characteristics of emigrants, 274–280
Law 241/90 (administrative procedures), 565 determinants of emigration, 281–282, 283, 300
Law 634/1957 (Southern Italy Development nn. 9–11
Fund), 589 economic impact, 5, 62, 64, 286–290, 291, 578, 585
Law 646/1950 (Southern Italy Development emigration by main destination, 271–272, 274,
Fund), 589 280, 577
licei, 251–254, 260 emigration rates, 272, 274
life expectancy, 3,4,7,15,33,227,237, 243–244 illegal immigration and crime, 297–298
North–South gap, 7, 572, 580 immigration into Italy, 261, 290–296
in selected countries, 238 internal migration from South to North,
See also standards of living 127–128, 261, 361, 625
List, Friederich, 136 migration policies, 62–64
literacy. See education North-South differential in GDP per capita,
litigation, 554, 555, 553–555 578, 585
index 781
policy in Ireland, 64 accumulation rate (investment/GDP ratio),

return migration, 272, 275–276, 280, 284, 300 1861–2010, 167, 168
nn. 4–5, 577 deflator estimates, 165
seasonal migrants, 275, 276, 285 demand-side estimates, 162–165, 181–183
skill premia, Italy vs. United States, 279 interpolating algorithm, 178–179
welfare shopping and welfare tourism, 297 investment, 164–165, 171–174
See also remittances Italy’s total economy performance, 1992–2010,
miracolo economico. See Golden Age 217–219
(1950–1973) GDP per capita, constant prices, 1861–2010,
monetary and fiscal policy, 13, 15, 52, 56, 65, 165, 166GDP levels, market prices, 1911–
89–92, 117–119, 130, 613 1951, 172, 173
Bretton Woods international monetary system, methodology, international labor productivity
71–72, 77, 143, 147 comparisons, 221–223
Bretton Woods system breakdown and methodology, national accounts reconstruction,
aftermath, 24, 195, 362–363, 430 158, 160–165, 175–176, 176–184
convertibility of the lira, 14, 359, 360 methodology, supply side (1861–1970),
currency misalignments, 352, 356, 357, 359 176–178
financial crisis of 1907, 52–53, 57 private consumption, 1861–2010, 166–167, 168,
government bonds (rendita), 52–53, 54 170–173
Great Depression, 58–60 sectoral analysis, 1861–2010, 165–167, 219–221
lira devaluation in 1992, 93, 594 sector classifications, 161–162, 163
lira revaluation under Mussolini, 54 TFP effect on aggregate growth: growth
macroeconomic program (programmazione) in accounting approach, 211–217
1960s, 78, 81–82 See also gross domestic product (GDP) per
participation in European Monetary Union person
(EMU), 100–101 Natta, Giulio, 427–428
public debt, 524–525, 528 neoclassical growth model, 211–217
response to Great Depression, 58–60 Nitti, Francesco Saverio, 142, 479, 580, 584
See also public debt North-South gap, 147–150, 511, 572, 574–575,
monopolies, 137–138 581, 582, 584
See also state–owned enterprises agricultural productivity slump in South, 1861–
Montecatini, 422–425, 427–429, 383, 461, 478 1913, 576–577
chemical products, 383, 424, 427–428 banking law of 1926, 584
fertilizers, 424, 461, 478 Cassa per il Mezzogiorno, 78–79, 91, 148, 543,
foreign subsidiaries, 423–424, 428 588
joint venture in the chemical industry, 383 city-state evolution in North before 1861,
research, 383 307–308, 320
Montedison, 427, 429, 435, 436 civic capital, 304, 319–320
multinational firms, 417–418, 420, 424–434, 436, civil justice, geographic differences, 551–552,
440, 442–444, 446, 447–448 553–554, 555, 558, 559, 567
Italian-owned manufacturing firms abroad, convergence, 1951–1973, 127–128, 246, 585–
1986–2009, 436–440 590, 625, 590–594
interwar period, 421–424 crime rates, 1861–1913, 574–575
seeking strategies, 418, 437 Doing Business indicators, 104, 105
from 1880 to 1914, 418–421 education and literacy, 7, 574, 580–581, 586
from 1945 to 1969, 424–430 emigration, 7, 272–273, 577–578, 585, 583
from 1970 to 1992, 430–436 Fascist economic policy impact on South,
from 1993 to 2011, 436–444, 450 nn. 15–18 583–584
nonequity investments, 418, 437 fertility decline and demographic dynamics,
See also foreign direct investments (FDI); 584–585
Mussolini, Benito GDP per capita gaps between regions, 574, 576,
monetary policies, 54, 360, 423, 617 580, 582, 585, 586
economic policies, 18–20, 58–59, 360, 477 government policy, 1861–1913, 578–580
emigration policies, 63–64 government policy, 1951–1973, 588–590,
mutual aid societies (voluntary associations), 308, 595–597, 624
309, 314–315, 323 n. 2 government in South before 1861, 306, 307, 320
income and human development in the
Napoleon III, 51, 140, 309 Mezzogiorno, 7, 595, 596
national accounts, 157–160, 165–167, 172–175 industrial geography, 8, 575–576, 588
782 index
North-South gap, (Cont.) Piombino, 16, 458

