The Italian Economic Crises of the 1970's

International Finance Discussion Papers Nwaber 120

June 1978

THE ITALIAN ECONOMIC CRISES OF THE 1970's

; - by a .

Raymond Lubitz

NOTE: International Finance Discussion Papers are preliminary materials circulated to stimulate discussion and critical comment. References in publications to International Finance Discussion Rapers (other than an acknowledgement by a writer that he has had access to unpublished material) should be cleared with the author or authors. , a

The Italian Feenomic Criscs of the 1970's

Raymond Lubitz*

The high rates of economic growth that Italy had enjoyed in the 1950's, and a slower but still healthy pace: in the 1960's, have disappeared in this decade. The Italian eccnony has suffered low investment and growth, high rates of inflation and balance of payments’ difficulties, and these difficultics have erupted into two severe crises -= in 1974 and 1976 -- that requized exccptional policy measures, external financial assistance, and the acceptance of externally-imposed economic conditions which have limited the policy authorities’ scope for economic management. The selected indicators below give the bare outlines of Italian economic performance

in this decade, -

————= " . ; Selected Economic Indicators eee 1970-72 1973 1974 1975 1976 1977

Ceeenaeeel

cone ee

Consumer Prices l/ 5.25 10.8 19,1 17.0 16.8 16.4 Real cpp 1/ 2.35 6.9 4.2 -3,5 5.7 1.7 Gross Fixed

Investment/GDP 2/ 14,2 14.3 14.3 12.8 12.6 12.5 Current Account 3/ 1.7 “2.5 -7.8 -0.5 -2.9 2.4

i/ Average annual rates of change. . 2/ Excluding residential construction, in 1970 lire -- per cent. 3/ Billions of dollars,

* Economist, Division of International Finance, Board of Governors of the Federal Reserve System, The views expressed hereim are solely those of the author and do not necessarily represent the views of the Federal Reserve System, An earlicr version of this paper was presented at the Joint Country Groups Pancl at the American Political Science Association meeting September 1977, I would like to thank George Henry and David Howard for their helpful comments on that paper,

In this paper I shall focus on the 1974 and 1976 crises and their aftermaiths, rather than on the earlier difficulties of the _ decade; in addition, the background to 1974 and 1976 will be discusscd in some detail, This background helps explain why Italian performance was among the worst of the advanced industrial economics, although all suffered badly in the last few years, The background factors are a staple of Italian discussion, although the relative importance attributed to the different factors varies considerably among observers, Also, Italian economists differ on basic analytica? issues and the nature of these disagreements has an important bearing on policy decisions,

The outline of the paper is as follows: Section I discusses

‘

.

some of the background issues; Section II takes up. in a non-technical fashion, the analytical debate; in the third Secti:on the two crises are analyzed; in the fourth Section I attempt to draw :some conclusions as

well as return to the themes of the second Section.

I There are four background areas discusseid in this section: the public sector deficit, wages, labor rigidity, and the public corpora-

tion,

A. The Public Sector Deficit It has often been noted in Italian discussion that the public sector deficit, however measured, has been growing rapidly, both abso-

lutely and as a share of Cross Domestic Product (GDP). The deficit can

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be viewed in two aspects -- as a diversion of resources from other ]

uses and as the source of monetary expansion. from the point of view of a diversion of resources, the current account (the budset excluding capital transactions) is the most useful concept, since it constitutes dis~saving, which offsets saving performed elsewhere in the economy and reduces resources available for investment,

The data below for the current-eccount deficit of the Public Administration (i.e., all levels of government) indicate that the current account, which had run surpluses (1979 and before) ran a deficit in this decade which in the last three years averaged over 5-1/2 per cent of GDP, The Public Administration is composed of three sectors -- central administration, local‘government, and social security

agencies -- and in all three sectors current deficits expanded,

A Current-Account Deficit of the Public Administration (Billions of Lire)

