The main and most surprising success of the Monti government so far has been the ability to push through Parliament two structural and “drastic” measures, the pension reform and the new property tax, without incurring any significant opposition from the unions or from political parties(with the exception of the Northern League). To a large extent this was due to the fact that sacrifices were distributed “universally”, i.e. that they were not targeted to particular groups (civil servants, small entrepreneurs) “guaranteed” by this or that political party. Today the government will approve a comprehensive package of liberalization which would also apply “universally”. These include reducing administrative burdens for companies, more freedom for shops (discounts and opening times), consumer protection and collective action, reforms of professional associations and their tariffs, liberalization measures for pharmacies, taxis, gas stations, local public services, postal services and transport, railways. It’s a good start. However the question is: will they succeed in jump starting Italy’s growth rate?
PRO COMPETITION EFFECTS OF REFORMS
The issue is far from simple. The size of the sector liberalized, although clearly relevant, does not necessarily represent a good indicator of the effectiveness of the measures. A particular market may be undersized (pharmacies) precisely because barriers to competition limit access and ensure rents to insiders. In addition, the pro-competitive reforms adopted in a sector often show chain effects on other markets. The experience of liberalization adopted in the OECD countries over the past twenty years suggests that reforms in the market for goods and services contribute to increasing employment, not only by facilitating the entry of new firms, but also by reducing the distortions in the labor market, and making labor market reforms more likely. Moreover, the positive effects on productivity growth in the liberalized sector often spill over on down-stream sectors (think of energy, an important input in many industries).
A recent study by economists at the International Monetary Fund looks at the effects of structural reforms over the last thirty years in ninety countries on the rate of growth of income per capita. The paper examines pro-competitive reforms in various sectors: international trade, electricity and telecommunications, agriculture, financial transactions with foreign countries, banking, and stock and bond markets. The main result is that countries at different stages of development, economic and political, benefit from liberalization in different sectors. In countries at intermediate level of development, the major effects on growth come from the liberalization measures taken in agriculture, in transactions related to international trade, and from removals of administrative constraints on bank lending. The growth rate in more developed countries mainly benefits from measures that foster the development of the stock and bond markets, such as improving the quality of supervision and regulation of markets, and facilitating the access of foreign capital.
A SIMPLE ROAD MAP
So it’s fine with the liberalizations in Monti’s pipe line, but the key to restart the country growth rate is likely to be found in the ability of financial markets to promote business development, an issue that is not tackled in the current reforms. For example, within the banking system it is crucial to achieve a separation between banks and their semi-public (main) shareholders, the “banking foundations”, which constitute the greatest obstacle to banks’ contestability, and the “Trojan horse” for the political interferences. Also, a more rigorous discipline against cross-ownership, both among banks, which leads them to collude, and between banks and large corporations (debtor), which diverts credit from small to large companies. Finally, in the insurance market, a more harmonized legislation should be promoted so as to end market segmentation.