industrial growth rates, 1861–1913, 575–576 Pirelli, Alberto and Piero, 477
internal migration from South to North, Pirelli, 16, 432, 433, 440, 441, 458, 477
127–128, 261, 361, 625 export business, 448 nn. 2–3
international comparison, 572, 573 foreign subsidiaries, 419, 477
Law 634/1957, 589 research, 383
Law 646/1950, 589 products, 419, 448 n. 2
life expectancy, 7, 572, 580 policy. See monetary and fiscal policy, industrial
macroeconomic program (programmazione), policy, migration, trade policies
78, 81–82 politics
population disparities, 572, 573, 582, 594–595 and administrative corruption, 561–562
productivity trends, 1951–1973, 585–586, 587 distributional coalitions, 24, 35, 103, 110, 123
productivity trends, after 1973, 587, 591–593, and entrepreneurship, 305, 311, 476–477
594–595 political influence over bureaucracy, 546–548,
public services, quantity and quality of, 566
596–597 See also administrative system in Italy; civic
regional income differences, 125–129, 601–602, capital; entrepreneurship; industrial policy;
626–627 monetary and fiscal; policy; postwar
sectoral industrial clusters, 576, 584, 588, 600, settlement; trade policies
618–619 post-oil shock period. See growth slowdown
socialist and communist parties in North and (1973–1992)
South, 305, 318–319, 320 postwar settlement, 20, 77–78, 80, 82, 102
special development policy (l’intervento See also Golden Age (1950–1973); Marshall
straordinario), 78–79, 82, 88, 91–92, 104 Plan
state-owned enterprises’ investment in the poverty, 3, 4
South, 589, 592, 596, 624 See also standards of living
transport, 1890–1950, 6, 13, 579, 613, 617–618, Preture, 550, 551, 553–554, 556, 558, 568 n. 6
621–622 price/earnings (PE) ratios, 486–487, 493, 494, 496,
unemployment rates, 587–588, 591, 592 499–501, 507–512, 513
Vanoni Plan, 148 and allocation of resources by banks, 486
voter participation, differences in, 304–305, cointegration between credit and PE ratio,
310–311, 312–317, 319–321 486–487, 508–512, 513
water resources in North, 572, 600, 612–615, 619 productivity, 187–189, 217–221
welfare indicators, 1861–1913, 572, 574, 580 convergence, 24, 26, 34, 84, 195, 220–221
See also regional differences in geography and firm size, 466–467
trade, convergence growth, 1911–1938, 194
growth, 1938–1951, 194
oil shock of 1973, 25, 418, 427, 431 growth, mid-1990s to 2011, 26, 27–28, 92–93,
oil shock of 1979, 90, 119, 446 195–196
Olivetti, 422, 426, 433–435 growth in Giolittian era (1901–1911), 16,
electronic components, 427, 449 nn. 7–8, 463, 193–194
480 growth in Golden Age, 22, 76, 194–195
export business, 425 labor productivity growth and currency value,
internationalization, 425–427, 449 n. 7 191, 192, 356–357, 361–362, 363
Orlando law, 253 labor productivity levels by country,
overvaluation of currency. See real exchange rates 1870–2007, 207–210
(RER) labor productivity, international comparisons,
221–223
Palmerston (Henry John Temple, Viscount labor productivity, methodology, 211–213
Palmerston), 137–138, 140 sectoral labor productivity growth, Italy,
Pasinetti, Luigi, 149 1861–2010, 190–197
patents and patenting, 76, 385–389, 412 sectoral labor productivity growth by country,
foreigners’ patents in Italy, 395–396 1870–2007, 204–207
in Giolittian era (1900–1913), 381, 386, 387, shift-share analysis of labor productivity growth
389, 396, 412 rates, 1861–2010, 197–199
index of revealed technologic advantage, 389, 390 South, 1951–1973, 585–586, 587,
Italian residents’ patents granted abroad, 386, 591–593
389, 390, 391 TFP and capital deepening, contribution to
See also innovation labor productivity dynamics, 214–215
index 783
