Chapter 5 - The Economic Recovery

Chapter 5 - The Economic Recovery - Chapter V - The...

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Chapter V - The Economic Recovery From Ashes to World Economic Power ECONOMIC PROFILE Overview: Italy has a diversified industrial economy with roughly the same total and per capita output as France and the UK. This capitalistic economy remains divided into a developed industrial north, dominated by private companies, and a less developed, welfare-dependent agricultural south, with 20% unemployment. Most raw materials needed by industry and more than 78% of energy requirements are imported. Over the past decade, Italy has pursued a tight fiscal policy in order to meet the requirements of the Economic and Monetary Unions and has benefited from lower interest and inflation rates. The government has enacted numerous short-term reforms aimed at improving competitiveness and long-term growth. The country has moved slowly, however, on implementing needed structural reforms, such as lightening the high tax burden and overhauling Italy's rigid labor market and over-generous pension system, because of the current economic slowdown and opposition from labor unions. But the leadership faces a severe economic constraint: the budget deficit has breached the 3% EU ceiling. The economy experienced no growth in 2005, and unemployment remained at a high level. Italy will continue to lose market share because of a loss of competitiveness. - Overall the Italian economy has some serious problems because it has not adjusted sufficiently to the new challenges posed by globalization. GDP growth has averaged only 1.5% a year in the past 10 years compared with almost 2% in the rest of Euroland, including Germany. Italy s biggest problem has been weak productivity growth. - The weakness of Italian output is primarily related to a loss of competitiveness. Given relatively low productivity growth, Italian wages should be rising less than its competitors ; if it is to maintain unit labor cost competitiveness. Instead, Italian wage growth has averaged 4.9% over the past 10 years vs. 3.5% in Euroland. The rise in relative unit labor cost (ULC) has resulted in Italian exporters steadily losing market share since the mid-1990s. - Italy s only route to improving its growth performance is to reverse the slide in cost competitiveness. This could arise through faster productivity growth and/or wage restraint. To raise productivity growth, Italy needs to deregulate its product markets, open itself up to competition and increase spending on education. In the absence of faster productivity growth, Italy needs to exercise much greater wage discipline. - Demographics pose a further challenge, although rising labor force participation is positive. A more open attitude towards immigration would help to ease Italy s deteriorating demographic profile. GDP (purchasing power parity): $1.645 trillion (2005 est.) GDP - real growth rate: 0% (2005 est.) GDP - per capita: purchasing power parity - $28,300 (2005 est.) GDP - composition by sector: agriculture: 2.1% industry: 28.8% services: 69.1% (2005 est.) Labor force: 24.49
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Chapter 5 - The Economic Recovery - Chapter V - The...

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