SSeS 1970 1971 1972 1973 1974 1975 1976 1977

Central Administration 334 -776 +1306 -2770 -1612 3010 = =-1925 -262

Local Governments -272 “415 - 445 - 370 - 483 -2406° -2399 ~41. Social Security

Institutions 578 332 - 613 697 = 221 ~2905 ~2905 -162° Total 640 ~869 -2364 -2443 -2316 -8429 -7229 -822. As Percentage of GDP 1.1 “1.4 +-3.4 -3.0 ~-2.3 -7.3 -5.0 -4.¢

—_—eesss—i‘CtS ; . Source: Relazione Generale Sulla Situazione Economica del Paese, various issues. ernie economica deli Paese

1/ Cotula and Lo Faso provide a detailed analysis of the deficit through 1975.

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Total transfers in the social security category rose from 8.7 trillion lire in 1970 to 34 trillion in 1977 -- nearly a fourfold increase while nominal CDP increased about 3 times. This spending has accounted for 45 per cent of the growth of current expenditures since 1970, although, of course, all other items have grown as well. The sharp increase in social spending reflects mainly the greatly improved health and pension benefits that Italian labor wou after 1969, The data also show that the local authorities, also responding to the demand for greater services, and with limited revenues, ran larger deficits _ through the period,

It is true that public spending has been growing in all the OECD

’

countries, and the ratio of spending to GDP in Itaky is at the average , level for the OECD as a whole (roughly 40 per cent); however, taxation has not grown sufficiently to cover these expenditures, although the ratio of taxation to GDP has grown significantly in the last few years, The Italian deficit cannot be taken as lightly as a generation (or more) of Keynesian economics has taught us to regard deficits. These deficits are not the result of either fiscal policy deliberately chosen ‘to achieve macroeconomic goals, nor are they based on optimizing public finance calculations. Rather they reflect two pressures -- the pressure for increased benefits to which successive governments since the "hot autumn™ of 1969 have yielded (as well as other pressures for increased governmemt spending) and a tax system which did not respond elastically to income ineréases and which

continues to be marked by widespread tax evasion. The easiest course for

the government to follow has been to accept the demand for higher benefits

and "pay" for them through deficit financing.

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In addition, the Ltalian deficit has, to a large extent, been financed by the central bank creating monctary base, leading to a large expansion of the money supply. This mechanism will be discussed in more detail later; it suffices to say now that the Italian authorities not only did not finance the growth of public spending through higher taxes, but, instead, by following the path of least resistance, monetizing Treasury debt. The public-sector-deficit concept that mcasures the overall borrowing needs of the Treasury, the Treasury cash deficit, grew as a percentage of GDP from 4.5 per

cent in 1970 to an average of 12.4 per cent in 1975-77,2/

B. Labor Costs

Real wages have grown substantially in Italy during the 1970's, Despite a 130 per cent increase in consumer prices between 1970 and 1977, money wage rates in industry increased sufficiently to allow real wages to rise about 53 per cent, At the same time, real GDP grew by about 21 per cent and industrial output only slightly faster. Most of the increase in real wages thus came about through a sizeable redistribution of income to wages; the wage share of net national income rose from 59.5 per cent in 1970 to 70.5 per cent in 1977, The national accounts data include in the non-wage share various types of income which obscure the true relationship between wages and profits. It is clear that the worsening of business profits has been substantial, although comprehensive historical data are lacking, Although some of the shift of income from profits to wages may have been cyclical, due to depressed conditions in the Italian

en i/ This figure includes certain one-time debt-consolidation operations,

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economy, the magnitude and consistency of the movement is probably indicative of an underlying trend. Bank of Italy data for the industrial sector illustrate the rise in labor costs. Income per worker rose faster than output per worker as a comparisom of the first and second lines indicates, thereby forcing up unit lzbor costs shown in the third line (the quoticnt of the two lines -- Labor costs per

unit of output), For the entire period product pri.ces did not rise

as fast as unit labor costs, thus Squeezing busines:s profits; Data collected by Mediobanca (a large credit institute) for 795 companies

indicate that for the period 1968-76 these companies collectively made

net cumulative losses,

eee - Productivity and Labor Costs in Italian Iridustry (Percentage change from preceding vear);