See also gross domestic product (GDP) per undervaluation, effect of labor supply
person; total factor productivity (TFP) undervaluation and economic growth, 352,
protectionism, 10, 14, 18–20, 57, 136–141, 152, 363–365
328, 461, 581, 583, 600, 615 undervaluation and export, 352–353, 366–368,
See also autarky; tariffs; trade policies 369, 370–373
public debt, 30, 74, 88–89, 516–519, 524, 529 undervaluation measurement, 352
after unification, 30, 52, 579 regional differences in geography and trade,
budget deficits, 26, 88–89, 527–529 599–601, 626–627
composition of debt, 518–519 economic structure, 604–605
growth and debt, 516–517, 519–528, 530 nn. elasticity of employment share with respect to
9–11 distance from Milano, 604–605, 608–610,
debt accumulation/reduction, 1880–1913 vs. 614, 618, 624, 625
1985–2007, 516, 524–528 employment shares by region and industry
debt-to-GDP ratio, 17, 26, 30, 88, 91, 93, 246, sector, 604–605, 606–607, 628 n. 6
360 external trade costs, 611
in 1870s and 1880s, 52–53 foreign market access, 1950 to present,
fiscal policy and, 524–525, 528 621–626
government bonds (rendita), 52–53, 54 geography model, 605, 611–612, 624, 626,
government expenditure and revenue, 524–526, 627–628
527 income differences, 125–129, 601–602,
Gran libro del debito pubblico, 517, 530 n. 2 626–627
inflation and debt after World War II, 21 industrial geography, 8, 575–576, 588
literature on debt-GDP growth link, , 30, 91, natural advantage in North, 600, 612–615, 619
520 519–521, 524–528 population and income shares, 601–602
monetization of debt in 1970s, 25 sectoral industrial clusters, 576, 584, 588, 600,
Mussolini government, 18, 54 618–619
threshold of 90% debt–to GDP, 29, 91, 520 specialization, 623, 624, 625
transmission channels from debt to growth, 91, transport, 1890–1950, 6, 13, 579, 613, 617–618,
520, 523 621–622
Putnam, Robert, 139, 153, 304–305, 307–308, 319, urban population, balance and changes,
321 603–604
value-added per capita, by region, 602
railways wages in North, 600, 620–621, 625
construction, 6, 13, 193, 476, 589, 598 n. 9, water resources in North, 572, 600, 612–615,
618 619
foreign investments, 381, 458 See also domestic market access; foreign trade;
and human capital, 548 North–South gap.
and international trade, 617, 621 remittances, 60, 284–286
and public administration, 539, 542 economic impact, 142, 286, 288, 289–290, 600,
and protectionism, 40 615–617
and growth, 151, 382, 443, 574, 579, 613 and exchange rates, 17, 358, 617
real exchange rate (RER) , 351–353, 359–365 and repatriation rates, 577
bilateral misalignment measurement, 352, share of GDP, 285, 286, 600, 617, 622
354–355, 366, 376 n. 25 and trade balance, 458, 617
correction for Balassa-Samuelson effect, 351– transfers in banking system, 63, 285–286
352, 353–354 Rendita (government bonds), 52–53, 54
currency misalignment, 352, 356, 361–362, 363 Ricardo, David, 136
undervaluation, determinants of , 356–359, Risorgimento, 10, 16, 139, 308–309
352, 356, 357, 359 Romeo, Rosario, 140, 142–143, 150–152
fiscal policy and undervaluation, 352, 356, 357,
359 scuola complementare, 254
implications for economic growth, 353 scuola materna, 254
labor productivity growth and currency value, scuola media, 254, 255, 256, 260
356–357, 361–362, 363 scuole commerciali, 253
overvaluation of Italian currency, 352–353, 363, scuole professionali, 252–253, 268, 269
373 scuole reggimentali, 259
lira revaluation under Mussolini, 54 scuole tecniche, 252–253
trade-weighted undervaluation, 353, 354–355, second globalization. See globalization, second
357, 359, 361, 363 (1990–2011)
784 index
second industrial revolution, 11, 16, 456, 458 Smith, Adam, 135, 136
