What's not wrong with Italy

Despite its latest political drama, the country gets some important things right

My family and I just returned from a lovely two weeks in Italy. While we were there, the country staged one of its periodic political crises, with Mario Draghi’s all-party technocratic government toppled by coalition infighting.

That the Draghi government exists at all is a typical example of Italy’s problems as a country. But despite these problems, which we’ll get into briefly below, I think that it’s often less interesting to talk about what other countries are doing wrong and more important to focus on what they are getting right and the lessons we might learn. After all, despite Italy’s poor recent economic track record, the country has some considerable strengths, especially in areas like housing, transportation, and public health. And the dialogue, even within Italy and the EU, might be improved by a greater appreciation for Italy’s strengths and how to build on them.

How Italy got here

Back in the early 1990s, the Italian political system was upended by a massive corruption scandal that implicated the leaders of all the main parties. Around the same time, the country gave up control over its currency and adopted the euro. But the old regime had wracked up incredibly large budget deficits during the 1980s, leaving the newly constrained government with significant legacy debt and essentially no room to maneuver on fiscal policy. And despite hopes that joining the eurozone would increase foreign investment and lower interest rates, Italy’s economic performance got worse. Much worse.

Italy has had essentially zero GDP growth over the past generation, leaving a country once roughly as rich as Germany now much closer to Poland.

This poor growth performance has made the legacy debt hard to pay off, even though recent Italian governments have been pretty fiscally responsible. This leaves Italy very much in need of assistance from the European Central Bank and the EU’s nascent fiscal authorities, both of whom are only inclined to help if Italy adopts structural measures aimed at improving growth performance.

That’s what Draghi was supposed to do.

Italy is both a major exporter of powerhouse technocrats (not just Draghi but Mario Monti and Romano Prodi) and importer of technocratic advice about how to “fix” their troubled economy. As a former head of the ECB, Draghi has credibility in Frankfurt and Brussels. And as the leader of an all-party coalition government, he was supposed to deliver EU assistance to Italy and Italian reforms to the EU. He’s been partially successful, but his party support crumbled before he could complete the job — essentially the story of every “technocratic” Italian cabinet over the past generation.

Italians are living longer and longer

Despite all of this, Italy is doing quite well on a number of measures.

Looking at life expectancy rather than GDP per capita, the Italian lost generation is not at all visible. On this metric, Italy started with an advantage over Germany, and the advantage has held since both are steadily improving. Poland is closing the gap somewhat thanks to its impressive improvements in the post-communist era, but here the laggard “used to be like Germany, now is like Poland” country is the United States (we wrote about this yesterday).

The consensus seems to be that the gap comes down to “lifestyle” factors rather than the superiority of the Italian healthcare system. Italians are less likely to be murdered or to die in a car wreck, but they also seem to maintain healthier diet and exercise regimes that generate less obesity and heart disease. I surprised myself by not gaining weight during our long visit, even though I felt I was eating a lot.

But it’s important to remember that we’re not just seeing high Italian life expectancy —it’s rising. Neither the Mediterranean diet nor universal health care are things that Italy just started.

The improvements instead come from the general march of progress. Over time, new drugs and new surgical techniques are invented, the stockpile of medical knowledge grows, information about treatments is disseminated. That Italy participates in this upward trend is not particularly surprising — it’s America’s stagnation that stands out — but it is noteworthy that despite zero measured economic growth, Italian living standards really are rising in a number of important respects. And in light of the narratives kicking around the United States about “deaths of despair,” the fact that sluggish growth isn’t leading Italians into heroin addiction or suicide or a violent crime surge is noteworthy.

It’s almost certainly not the case that there’s a real tradeoff between U.S.-style economic growth and Italian-style life expectancy improvement, but if you did have to choose, it’s not obvious that the Italian choice is worse. And at a minimum, Italy’s success here suggests they might have important things to teach the rest of the world.

Italians move to opportunity

The Italian north, broadly speaking, is a lot more prosperous than the south.

The country is divided into regions which are further divided into either provinces or metropolitan cities. The richest region is little Trentino-South Tyrol near Austria, and its population is growing fastest. Lombardy is the largest and second-richest province with the third-fastest rate of population growth. Lazio, containing Rome, is the second-fastest growing region.

On one level this is extremely unsurprising: why shouldn’t the richer parts of the country grow faster as people move toward opportunity?

