Italy: 16 facts and 7 anecdotes (2/3)
Why are we not growing?
Banca d’Italia and IMF, among others, have published great reports on the topic. The evergreens of the past decade have been:
- Low level of labour productivity
- Low effectiveness of public expenditure
- High taxes and huge bureaucracy
- Capillary presence of the mob
- Rigidity in the labour markets
- Huge tax evasion
- Difference between North and South
As mentioned before: this is an attempt to give my amateurish perspective of the story.
So why are we not growing? To grow you need to
- Generate enough income
- Be able to reinvest it
- Have profitable investment opportunities to reinvest your income in
The problem is not in the lack of profitable investment opportunities, the many inefficiencies that Italy has can be exactly those opportunities.
I rather believe the issues are:
- A substantial portion of income cannot be reinvested in profitable activities because it gets deployed in unproductive areas
- Some characteristics of the public and private sectors drag down economic activity capping Italy ability to generate enough income
- The process of resources allocation is deeply suboptimal
1. A substantial portion of income cannot be reinvested in profitable activities
Income gets sucked up in unproductive areas pensions, interest payments on debt and taxes (fair to guess that public spending is less effective than private spending).
1A. Pensions: demographics and past policy don’t help
We have a strong unbalance in the proportion of people that can work to assist the rest of us who can’t. This combined with generous retirement policies in the past decades becomes a big hole where we country’s income ends up.
Fact7: For every individual not in working age Germany has twice as many potential workers as Italy. Population in the range 15–64 years old is 57% of total, in Germany 72% (France 65%, Netherlands 75%). So Germany has 2.6 (.72/.28) potential workers per person not in working age whereas Italy only 1.3 (.57/.43).
Fact8: Until recently pensions were based on the latest salaries the employee earned and not on the effective contributions he paid throughout his career. Since salaries tend to increase under this scheme the government has a pension liability structurally higher than the amount it gets from pension contributions, which means that when the party is over and you can’t get more debt from abroad new generations have to pay for the extra-pension of old ones.
Anecdote1: Go in any bar, open this discussion and you will hear a ton of stories of people retiring at the age of 35–40 until a couple of decades ago. Stories get particular frequent for people who were somehow involved in politics — must be by chance.
1B. Taxes: tough on the honest and gentle on the dishonest.
Fiscal pressure in Italy is one of the highest in Europe. Our tax structure also contains some weird beasts like IRAP, which basically disincentivizes companies to employ labour (the amount taxed is gross of salaries so if both company A and company B produce $100 but A employs more people it gets taxed the same amount of B as salaries are not deducted in IRAP computation).
Fact9: Italy fiscal pressure is around 55% (as measured on official GDP, would be lower if you include the gray economy), France 50%, UK 40%.
Sky-high tax evasion makes the tax burden heavier on healthy companies and honest people, reducing their consumption and their ability to reinvest in profitable and legitimate activities. It is reasonable to believe that tax evasion is more endemic among SMEs rather than large corporates as the second ones are under higher scrutiny, for obvious reasons. Not talking about tax elusion and “Double-Irish” sort of solutions as these don’t affect only Italy, so we can’t blame on them our stagnation. Those issues affect Italy probably to a lower extent than in other countries where large corporates are more dominant.
The problem is really in SMEs/Professional services tax evasion: the fact that you have a few millions of SMEs evading taxes, even if each of them is individually small, makes the whole thing a very big problem by simple math.
Say effective tax evasion is 30% of the GDP. Assume that I tax it at 50% I get 15% of GDP available. Public healthcare is 7%, you can rebuild it 2 times. Education is 5% you can rebuild it 3 times.
Fact10: 51% of self-employed workers (with VAT number) declare less than 15.000€ per annum. Only 3.3% of VAT registered numbers declares more than 100.000€, 1.4% among entrepreneurs. Yes, there are no typos, 2011 data.
Fact11: People without VAT numbers that make more than 150k are 143.400, around 120.000 of these are either employees or retired, i.e. the guys that can’t lie that much on how much they make.
Anecdote2: Go in any big city and you will see that the percentage of luxury cars, unaffordable for a less than 150k a year, is stratospherically not in line with the numbers above.
Anecdote3: Apparently in Naples there are a few stands in the daily market where you can “buy” invoices. So it goes like this: you realized you have been invoicing too little, you need to declare some more revenues to avoid issues with “Fisco”, as it checks on average figures for the sector you are in, so called “studi di settore”, there you go doing fake invoices.
To be noted we also had toxic policies repeatedly having tax evasion amnesties, “Condono”, a quick but short-sighted way for the State to cash-in, misaligning incentives in the medium-long run.
