Why Italy’s economy does not grow

February 22, 2019

The Italian economy has been growing slowly for a long time and Italy’s per capita income is now at the level of 1999 (Figure 1). This is partly due to the great recession, but not only. In this data viz we break down GDP growth into its determinants in order to assess the evidence.

GDP growth can be broken down into the contribution of three components: labour input (number of workers and hours worked per capita), capital input (investments and their utilisation rate), total factor productivity (TFP), the latter defined as the residual component of output that exceeds labour and capital input contributions. In other words, TFP is a measure of the degree of efficiency of the economy as a whole.


From Figure 2, where these contributions are presented, it is clear that Italy does not differ from France and Germany in terms of labour and capital contributions, but it does in terms of TFP. The growth differential between Italy, on one side, and France and Germany, on the other, mirrors the gap between the different TFP dynamics that, for the last twenty years, "explains", on an annual basis, 0.8 percent of lower growth compared to Germany, 0.5 percent compared to France. Spain is a case in itself, because it has experienced a very unbalanced growth in construction investment, particularly before 2008, with a high contribution of labour and capital, and negative TFP.

In summary, TFP is a (broad) measure of production factors efficiency, labour and capital. It depends on many aspects: firms size and governance, quality of management, digitization and ICT diffusion, North-South divide, public administration efficiency and of the legislative-judicial apparatus, education, quality of capital, meritocracy, quantity and quality of infrastructures, etc. 
All these aspects represent areas in which economic policy should intervene to boost Italy’s economic growth.