But it’s certainly not how things work in the United States. America’s regional economic divides aren’t as big as Italy’s, but they aren’t trivial either. California and the Northeast are substantially wealthier than the South and the Midwest, but it’s the relatively low-income metropolitan areas in the South that are seeing their populations boom. That’s because wealthier states like California, Massachusetts, and New York have worked themselves into a weird corner where they’re “rich but unaffordable,” and most people over the past generation have been able to obtain higher living standards by moving to Phoenix, Atlanta, or Dallas, even though pay is lower.

America is large enough, diverse enough, and dynamic enough to have enjoyed economic growth despite this costly diversion of people away from our highest-productivity regions. The United Kingdom, which has similar problems in a smaller and more London-focused economy, has not.

In Italy, the rich northern metropolitan areas of Milan, Turin, and Bologna are growing, and Rome, which is rich despite being south of the Po, is also growing. And this growth is complemented and supported by growing and improving transportation infrastructure.

Italy is good at trains

People generally don’t have any trouble believing that the United States is worse at cost-effective mass transit construction than Korea or the Nordic countries. What many find surprising is that the next-tier of highly effective builders isn’t Germany and Singapore, but Spain and Italy.

Southern Europe is stereotyped as corrupt and poorly governed, but state capacity tends to be highly specific (the United States put a man on the moon and has an amazing navy, even if other aspects of our public sector are less impressive), and while Germany and France are mediocre at transit, Spain and Italy are really good. I knew that broad fact for a long time but learned a lot more from Marco Chitti’s recent in-depth case study for the Transit Cost Project. Chitti’s work clarifies that northern Italy in particular is incredibly impressive, with the Italian national average dragged down by a single ill-conceived project in Naples that saw costs explode thanks to a U.S.-style indulgence in expensive custom stations.

Line C in Rome, which opened relatively recently and still isn’t done, was also relatively expensive. But I think it speaks to the strengths of Italian civil engineering that when you see a project that faced costly delays due to historic preservation and mid-project changes in scope, it’s because they were literally digging a tunnel through Ancient Roman ruins and kept making significant archeological finds.

Whether the Italians should be less precious about their architectural heritage and just get the tunnel built doesn’t seem like something for me to decide. But in contrast to excuse-making from the MTA about New York being an old city or fighting to preserve a “historic” strip mall, this is non-pretextual. Italy might want to think about a less sentimental, more commercial approach to managing its architectural legacy, but I don’t think Rome Line C reveals anything dysfunctional about the construction paradigm per se.

Meanwhile, northern projects have been very cheap and impressive. A particularly neat example from Chitti’s writeup is that Turin constructed a one-line Metro system at a very low cost by importing both technology and expertise from the French city of Rennes. They didn’t just bring in consultants to do the construction; they contracted with Rennes’ in-house team to help them build their own in-house team to manage the project. That in turn let Turin lend its expertise to Brescia when Brescia built its own light metro system. Milan finished the fourth line of its Metro system (confusingly called Line 5) in 2014, and Line 4 is set to open in the next few years. Before that, between 2004 and 2008, they opened the Milan Passante rail tunnel, which allowed them to create an S-Bahn they call the Milan Suburban Railway Service.

Bologna, which has legacy through-tracks, is building out an S-Bahn of its own, and Rome and Turin both have some with extensions planned. There are also plenty of modern tram systems in Italy, along with one of the world’s best high-speed rail systems.

“Italian governance” does not have a strong international brand, but this is an area in which they really excel. The U.S. public sector should be aggressively hiring Italian managers to help improve our transit agencies and should be trying, à la Turin with Rennes, to sign capacity-building agreements with Italian cities (especially Milan) to get them to teach us to be less reliant on consultants and design-build contractors and more capable of doing in-house design and project management work.

A pleasant mix of housing typologies

It’s hard to directly compare U.S. and Italian housing policies because population growth in Italy is so low.

But one thing that stands out is that Italy has roughly five times America’s population density. In “One Billion Americans,” I note that tripling American population density would leave us with the density of France, which is widely considered to be an attractive and pleasant country. It would leave us even less dense than Italy which, again, is beautiful. If Tuscany were a state, it would rank #8 in population density between New York and Florida at over four times the average density of the United States. And before you ask, yes they have mountains in Italy.

The Dolomites (photo by Wolfgang Moroder)

The main thing I would say is that compared to the United States, Italy does a good job of incorporating lots of different kinds of things within small envelopes.

To see what I’m talking about, look at the tiny town of Buonconvento that’s a bit off the beaten path but that I randomly visited. There’s a tiny walled medieval town west of the SR2 road and north of the hotel where obviously everything is very strictly preserved. But then you have tightly built 19th-century style walkable urbanism to the south and east of the old town. For scale, from the Coop supermarket to the Carpe Diem Risto Pub is a comfortable 15-minute walk even in a historic heat wave.