composition and size of firms, 470–473, 474, Smith, Penelope, 138
475 SNIA (Società di Navigazione Italo–Americana) ,
foreign subsidiaries of Italian firms, 419 422, 423, 427
industries, 456 international success
Italian industry, 1880 to 1914, 458 foreign subsidiaries, 422–423, 427
Italian industry, 1960s, 461–462 laboratories and research, 383
See also third industrial revolution textile business, 422–423, 427, 449 n. 6, 461
services social welfare, 116, 233, 236, 535
“Charter for Public Services” (Cassese), 565 Società Strade Ferrate Meridionali, 476
credit, 495–498 Sombart, Werner, 139–140
employment, 6, 29, 189–190 South. See North-South gap, productivity, regional
growth, 84–85, 188 differences in geography and trade.
labor productivity, 16, 28, 190–197, 204–207 Southern Italy Development Fund, 78–79, 91,
labor productivity, international comparison, 148, 543, 588–590, 594, 598 n. 10
207–210 Spaventa, Luigi, 149, 153
liberalization, 97, 225 n. 16 special credit institutions, 445, 490, 491, 511, 513
national accounts, methodology, 175, 177, 178, specialization
183, 185 causes of changes in specialization, 348–349
opening trade, 29 flexible-specialization model, 86, 88
price/earnings ratio, 499–502 stagflation in 1970s, 72, 74
public services, 23, 104, 526, 535, 541–544, stagnation (mid–1990s to 2011), 92, 121–123
596–597 educational quality, 97, 99
regulation, 1975, 1990, 86 exports, 99, 121, 463
structural change, 74, 84, 197–204 GDP per person, 1995–2007, 93, 94
transportation and communication advances, ICT, 92–93
455–456 industry growth, 92, 463–464
transport, 1890–1950, 6, 13, 579, 613, 617–618, competitive pressures from low-wage countries,
621–622 100, 103, 456, 463, 466
value added, 10, 166, 167 and investment in intangible capital, 95–96
See also banking system Italy, Germany, and Japan, 120–125
silk industry and overvaluation of Italian currency, 373
effect of water resources, 613, 614 productivity, 26, 27–28, 92–93, 195–196
exports 1861–1914, 327, 341, 373, 377 n. 41, social mobility, 125
457, 600, 614 supply-side reform, 93, 96–97, 98–99, 100–101,
production in North, 457, 600, 614 102–103
silk reeling, 382, 614 See also globalization, second (1990–2011)
SITC classification, 350 n. 3 standards of living, 4–5, 15–16, 23, 227–228,
Silver Age. See slowdown (1973–1992) 243–247
Sinigaglia, Oscar, 57, 479, 484 n. 17 child labor, 7, 15, 17, 231–232, 246
slowdown (1973–1992), 23–26, 82–92, 102, 462, convergence, 239, 242, 245
463 GDP-augmented measures, 239–240, 243
employment protection, 84, 85 height of recruits, 3, 7, 15, 239, 279
female employment levels and, 84 hours worked per person, 20, 27, 231,
flexible-specialization model, 86, 88 232–233
GDP per person, 24, 83–84 income, 228–231
industry growth, 88, 119, 120, 462, 463, infant mortality, 15, 33, 237, 238, 239, 537
468–470 See also education and literacy; gross domestic
macroeconomic policies, 89–92, 117–119, 130 product (GDP) per person; income; life
and North-South regional convergence, expectancy
590–594 state-owned enterprises (SOEs), 80, 104, 114, 594
productivity convergence, 24, 26, 36, 84, 195 foreign direct investments, 445, 447
product-market regulation, 84, 85, 86 investment in the South, 589, 592, 596, 624
and retirement of men, 84 research and development (R&D), 401, 416 n.
service sector growth, 84–85 15, 463
social transfers, 87, 88–89, 117 See also Institute for Industrial Reconstruction
taxation, 84, 87, 89 (IRI)
total factor productivity (TFP), 83–85, 214–215 Stringher, Bonaldo, 53, 57, 360
and undervaluation of Italian currency, 372 sulphur mining and trade, 136–137
index 785
tariffs, 10, 41–51, 615 See also globalization, second (1990–2011);

