Andrea Boltho
Italy’s Regional Experience: Will the Mezzogiorno Finally Converge?

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Andrea Boltho ^*
Italy’s Regional Experience: Will the Mezzogiorno Finally Converge?

^* [ Magdalen College, University of Oxford]

Italy’s experience in trying to reduce the large income gaps that have long existed between the two halves of the economy has usually been considered as disappointing. Despite a very sizeable development effort, the gap in GDP per capita between the Mezzogiorno and the North-Central part of the country has remained stubbornly in place. Indeed, in volume terms, it has actually increased between the early 1950s and the late 1990s (Figure 1). [Volume figures are more appropriate than the conventionally used data in current prices, since the latter are swollen in Southern Italy relative to the rest of the country, by the greater weight of govern ment consumption.]

While it is clearly true that regional convergence has failed to occur despite repeated public efforts, it should, nonetheless, be remembered that Southern Italy over this period experienced significant growth. Real GDP per capita rose by nearly 3 per cent per annum and the volume of per capita consumption, thanks in part to generous transfers from Rome, grew at an annual rate of nearly 3½ per cent, or virtually fivefold over the half century. The gap between the North and the South may not have decreased. Absolute poverty, however, fell substantially and living standards today bear no comparison to what they were soon after the war.

It should also be noted that Italy experienced some regional convergence from the early 1960s to the middle 1970s. The period was brief and convergence was again interrupted, yet it may be interesting to investigate why success occurred (apparently for the first time

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since Italy’s unification in 1861), and what were the main reasons for it being so ephemeral. [A set of explanations throwing light on both these questions is provided by Boltho, Andrea, Carlin, Wendy, and Scaramozzino, Pasquale (1997): Will East Germany Become a New Mezzogiorno, in: Journal of Comparative Economics, Vol. 24, pp. 241-264.]

Convergence in the 1960s was greatly helped by development policies that successfully encouraged industrial investment in Southern Italy. At the same time, labour costs in the region were still under control. Indeed, wage levels were lower in the South than in the rest of the country, thanks to an agreed pattern of regionally differentiated compensation packages. Rapid productivity growth (because of buoyant investment) together with wage moderation, lowered unit labour costs (i.e. the real exchange rate) relative to the rest of the country and powerfully contributed to the catching up process.

Both of these favourable trends were inverted in the course of the 1970s. Investment in the South fell sharply. It had been mainly carried out by state enterprises in relatively heavy-industry and raw-material intensive sectors. The oil shocks sharply diminished the profitability of many of these projects. In addition, trade union pressures, very strong in Italy throughout the 1970s, abolished regional wage differentials. As a consequence, the Mezzogiorno’s real exchange rate now appreciated vis-à-vis that of the North-Central part of the country and this process has, more or less, continued throughout much of the 1980s and 1990s.

In addition, the central government shifted its focus from encouraging investment in the South to a policy of more direct income maintenance through transfer payments and job creation in the public sector. And local governments were also encouraged to act in a similar way since administrative decentralization gave them increased spending powers without at the same time making them responsible for the collection of tax revenues. Arguably, the spread of these various forms of assistance raised the scope for rent-seeking activities and diminished incentives to engage in productive ones. The gap with the North-Centre increased further.

The story so far is thus one of a very limited and temporary period of success, giving way to a prolonged phase of worsening. Yet, few trends in economics continue forever. Thus, it seems that incipient signs of revival in the Mezzogiorno’s fortunes have been appearing in the recent past. Some of these may be merely temporary, or of only anecdotic value, such as the apparent rise of high-tech clusters in Cagliari (Sardinia) or Catania (Sicily). Others seem more solid (e.g. the clear success of a furniture-making cluster in Basilicata). More importantly, the most recent, and as yet unpublished, national and regional accounts data [These date have been revised in line with the new international guidelines for the system of national accounts, SNA 93, and the European System of National Accounts, ESA 95.] suggest that, in the very late 1990s, growth in the South has picked up and has apparently outstripped that of the rest of the country.

It is too early, of course, to be certain whether this is the beginning of a new trend or merely a one-off phenomenon. Yet, there is some hope that Southern Italy may be able to improve its relative performance over the coming years in view of a number of institutional developments that have taken place during the 1990s. First, the central government has, particularly in Sicily, followed a much more determined law and order

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policy in the late 1990s that has seriously dented the strength of criminal groups. This is bound to have positive consequences for legal economic activities. Second, local government reforms have led to the direct election of mayors, strengthening representative democracy and creating strong incentives for the elected politicians to deliver tangible economic results. Third, and most importantly, the pressures that fulfilment of the European Monetary Union’s Maastricht Treaty put on the Italian fiscal authorities has greatly reduced the scope for income maintenance expenditure in the South. For one thing, the freedom given to local authorities to spend without being responsible for tax levying has been severely reined in. For another, much of the earlier aid distributed through the Mezzogiorno’s funding agency has been abolished. Financial assistance for investment is still available, as are reductions on firms’ social security contributions, but, overall, aid has been significantly scaled down.

Clearly, these latter trends have created a harsher economic climate in the South, but given the apparent failure of earlier aid to generate a self-sustaining growth process, such changes may well have been inevitable. Indeed, they may also be beneficial if, as some of the early indicators just mentioned are suggesting, they also generate stronger incentives and spark off a more durable growth process.