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Assessing the Macroeconomic Impact of Structural Reforms: The Case of Italy

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Assessing the Macroeconomic Impact of Structural Reforms: The Case of Italy

IMF,

15 min read
10 take-aways
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What's inside?

Italy can halve its euro-zone competitive gap through reforms in product, labor and service markets.

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Editorial Rating

7

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  • Comprehensive
  • Analytical
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Recommendation

International Monetary Fund economists Lusine Lusinyan and Dirk Muir studied the impact of a wide range of economic reforms on Italy’s economy. Their report showcases simulations and reflects Muir’s work as an IMF researcher specializing in modeling. This combination of academic case studies and the IMF’s Global Integrated Monetary and Fiscal (GIMF) modeling predicts improvement in Italy’s economic growth rate given a comprehensive package of reforms. The caveat is that Italy must implement reforms quickly and effectively. All models have their limitations, and this one is no exception; important issues such as restrictive professional services, the dynamics of hiring and firing policies, and the reforms’ impact on energy prices, are “only approximate.” The report also doesn’t address the “unofficial,” underground Italian economy. getAbstract recommends this research to anyone who is doing business in Italy or who is curious about how a low-performing euro-zone nation really could turn things around.

Summary

Economic Reforms

Italy’s growth is low compared to its peers among other nations. Even so, Italy’s economy has several strengths: Households make ends meet, private debt is low and private savings are high. Public debt appears alarmingly excessive, although the public sector’s “large assets” partially offset this problem.

The country’s deficit is low compared to those of other southern members of the euro zone. Italy is not among the leaders in high-value exports, but its exports are diversified. Despite this balance of strengths and weaknesses, Italy’s average growth has been less than 0.5% over the past 10 years, less than half that of the core EU and G7 nations. Recently, even these minimal levels of growth have faded or become negative. If Italy doesn’t act, it will experience zero growth in the coming years.

The problems facing the Italian economy are deep-seated and widespread. They include “limited competition” due to inflexible regulations that increase costs. Companies in Italy find it difficult to grow and move up the skill chain. Efficiency is low, and innovation is restricted. “Labor market rigidities” include poor levels of education and low participation...

About the Authors

Lusine Lusinyan and Dirk Muir are economists and researchers with the International Monetary Fund.

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