7 1970 1971 1972 1973 4974 1975 10976 - a . ———— — ———ee —— _—_—_—_—_ Output per Employed

Worker 3.8 1.4 5.4 8.4 3,0 -8.6 9.8 Labor Income per

Enployed Worker 18.6 11.6 11.2 22.9 2:3.5 22.5 22.4 Labor Cost per unit

output 14.2 10.1 5.5 13.3 1.9.9 34.1 11.5

ee Source: Bank of Italy, Annual Report, various issues, eee The rise in real wages and the dramatic shift in income shares reveals the power of labor to extract real income increases despite a stagnant economy, Increases in real labor compensation have been due to

the contractual wage increases and also to a substantial increase in fringe

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benefits financed by employees. In addition, the real value of the wages (and ouch of the fringe benefits) have been protected by the scala mobile -- the Italian system of wage indexation.

The sharp rise in unit labor costs poses a severe dilerma for policy makers, If the authorities accomodate the higher labor costs by expanding the nominal value of aggregate demand though fiscal and monetary policy, and therefore permit business to pass on these increased costs in the form of higher prices (if the authorities in other words "validate" the price pressures) then the overall price level will rise. On the other hand, if the pressures are resisted, output and employment will fall, business will suffer losses and, in the Italian context, the state, faced with the choice of subsidizing business losses or watching companies fail and unemployment rise, will choose to subsidize, thereby futher burdening the public sector.

In an open economy the policy problems are compounded since higher prices at home will cause a loss of international competitiveness requiring corrective action. This will probably imvolve some combination of exchange rate depreciation and domestic demand restraint, which will in turn raise problems that will be further discussed below.

Before concluding this Section, some aspects of Italian labor costs will be briefly compared with developments in other

countries, using for this purpose a table from the OECD's 1977

Economic Survey of Italy .2/

1/ The table on page 18 of the Survey, is based om a study by the European Community Commission.

Comparative trends of wages and labour costs Averanc annual percentave chantes

————_____ ~~ a Parnings Unit costs Fuorchasing power pai cost per wage-earner in national currency jef wage carners iin dolbar W9OS-1972 172-1975 11963-1072 tf y Italy Germany France

United Kingdon United Stertes

In the first two sections of the table, changes in earnings and unit labor costs in local currencies are shown for two periods; the third section shows changes in purchasing power, It cam be seen that Italy and the United Kingdom had the largest increases im rates of change of money earnings between the two periods, Also, in the second period real

ra purchasing power increased much more slowly in Germany, France end the United States but rose at the same rate in Italy, despite the slowdown in economic growth and actually rose faster in the United Kingdom. In the second period Italian workers enjoyed the fastest real income growth of the countries show, The final column gives unit labor costs converted into dollars from local currencies, and indicates that because of currency appreciation (relative to the dollar) in France and Germany and depreciations in Italy and the United Kingdom, the dispersion of unit labor costs measured in a common currency, under the pressure of international competition, was reduced,

As a final point, intermacional comparisions also indicate

that the ratio of fringe benefits to direct wages is higher in Italy

1/

than elsewhere further burnening Italian businesses,

—* 1/ See OCD Italy 1977, p. 18.

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D, Public Corporations

Italy's large state corporations are é significant part of

The largest group is LRI (Istituto per la Ricostruzione Industriale)

a holding company with subsidiaries inter alia in stecl, enginecrinz,

shipbuilding, shipping, telecommunications and banking. The hydrocarbons

sector is dominated by ENI (Ente Nazionale Idrocarburi) and there are

also state companies in minerals, electricity generation and other arcas, The ideal of the state corporation -- publicly owmed, acting

in a market environment, but on the basis of social considerations and

not commercial profitability elone -- was supposed to be a unique

Italian institution and a driving force in Italian growth, For some time the corporations did perhaps play this role, but by general

agreement they no longer do so, although parts of the state sector

still turn in commendable performances,”

The difficulties of the state corporations arise from several sources. At first they were relatively free of political control, but beginning in the late 1950's it is alleged that they became a Christian Democratic power base with political appointees placed in top positions. 1/ The treatment by Allen and Scevenson, chapter 7 is an example of an

‘ earlier view of these corporations. For a good sumnary of the criticisms, sec Paul Betts. .