agricultural tariffs in Europe, 45–46 industrial revolution; second industrial
agricultural tariffs in Italy, 42–43, 68 n. 2 revolution
engineering industries protection, 616 Toeplitz, Giuseppe, 58
impact of Italian tariffs, 43–51, 68 n. 5, 615–616 total factor productivity (TFP), 10, 213–215, 225
iron and steel tariffs, 41, 43, 49, 616 n. 19
manufacturing tariffs in Europe through 1913, labor productivity dynamics, 214–215
41, 46 effect of market regulation, 84–85
and market access, 615–616, 622 growth accounting approach, 211–217
“most-favored nation clause” impact, 17, 40 in Golden Age, 22, 76, 214
revenue (exotic) tariffs in Europe, 46–47, 48 international perspective, 215–217, 225 n. 21
tariff levels, by sector, 1897–1911, 49, 50 residual approach to TFP measurement, 211
tariff of 1878, 40–41 slowdown from 1970s to 1990s, 83–85, 214–215
tariff of 1887, 14, 41–42, 615 slowdown, 1990–2011, 27, 28, 217–219
textile tariffs, 1890, 615–616 structural change effect on labor productivity, 76
trade war with France in 1880s, 14–15, 42, 193, See also productivity
337, 343, 615 Toynbee, Arnold, 147
wheat prices and, 47–48 trade. See foreign trade; trade policies.
See also foreign trade; protectionism; trade trademarks, 392–393
policies trade policies, 41–51, 70–73, 79, 458, 577, 600, 615
taxation capital mobility after World War II, 71, 72
after unification, 12, 140, 532 n.21 Cobden-Chevalier treaty, 10, 38, 40
distortionary, 84, 87, 89 “European network of treaties” in 1860s, 40
and North-South gap, 128, 579 free trade in 1850s, 9–10, 40, 41, 136–139
and private sector, 526, 527 GDP per capita, 22, 71–72, 73, 75–76
and public spending, 30, 59, 520 Heckscher-Ohlin model, 41, 45
See also monetary and fiscal policy; public debt “most-favored nation clause” impact, 17, 40
Technical Assistance and Productivity Program, protection in Italy, late nineteenth century,
384 41–51, 458, 600, 615
See also European Recovery Program (ERP) trade treaty with France, 1863, 40
technology. See technology transfer, innovation trade war with France in 1880s, 14–15, 42, 193,
technology transfer, 5, 16, 380–384 337, 343, 615
exports of disembodied technology, 405–406 See also foreign trade; protectionism; real
foreign disembodied technology purchases, exchange rates (RER); tariffs
396–397, 405–406, 412 Tribunali, 550, 551, 553–554, 556, 558, 568 n. 6
and growth in backward countries, 32, 64
machinery imports, 382, 384, 393–395, Uffici di conciliazione, 550, 551, 553, 556, 559, 568
402–403, 412 n. 6
technologic balance of payments (TBP), undervaluation of currency. See real exchange
396–397, 405–406, 412, 463 rates (RER)
See also foreign direct investments (FDI);
innovation Vanoni Plan, 148
Telecom Italia, 435, 440, 441, 444 Villafranca armistice, 10
Terni (steel industry), 16, 56, 458, 476, 478, 483 voter participation. See civic capital
n. 10
third industrial revolution (technologic welfare, 116, 233, 236, 535
revolution), 456 pension, 526, 543
composition and size of firms, 470–473, 474, welfare shopping and welfare tourism, 297
476 See also education

