On October 26, Mr Mario Draghi, the Governor of the Bank of Italy, gave an interesting lecture at the 48th meeting of the Italian Economic Society in Turin. The lecture was on”Consumption and Growth in Italy” ( see http://www.bancaditalia.it/interventi/integov/2007/26102007/Draghi_26_10_07.pdf ).
According to the Governor, the dynamics of italian consumption and income growth in the past two decades presents two puzzles, see Figure 1 ( http://dse.unibo.it/manasse/Pdf/Figures_smooth.pdf )
The first is why, during the 1990s, consumption (solid line in the graph below) kept growing, 1.7 percent on average, despite the stagnation of real incomes (dashed line). The second is why househods’ consumption came to a halt since 2001. According to Mr Draghi, aggregate consumption in the 1990s was fostered by a the rise in the financial wealth due to booming stock prices, in the first half of the nineties, and later by rising house prices; the fiscal consolidation of the early nineties also contributed to boost consumption as the it may have affected the present value of future taxes; lower real interest rates, due to the Euro, induced households to tilt their consumption plans toward the present.
Yet, argues Mr Draghi, we need to look at the micro data to explain the lucklustre performance of consumption since 2001. Here, the story goes, two important factors come into play: demographics and the labor market. Fewer kids, more single parent families, longer life expectancy but same working age all contributed to the consumption slow down (according to the Bank of Italy, the change in households’ composition between 1997 and 2005 have implied a 1.5 percent fall in the level of conuimption). Finally, the recent labour market reforms (legge Treu (1997)) have increased labour market “flexibility”, and have raised the volatility of earnings (temporary jobs among the young have doubled the last decade): precautionary savings has risen as a consequence.
I felt very much reassured after reading the report: “Well” I tought ” After all, I leave in a “normal country”, where consumers smooth consumption over time by borrowing and lending in a perfect capital market, exactly as they should..”.
Yet the pleasant sensation didn’t square very well with another report, published a few days earlier by the Association of Small Retailers (Confesercenti), and entitled “The Hands of Crime on Enterprises” (http://www.confesercenti.it/documenti/allegati/2007decimo.pdf ). According to this report, in 2007 the estimated turnover of organized crime was 90 billions Euro, roughly 6 percent of GDP, see Table 1 (http://dse.unibo.it/manasse/Pdf/Figures_smooth.pdf )
Criminal activities that do not directly affect small business, such as drug trafficking and prostitution, are not included in this estimate. Money lending, “usura”, accounts for one third of the total: a nice graveyard headstone (R.I.P.) for the assumption of “perfect capital markets” underlying the life-cycle theories for Italy.
Interestingly, the distribution of this mafia tax among different regions is very uneven: for example, in Sicily 50,000 small business, 70 percent of the total, pay for “protection”, against 5000, 5 percent, in Lombardy.
So this is what I did. A quick ride over the net provided me with regional data on households consumption (http://www.istat.it/dati/dataset/20071004_00/ ) and with a recent survey on 60,000 businesses (18 October 2007) by Confcommercio, the Retailers Conferderation, and Eurisko, a private reserch institute (see http://www.confcommercio.it/home/ArchivioGi/GEN-2007/NP200701/indagine-per-sito.doc_cvt.htm ). The survey asks firms how they see the impact of crime on their activity. I took the average rate of growth of household consumption in 2001-07 in each region as the dependent variable, and the percentage of businesse reporting and increase in usury in the survey as “the explanatory” variable. Here is the picture, Figure 2, each point representing a region ( http://dse.unibo.it/manasse/Pdf/Figures_smooth.pdf ):
For regression-lovers, here is what I get by regressing average households consumption growth in 2001-07 in each region on average regional GDP, and on the percentage of businesses reporting a worsening in usury in the past 2-3 years:
Usury | -.0392458 .0207238 -1.89 0.131 -.0967844 .0182928
gdp | .6854988 .1570197 4.37 0.012 .2495423 1.121455
_const | .0066084 .0034942 1.89 0.132 -.0030931 .0163099
R-squared = 0.8731
Adj R-squared = 0.8097
Consumption growth is significantly lower for regions where the more entrepreneurs report a worsening of usury (I promise: I will not sent the regression to Econometrica).
Conclusion? Well, the credit market in Italy, as many othe markets, is far, far from perfect. Overlooking this means indulging in “wishful-thinking economics”.
 Interestingly, this estimate only includes traditional Mafia activities affecting small businesses (such as moneylending (usura), racket, theft and robbery (furti e rapine), fraud (truffe), smuggling (contrabbando), forgery (contrafazione), unauthorized constructions (abusivismo), control of farming and garbage disposal (agromafia), public conracts (appalti), giochi e scommesse (gambling), see Table below from the report).