- See

~ll-

In addition to managerial inefficiency ereated by political control, the corporations, in my view, suffered from some cenfusion as to their objectives. They were enjoined to economicity (an untranslatable word) which docs not appear to mean profit-maximizing, but does imply that economic efficiency should ba respected, sub ject tom taking account

of non-economic objectives. Translating into economist's terminology, one could say that the firms were meant to maximize a "profits"

variable with social objectives incorporated into "profits.

Of course, even the best managed firms world’ only approximate such a counsel of perfection, but in the Italien case, many investments, particularly in the Mezzogiorno, were mot justifiable by even the most generous interpretation of a socially-modificd

*

profitability criterion; rather, they were clearly wasteful of resources, »- Investment also tended to be more capital-intensive than for the rest of the economy, which is in part a reflection of the technical characteristics of the sectors involved, but also is probably due to the fact that equity is provided by the state and borrowing often is subsidized, Another source of waste is the use of state endownent funds (intended for capital formation) to cover Operating losses, Finally, state corporations have been increasingly used to take over failing companies

in the private Sector, increasing the holding companies losses and

weakening market discipline in the private sector,

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The problems of the state corporations explain in part why few Italian cconomists argue for greater nationalization as a romedy for the country's ills, The call instead is for either subjecting the corporations to strict market criteria, letting losing firms go

under or (and these are not exclusive alternatives) better manage-

ment and state co-ordination of the activities of the corporations, Before concluding this section, I would like to dray together

some of its themes and show their applicability to the economic crises

to be discussed later, The Italian public sector ran large and

rowing deficits due in Significant measure to the expansion of

social benefits, the growing deficits of the local authorities and

the financing of inefficient enterprises, ‘while at the same time

the state was uncle to raise taxes sufficiently to pay for these

expenditures, The strength of Italian labor was shown in its ability

to receive growing benefits from government and business, At the same

time, the social infrastructure -- housing, hospitals, urban transpor-

tation, schools -- were in disarray so that the returns to public

spending were low in part due to a large and inefficient bureaucracy,

The flexibility and productivity of the econony was harmed by labor

practices and the state enterprises were a source of growing woaknhess, The point of repeating this sad litany is to show that the

traditional tools of economic policy are not adequate in such a situation and

that, as happened, the country was prone to move from crisis to crisis

with economic recoveries running up against the barriers of inflation

_—

1/ Most economists would, I think, agree thac to the extent state firms undertcke activities which are socially desirable, but that deviate

from private profit maximization, some subsidization might be legitimate.

a ster coe

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and external disequilibriua, Finally, although I point to union pushfulness as a major clement in the economic dilemma facing the government, labor's behavior may legitimately be seen as a reaction to the inequities and inefficiencies of the political and cconomic system

and the backward state of public services. iI

As might be expected, Italian economists have been vigorously debating the causes of: their country's economic problems. There is widespread recognition of the importance of the factors discussed in Section 1,2/ however, a more technical debate over causation is also taking place. _ 7

- " The two main views stress the role of either excess aggregate demand or wage pressure stemming from trade union activity. Within this very broad division, many theories are clearly possible. For the purposes of this paper I shall concentrate on two specific analytical viewpoints.

The first view, that of Modigliani and Padoa-Schioppa argues

- . that the trade unions have imposed a real wage on the economy

: inconsistent with achieving the goals of full employment, price

stability, and external equilibrium (what I shall sometimes call internal

. and external balance). The second view holds that excessive aggregate

ee . i1/ A useful presentation of the eclectic approach stressing structural {actors can be found in Schmitt.