1C. Interest on public debt: a huge drawback
Even before the 2011 crisis we were paying €90bn on debt (which is mainly interest and not principal repayment), that’s 5% of GDP. Education is still at 5% and public health still at 7%.
Notice here though that around 50% of €90bn goes back into Italy’s pockets as the main creditors of Italy government are Italians, so to some extent those get funneled back into national consumption and savings — still this burden prevents the State from reinvesting in profitable activities.
Fact12: Italy debt was a 20% after WWII, stayed below 60% until the end of the 70s and then by mid 90s rocketed to 120%. Thanks guys, you rocked it.
2. Some characteristics of the public and private sectors drag down economic activity
Looking at income as (Productivity per hour x N. hours of work), my sense is that low profitability is not a problem of n. of hours (the sort of issue that France has), especially in the private sector.
It is rather an issue of productivity, which has been stagnant for years whereas it grew in the rest of EU, and labour organization — in particular in the public sector. Don’t have a lot of numbers to support that but a few anecdotes:
2.A Public sector effectiveness
Public owned companies were used in the past as a way to employ people that otherwise would have been unemployed. This generates organizational inefficiencies which slow the system.
Anecdote4: Here my example of over-employment in the public sector: I had to walk in a Ministry a couple of years ago and at the reception there were 4 men (instead of standard 1 that would be needed): one was watching television, one was sleeping on a chair, the third one was reading the newspaper and the fourth one was lazily doing the job.
Anecdote5: A friend had the opportunity to visit the “back office” of a Public Admin department. He had to make a verification on a document he sent a couple of years before. He discovered the way they were managing documents was paper-based to the maximum extent imaginable. When he went to the PA office the guy in charge brought him in a dusty room (their “back office”) where documents were “archived” in paper folders. It took them a couple of hours to find it. Computers and scanners are not a reality yet.
This over-employment creates all sort of organizational inefficiencies, e.g. documents need to be seen/signed by multiple people in multiple departments. The oversupply of manual labour results in delays/avoidance in technology adoption for process automation.
Software, even if available, is not eating the world of public admin yet.
2B. Private sector effectiveness
In Italy we have: large public/semi-public companies, same as everywhere else, a group of phenomenal SMEs but also a good number of SMEs on whose effectiveness we can debate.
(i) Small & Medium business competitiveness
1.To me the fact that a few of these SMEs are passed through generation casts a doubt on how effectively they are run.
Me:“Ok the founder was great but what about the nephew, is he the best person to run this company?”
Friend:“Simple if the nephew is not good enough the company would fail and go bankrupt”
Me:“Yes maybe, in the meantime he stops paying taxes and abide to the gray economy because, as he says, he would go bankrupt otherwise”
2. As wrote before before micro-enterprises employ a big portion of the workforce. We can either be in a situation where this workforce is in dynamic and lean companies or in that we are losing opportunities to do economies of scale. I am sure it’s a mix, some SMEs are phenomenal, others are plain inefficient.
Fact13: There was a study, which I can’t find anymore, according to which in Italy for each euro of revenues (i.e. I am controlling for size) the proportion of export is higher in large companies than in smaller ones. So if we were to replace all big corporates with SMEs we would have less export, even for the same total amount of revenues. This is not an obvious conclusion as it is often stated that SMEs export a lot, which would imply the exact opposite.
Fact14: If we take the numbers on SMEs showed in Part1 and we compute the ratio between (% of Added value produced / % of workforce employed) we have that very small companies are comparably less effective in Italy than in Europe (ratio of 0.6 vs. 0.7).
(ii)Companies struggles in doing business with the public sector
The amount of private business involved with the public sector is significant (we are talking about payments outstanding of €100bn in 2013) but:
- They struggle in getting paid, bad cash flow dynamics.
- Even worse: they fail as they don’t get paid by the government but they still have to pay taxes. It was not possible to compensate credit and debit versus the public sector, which created the dynamic outlined above. Apparently this is supposed to change now under Renzi government.
Fact15: In terms of days payable (n. of days with which the gov pays its commercial debit) Italy stands at 200 days, versus 70–75 of France and less than 40 in Germany (2010 data).
As a side note the topic of days payable apparently is a bit controversial on the way the comparison is made, I am not entering the discussion here but would appreciate inputs.
3. Sub-optimal resources allocation decisions
Don’t have a lot of numbers but it’s well accepted that mob in Italy is present everywhere. Decisions on which project should be financed/which vendor should get the project is highly influenced by that, as a result capital allocation process is by far not ideal.
