In The Political Economy of Italy’s Decline,Andrea Lorenzo Capussela offers an account of Italy’s current political and economic malaise, charting the evolution of the current social order from the post-war years to the aftermath of the eurocrisis. This is an erudite and compelling study, writes Dominik A. Leusder, that will be a key theoretical resource for anyone seeking to better understand Italy’s present predicament.The Political Economy of Italy’s Decline. Andrea Lorenzo Capussela. Oxford University Press. 2018.The decline of democratic capitalism in Italy is perhaps the most consequential development in Europe today. While the symptoms of this decline – political dysfunction, low growth, high unemployment, wage stagnation, inequality, declining productivity – are becoming distressingly commonplace, Italy’s malaise is at once more severe and longer in the making. Despite boasting a sophisticated manufacturing sector and a sizeable current account surplus, Italy experienced the worst average per capita growth rate in the world between 2001 and 2010, the longest eurozone recession and the weakest recovery. Something else is clearly at work.Andrea Lorenzo Capussela’s The Political Economy of Italy’s Decline is an erudite and compelling attempt to explain these developments. As former head of the economics unit at Kosovo’s International Civilian Office as well as one of the EU advisers to Moldova’s economy minister, Capussela is well-acquainted with the institutional and political determinants of economic growth, and is thus able to view Italy from an acute angle.One of the merits of this book is the long-term view it takes of the decline, charting the evolution of the current social order from the post-war years to the aftermath of the euro-crisis. It does so through the lens of a collective action problem that is at the heart of the main argument (Chapter Four). Italy is trapped in a ruinous politico-economic equilibrium, maintained by deeply inefficient institutions, recalcitrant to political reform while crowding out public-spiritedness and innovation. This argument is premised on a composite understanding of institutions as both formal and informal (what Douglass North termed ‘the rules of the game in a society’), and how these institutions shape the expectations and structure the incentives of firms and individuals – with real macroeconomic consequences.Two main questions are addressed: why did these institutional constraints on growth become more binding in the 1980s, and why has the equilibrium been so resistant to meaningful reform? Key to answering the first question is what Alexander Gershenkron referred to as ‘the advantage of backwardness’. In the immediate aftermath of the war,
Italy’s relative agrarian backwardness proved advantageous: it led to the nation’s rapid convergence on the frontier of industrial economies. By the late 1970s, national income had nearly trebled while the rate of total factor productivity growth (TFP) had outstripped even Germany. The subsequent decades, however, saw Italy’s advantage rapidly decline. The large stock of sovereign debt accumulated by successive governments in the 1980s was in no small part the result of the need to offset the collapse in TFP growth.In view of the numerous reform efforts throughout the same period, most commentators have been quick to dismiss institutional accounts of the decline, regarding as implausible the inverse relationship between growth and the quality of institutions. After all, how could Italy’s exemplary growth give way to sclerosis despite reforms? This apparent paradox has lent credibility to the widely held belief that the euro is chiefly to blame, eliminating as it does the possibility of devaluation while imposing fiscal constraints.
While these arguments are not entirely without merit, they still fail to explain the severity and persistence of the symptoms relative to those of other countries in the eurozone ‘periphery’. Instead, Capussela suggests that the same institutions that lent themselves to the technological diffusion at the basis of rapid catch-up growth proved incapable of sustaining intensive, innovation-led growth. That is the reason why Italy’s institutional constraints only become binding at the eclipse of the Bretton Woods regime....
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