OR ee ee

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demand, rather than union wage pressure is responsible for Italian + . - ~f * . . inflation. In Frattianni’s version of this orguiscnt, monotary expansion

. . . } has been the major cause of this excessive demani.—

The second view, which I shall, loosely, call monctarist,

argucs that Italian inflation can be explained almest entircly by increase

in the monetary aggregates greater than necessary tn finance increases . _ of

in real output, and the foreign rate of inflation.— Money wages of

course have risen sharply, but it is asserted that these wage increases

are explained by workers responding to past and expected price

increases, Because the Italian authorities have responded to the

inflation caused in large part by excessive monetary growth with €

restrictive policies, the Italian economy has undergone a cycle of

stop-go policies which has ‘led to the stegnation it has experienced.

The rapid expansion of the monetary aggregates is in turn due to the increase in the monetary base and the major source of

monetary base creation has been the central bank's financing of

l/ At the time of writing, I did not have available to me a full exposition of Frattianni's general position. Modigliani-Tarantelli provide cconometric support for the role of trade union activity in explaining inflation, while Spinelli's work fails to find such evidence, but rather argues for the role of excess demand as docs Frattianni's. Robert Gordon provides evidence that wage push accounts for wage-inflation but that the latter fails to explain price increases.

2/ Frattianni does not rule out on theoretical grounds that non-monetary sources of aggregate demand could have produced the Italian inflation, but argues that, empirically, monetary impulses hhave predominated,

S

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., Ll : . . of the Treasury's deticit 2/ The Bank of Italy has itself maintained that it has been required to finance the Treasury deficit and therefore has lost control of the monetary base and moucy supply. One fact is not in dispute: central bank financing of the Treasury has been throughout the 1970's the major conponent of monetary base creation and in 1974-76 contributed more than 100 per cent to creation of monetary base (other components, essentially the foreign sector, because of external deficits, being negative). However, the interpretation of this fact, as well as the monetarist position in general, is disputed. The Modigliani-Padoa-Schioppa position is presented in a tightly argued paper and the following eccount highlights only some of the essential points. The unions have imposed a real wage on the economy because 100 per cent indexation under the scala mobile fixes the real wage implied by any nominal contractual wage. The specified real wage will, for a given capital stock and technology, determine a level of output and employment which varies inversely with the real 2 . : : : . . P wage.—- Since a basic price in the system is fixed, there is no reason eee 1/ For present purposes monetary base can be defined as the liabilitics of the central bank (currency in circulation and bank reserves held at the central bank). Since base is either bank reserves or currency which, if deposited at a commercial bank, is convertible into bank reserves, the amount of monetary base in existence will roughly determine the amount of bank deposits. and the stock of money. The process the text describes can in essentials be reduced to the following: the Treasury deficit is financed by issuing debt against itself, much of which is bought by the central bank. The Treasury receives a deposit at the central bank in return for the debt obligation, spends the deposit, thereby placing in the hands of the public liabilitics of the central sank (monetary base). When deposited at a comercial

bank these reserves support a multiple deposit creation and thercfore money supply expansion. ‘

2/ Modigliani-Padoa-Schioppa derive this relationship from an oligopoly

model and not from marginal productivity theory which would also produce the inverse relationship.

Toe renee nm es eer ee tere mene me ge . ooo - ce meee ne

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to expect internal and external balance to be simultaneously achieved. If the authorities respond to the unemployment erecated by an overlynigh real wage by monctary expansion, a higher levef of output wight be achieved but at the cost of continuous inflation. In an open economy under a fixed exchange rate, full employment and price stability might be achieved, but only at the cost of a balance of payments deficit. This deficit can persist for only as long as it is financed, and the same inconsistency between full employment and price stability will reappear when the deficit is corrected. A devaluation can improve the external position only temporarily, since, given that real wages are fixed, higher import prices resulting from the devaluation will re-ignite the inflationary process and the external disequilibrium will be recreated at the new higher price level. In the end the economy will be at a higher price level, depreciated exchange rate and external imbalance. In this analysis it is accepted that the inflationary process must be validated by the monetary authorities. The alternative to doing so is a fall in output and employment. But Modigliani- Padoa-Schioppa argue that increases in the money supply are a response to price and cost increases rather than their cause. Moreover, they assert that it is fallacious to say that central bamk financing of the Treasury deficit causes the increase in the money supply. That increase could have been equally brought about by the central bank's "purchase of any debt -- public or private; also, the Treasury always

has the option of selling its debt on the market, which would drive

up interest rates but would not increase monctary base.