Then in the newest part of town east of SR2 and south of the train station, all kinds of stuff is going on, from single-family homes to nice garden apartments to a single tall building and tacky strip malls. And this is all a stone’s throw from actual farms.

Obviously like many Italian towns, this all starts with something we don’t have in the United States — a medieval town center built around an old fortress. And many Italian towns have roots that are even older than that, so there’s no direct carryover to American planning. But there is a spirit of “live and let live” that we could benefit from. Probably nobody would ever want to build something as dense as the central districts of Italian towns in the United States, but why do we make that illegal? Nobody goes on a walking tour of Siena and thinks, “it’s scandalous that this was ever allowed to exist!” At the same time, nobody comes home from Siena with photos of the Burger King that’s an 8-minute drive from the Piazza del Campo, but suburban-style built environments have lots of practical utility to people living their everyday lives.

One of Italy’s real strengths seems to be a lot less fussiness about the idea that everything needs to be in the right little box. Every Italian community I saw contains a mix of detached houses, townhouses, and apartments. Every Italian community I saw contains a blend of old and new structures. It’s maybe a consequence of the country’s architectural legacy lasting for thousands of years that while you do see massive investment in preserving old things, you don’t have hangups about the fact that the buildings across the street from the Colosseum don’t match the “neighborhood context” of the Flavian era.

We would do well to relax and just let things be.

So what’s wrong with Italy?

Because I’m a boring person, I spent a lot of vacation time reading the “what’s wrong with Italy” literature.

To my eye, the idea with the most potential as a policy reform stems from Fabrizio Colonna and Stefania Marcassa, who write that Italy has the lowest labor force participation rate for married women in the developed world. They attribute this to Italy’s tax treatment of married couples versus unmarried, which is a pretty straightforward thing to fix. They don’t talk about this in their paper, but if I understand them correctly, the same tax code feature also generates a substantial marriage penalty, which could motivate traditionalist-minded people to care even if they approve of the bias toward stay-at-home parenting. What makes this promising as a policy reform is that even though tax reforms are politically challenging, it’s definitely doable on a technical level. And even though the growth boost from increased women’s labor force participation would be a one-off, a one-off growth boost would improve Italy’s debt-to-GDP ratio.

That’s important because Italian budget deficits are driven entirely by debt service costs. Italy runs what’s called a “primary surplus” with tax revenue exceeding current spending on everything other than debt service. So a one-off surge in GDP cuts the debt service costs, and the country can then split the savings 50-50 between speeding up debt retirement and reducing the primary surplus (lower taxes and more public investment). That becomes a virtuous circle that further boosts growth and reduces debt.

But the most interesting entry in this literature is Bruno Pellegrino & Luigi Zingales who argue the following:

1. Italy’s dismal productivity growth can be attributed to a failure to take advantage of the productivity-boosting benefits of information and computer technology (ICT) in the way many other countries have.

2. The ICT failure in turn stems from the fact that ICT boosts productivity only in the presence of competent management.

3. Italy lacks competent management because Italian companies have a much less meritocratic system for promotion and hiring than elsewhere in the developed world.

4. While (3) seems dysfunctional, the firm-by-firm evidence shows that it’s actually adaptive in Italian conditions because the legal and banking systems are so dysfunctional that nepotism and clientelism are rewarded.

This is an account that’s grounded in longstanding sociological and historical takes on Italy (and I’m sure non-economists will be annoyed by their failure to pay adequate homage to the existing literature on these points), but they bring to bear a lot of detailed quantitative evidence for these propositions.

The advantage of Pellegrino & Zingales over Colonna & Marcassa is it explains the more mysterious thing — not “why is Italy poorer than Northern Europe?” but “why did Italy suddenly stop growing?” But the downside of the Pellegrino & Zingales take is that while there is broad agreement that Italy needs to improve the functioning of its court system and bureaucracy, that’s not an easy switch you can flip. It’s a long-term project.

To bring this back to the positive perspective, it’s worth saying that there is a time and a place for everything. America’s highly developed system of adversarial legalism evidently has some real advantages. We have good contract enforcement, which means we don’t need to rely on personal relationships to make business arrangements and talent has some chance of overcoming nepotism. At the same time, Italy seems to excel in some areas where adversarial legalism is undesirable. We Americans are so proud of our efficient and highly developed legal system that we want the solution to everything to be more rounds of legal review, when that’s made large-scale construction projects — both private and public — increasingly impossible to complete in a timely manner. If Italy needs to learn how to make better courts, we need to learn how to carve out more space for democratic decision-making rather than post hoc litigation.