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[Mariana Mazzucato, Giovanni Tagliani] Economic shortsightedness is jeopardizing Italy‘s G7 ambitions

June 12, 2024 - 05:31 By Korea Herald

On June 13-15, Italy will host the 50th G7 summit in Fasano. Ahead of the meeting, Prime Minister Giorgia Meloni’s government announced an ambitious Africa-centered development plan and invited the leaders of several African countries and the African Union to attend -- the largest number of representatives from the continent at a G7 summit since 2017.

Meloni unveiled her Africa initiative, known as the Mattei Plan, at the Italy-Africa Summit earlier this year. It aims to establish international development partnerships focused on energy, growth and immigration.

The plan is named after Enrico Mattei, the founder of Italian oil giant Eni. In the 1950s, Mattei broke the monopoly of the major oil companies -- known as the “seven sisters” -- by offering developing countries more favorable partnership agreements. These agreements often allowed developing economies to retain 75 percent of the profits, in contrast to the less equitable terms imposed by the dominant oil giants.

Mattei also viewed state-owned enterprises (SOEs) as an essential component of national development strategies and considered personal entrepreneurship a public duty. Eni and other SOEs played a pivotal role in Italy’s postwar industrial policy and economic miracle, promoting capital-intensive backward linkages and laying the foundations for many of the country’s present-day industries.

Ironically, Eni is now part of Meloni’s 20 billion euros ($21 billion) privatization plan, which involves selling SOE shares to reduce the public debt. The plan reportedly includes financial institutions like Poste and MPS and may extend to essential public services, such as the national railway operator Ferrovie dello Stato and the air traffic controller ENAV.

Meloni’s privatization program is a misguided combination of outdated theories and failed policies. The economic rationale for reducing public debt through rigid fiscal rules is based on a misinformed and short-term view of government finances that overlooks the long-term macroeconomic impact of mission-oriented public investment, especially its ability to crowd in private capital and stimulate economic growth.

Italy’s economic history is a case in point. Both private and public investment declined between 2009 and 2016, and started to rise only after public investment increased in 2019. A recent study of 21 OECD countries supports this view, finding that increased public investment attracts private capital.

The Italian government justified its proposed sell-off by claiming that the state would retain control of most partly privatized firms -- with the exception of MPS -- and that the state’s reduced stakes in Eni and Poste would be offset by recent share buybacks. But this shortsighted policy aggravates financialization and effectively forfeits direct and indirect dividends that could arise from increased state ownership of profitable companies. While Italy’s ratio of stock-market capitalization to GDP is lower than in the US and the UK, it doubled from roughly 20 percent in 1960-90 to an average of nearly 40 percent between 1990 and 2020.

Meloni’s privatization plan is indicative of Italy’s short-termism, aimlessness and absence of a serious industrial strategy. Well-governed SOEs can boost economic development and create technological spillovers, sectoral complementarities and economies of scale and scope.

Moreover, SOEs can provide patient capital and enhance a country’s technological capabilities, both independently and through their supply chains. For example, the Italian government could leverage Industria Italiana Autobus’s expertise in producing electric buses to tackle the urgent need for sustainable municipal public transport. This would involve substantial public procurement and could be integrated into a green industrial strategy that drives economic growth while addressing national challenges, such as severe air pollution in the Po Valley.

To be sure, Italian SOEs have not always been conducive to transformational change. In fact, their historical trajectory reflects the country’s economic struggles. The energy crisis of the 1970s, for example, affected state-owned steel producers, as technological efficiencies and demand shifts led to widespread job redundancies. With layoffs proving politically toxic, intense price competition resulted in heavy losses and budget shortfalls, leading to increased state support. This, in turn, led to excessive government influence and triggered calls for privatization.

In the 1990s, Italy initiated the largest privatization program in continental Europe, dismantling much of its industrial backbone instead of fostering innovation. For example, while the telecommunications conglomerate STET allocated 2 percent of its revenue to research and development between 1994 and 1996, our calculations show that its privatized successor, Telecom Italia, spent roughly 0.4 percent on R&D between 2000 and 2002. The semi-public firms that survived, like Eni, often lacked a mission-oriented, whole-of-government industrial strategy.

These trends reflect the broader challenges facing the Italian economy: political and managerial shortsightedness, lack of direction, inadequate public and private investment in R&D and insufficient human capital formation. The labor-market reforms of the 1990s and 2000s led to precarious work conditions, disincentivizing long-term investment in skills and training and reducing productivity. The management of major Italian firms, both private and public, has been particularly shortsighted, as politicians and executives dismantled valuable capabilities and sold much of Italy’s advanced industry to foreign companies.

Meloni’s flawed privatization plan is representative of a broader global trend. Although the International Monetary Fund has recognized that austerity does not reduce debt-to-GDP ratios and hurts growth, European policymakers still cling to obsolete fiscal rules that push governments to sell industrial assets to reduce public debt. Instead of promoting sustainable industrial strategies, this approach provides only short-term relief.

With SOEs increasingly engaging in share buybacks, financialization has reached record levels, often at the expense of productive investment. While the financial sector continues to invest primarily in itself, non-financial companies are spending more on share buybacks and dividend payouts than on human capital, equipment and R&D.

Despite Meloni’s attempt to present an innovative development vision, her government’s embrace of outdated theories produces failed policies that jeopardize the G7’s economic agenda and partnership with Africa. Instead of fostering a greener, more inclusive economy driven by investment and innovation, Meloni has adopted the same shortsighted approach that is responsible for many of Italy’s problems.

Despite its branding, Meloni’s government has failed to live up to Mattei’s legacy of public ownership and international cooperation. To address Italy’s economic challenges, policymakers must walk the talk and adopt a forward-looking industrial strategy.

Mariana Mazzucato and Giovanni Tagliani

Mariana Mazzucato, founding director of the UCL Institute for Innovation and Public Purpose, was chair of the World Health Organization’s Council on the Economics of Health for All. Giovanni Tagliani is a researcher at the UCL Institute for Innovation and Public Purpose. The views expressed here are the writers‘ own. -- Ed.

(Project Syndicate)