by Vera Negri Zamagni Johns Hopkins School of Advanced International Studies Bologna Center
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Italy was a mere geographical expression until 1861—it had never existed before this date as a nation. While it is true that the Italian economy is only 150 years old, the legacy of centuries of history is extremely complex. The imprint of the Roman Empire is evident in Italy—in its cities, infrastructure (roads, aqueducts, bridges, temples, theaters, thermal baths) and in the development of law. After the "barbarian" invasions of the Western Roman Empire, a new civilization flourished in the newly born Italian city states based on liberties: political (municipalities), cultural (universities), and economic (chambers of merchants and guilds). The city states also generated advanced economic institutions such as banks, insurance, public debt, double—entry bookkeeping systems, and commenda—the early form of joint—stock company. The ensuing economic success of the Italian city states of the Renaissance endowed Italy with its abundance of grand palaces and churches. Such leadership however could not be maintained beyond the sixteenth century and a slow decline set in. The beginning of the new kingdom in 1861 was therefore an opportunity for a Risorgimento not only in politics, but also in the economic arena.

The new state started off on the right foot, putting in place brand new legislation in the financial, fiscal, commercial and educational fields, aligning it with the most advanced European states of the time. However, business was slow to pick up for a number of reasons: coal reserves were non—existent and only a small amount of iron ore could be mined. Ports and railroads had to be built, and in terms of textiles, only silk was well established (making up half of Italian exports at unification). In cotton production, Italy was outdone by Great Britain.

Better organized banking, the introduction of some protectionism, but, above all, the discovery of hydroelectricity (known as "white coal" in Italy) spurred the industrial take—off of the Italian economy between the end of the nineteenth century and World War I. Italy was dynamic in most industrial sectors, with particular success in engineering and electricity (hydro). At this point, however, one of the impasses of the Italian economy emerged—one that has proven resistant to any solution to date.

The economies of the so—called industrial triangle (Milan—Turin—Genoa) took off, with the remaining part of the North and Center of the country following at some distance, while the South began to lag behind, demonstrating a distinct incapability to react positively to new economic opportunities. The causes of this differential performance along geographic lines are still hotly debated today and there is still no consensus on reasons why. What might be mentioned here is that already the liberal governments of the time realized the need for state intervention and put in place measures to encourage economic activity in the South, measures which were unfortunately discontinued as a result of the Great War.

World War I broke out in the early days of the development of the Italian economy and completely dislocated it. As a result a serious post—war economic crisis added instability and compounded Italy's political difficulties, leading to the fascist dictatorial regime of Benito Mussolini. It is by now an established notion of historiography that fascism did not disrupt Italian industrialization, but more accurately, it paid no attention whatsoever to the South (exacerbating the North—South gap). Italy faced the 1929 crisis with an across—the—board nationalization of banks and industrial corporations, which left a lasting mark on the Italian economy. Since the creation of the state—owned industrial holding IRI (Istituto per la Ricostruzione Industriale) in 1933, big industry in Italy, with the exception of a few companies like Fiat, remained under the control of the state until the end of the twentieth century—and in a few cases beyond!

The disastrous conclusion of World War II was not followed by the same negative political implications experienced after World War I due to the foresight of the United States government that launched the Marshall Plan. Italy was a substantial beneficiary of the Plan, through which industry was re—launched and a true "economic miracle" was achieved. In the 1950s and 60s Italy's economic growth rates were among the highest in the world. When the oil crises of the 1970s broke out, the ensuing slowdown of the economy was not well understood by the ruling political parties.

Attempting to restore previous growth rates, governments in the 1980s carried on a reckless fiscal policy (with extremely high budget deficits). At the same time governments sought to remain part of the European process of integration, which returned to a common orthodox monetary policy with the creation of the EMS (the European Monetary System) in 1979. The result of this incoherent approach was that a mountain of public debt accumulated in the span of a few years, which would prove to be one of the major stumbling blocks of the Italian economy in subsequent years. Fortunately, a season of success for Italian small and medium sized firms kept the Italian economy afloat, creating substantial exports up until the 1990s.

By the end of the twentieth century, the results of the industrialization process were substantial: Italy had become a fully industrialized country, belonging to a small league of the most advanced nations of the world, though with some notable characteristics—a predominance of small size of businesses, a deep North—South gap, and a high public debt—all of which were viewed with suspicion according to global public opinion.

At the beginning of the twenty—first century, globalization challenged the Italian economic structure further. State—owned enterprises (including banks) were privatized, many Italian small businesses suffered in the race for internationalization, a number of reforms of the public administration were delayed, and governments lost the drive to face structural change. This explains why over the past decade, Italy has stagnated, losing ground in the international economic (and political) arena.

Is the country on the road toward decline once again? This fate does not seem inevitable. First, the amount of industrial production Italian corporations can supply is second in Europe only to German industrial might (and larger than British or French production). Second, Italian banks have been more resilient to the global economic crisis than most other banks—no bubbles were produced in the real estate market. Third, Italian entrepreneurship boasts world class excellence in niche products. Nevertheless, Italian governments have thoroughly neglected the fact that a country's competitiveness derives from the efficiency of its entire systemic structure, not only from its manufacturing sector.

Italy is now at a crossroads. What is badly needed is a government that has the courage to launch new infrastructure projects, make critical changes in public administration, revitalize innovation, and improve the labor market. If Italians succeed in securing such a government, the economy will soon be revived; otherwise, it will be impossible to stop the downslide. The major economic declines of the past should be a lesson to people living in this country to take the challenge seriously and reverse the trend before the gap between Italy and the advanced world becomes too great.

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