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Library of Congress Cataloging-in-Publication Data

PART I AGGREGATE GROWTH AND POLICY

PART II SOURCES OF GROWTH AND WELFARE

PART III INTERNATIONAL COMPETITIVENESS

PART IV FIRMS, BANKS, AND THE STATE

PART V THE REGIONAL DIVIDE

Data Appendix—Italy’s National Accounts (1861–2010)

Brian A’Hearn: Pembroke College, Oxford

Giovanni Iuzzolino: Banca d’Italia

stubborn persistence of the most pronounced case of regional income inequality

Mario Draghi (President of the European Central Bank

Ignazio Visco (Governor of Banca d'Italia).

Frankfurt am Main and Rome, September 2012

Map: The Italian Peninsula before Unification (1848)

Map: Italy, present day

On May 5, 1860 when Garibaldi’s one thousand red-shirt volunteers, boarded

Table 1.1 Welfare indicators: 1861 and 2011

Sources: Chapters 6 and 8.

accounting and productivity statistics; welfare (including income distribution)

A Tale of Convergence and Two Tails

Source: Maddison (2001).

Table 1.3 A tale of convergence and two tails

Sources: Maddison (2001), http://stats.oecd.org/ Chapter 6, and Data Appendix.

The Years 1861–1896: Tenuous Growth

Source: Data from Maddison (2001).

successful in international economic negotiations than those of uncoordinated

The Long Convergence, 1896–1992

Hooking into the “First Globalization,” 1896–1913

fiscal, and exchange rate policies supported growth in a time-consistent fashion

Economic Survival and Political Collapse

duty was reintroduced together with an increase in overall protection of the

Catch-up Intermission, 1929–1945

Reconstruction: Setting the Stage for Long-Term Growth

The Golden Age

The Silver Age, 1973–1990

the advantages of an abundant supply of labor faded. Convergence itself reduced

Divergence in the “Second

From Convergence to Divergence

Table 1.5 Economic performance, Italy and advanced countries, 1992–2010

Sources: http://stats.oecd.org/ Chapter 7, and Data Appendix.

Table 1.6 Labor and Total Factor Productivity

Sources: Elaborations from Chapter 7 and Data Appendix.

Losing Growth Capability

goods, services, and capital (known as the “second globalization”); an accelera-

Missing Growth Factors

The Impact of Old Weaknesses

Education, a Case in Point

It is likely that the relative scarcity of human capital, as gauged by school

The Roots of Sluggish Growth

Why has Italy been so stubbornly resistant to deep institutional change?

long enough to allow institutional reforms to permeate society. This is likely

ITALY AND THE

harold james and

Introduction: Italian Policies

This chapter demonstrates that such a comparative perspective is

Kingdom of Italy to a developmentalism that in the 1880s focused on building