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I do not propose to resolve the controversy between the

two views in this paper. The simple facts do not resolve the issues

1/

as the following table may suggest:=

Money Supply, Gross Domestic Product and wages

(Percentage Changes from Preceding Year)

GDP Contractual Real My Nominal Real Deflator wage wage

1970 11.8 12.1 3.0 6.7 20.7 15.1 1971 15.0 8.8 1.6 7.2 11.9 6.8 1972 18.3 _ 9.6 3.1 6.2 9.2 3.3 1973 20.3 19.4 6.9 11.7 23.0 11.0 1974 20.4 23.3 4.2 18.3 20.1 0.8 1975 18.8 13.1 “3.5 17.2 23.0 9.4 1976 22.8 25.0 5.7 8.3 20.9 3.5 1977 © 20.7 20.3 1.7 18.3" 27.4 8.9

- 1i/ Contractual wage deflated by consumer price incex. Source: Bank of Italy, Bolletino; ISTAT, RPolletino Mensile de stetistica; Relazione Generale Sulla Situazione Economica del Paese.

The money supply (defined as M2 -- the brozd definition), wage rates, prices and nominal income all rose sharply. For the period 1973-77 (except for 1975), M2 and nominal GDP rose at roughly the same rate, and a simple table gives no indication of causation. It does seem that in 1971-72, M2 rose far faster than neminal GDP and the necd to validate inflationary pressures; one might argue that in this period the inflationary process was ignited by monetary factors. The wage push view could reply that the authorites were indeed pursuing a consciously expansionary policy, but in response to the recession

1/ As the footnote on p. 14 suggests, econometric analysis has not resolved the issues either. -

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brought on by the wage-explosion of 1969; that is, in order to offset the depressing effects on output of the wase inerease, nominal demand had to expand. It does appear, however, that for 1971-72 monetary expansion was overdone, and that this expansion might have helped prepare the way for the subsequent inflation. ‘In this period the central bank's hand was probably not forced by the need to finance the Treasury; rather there was general agreement among p policymakers on the need to pursue expansionary policies.

The simple data for 1973-77 differentiate even less betweeen the two views. On the wage-push side, one can note that money wages were rising faster than that justified by inflation plus productivity -i.e., real wages were rising faster than productivity _/ This lends | support to the view that workers were not only responding to past and anticipated inflation; since real wages were rising faster than productivity, the wage level may have become incompatible with internal and external balance.

On the other hand, the wage claims made by labor are not

necessarily insensitive to the willingness of the authorities to expand

the money supply. Moreover, the expansion of the moneysupply may not

‘simply have been a matter of the authorities validating wage pressures.

I think that one must give a great deal of weight to the repeated statements by the Bank of Italy that it had lost comtrol of the monetary

l/ To see that real wages were rising faster than productivity compare real wages in the table above with productivity in the table on

p. 6.

SN a army oe ne mae eee RPE meme re ory

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base because it was contrained to finanee the Treasury deficit and did not have the option, contrary to the Modigliani-Padoa-Schioppa view,of letting the Treasury sell securities on the market forcing wu» interest rates. Thus, one can agree with Modigliani-Padoa-Schiopoa that the real wage is too high for internal and external balance, but stil] believe that an exogenous expansion of the money supply (not simply a validation of wage claims) occurred, which may in part have been responsible for the sizeable wage claims Italian workers made.

However, it appears that the unemployment rate associated with price stability. did rise because of a rise in the real wage unjustified by productivity increases. This wage behavior lies outside

the monetarist framework. In my view, the explanatory power of the

_Monetarist hypothesis is greater if the starting point is a position

of labor-market equilibrium associated with a given real wage. Monetary expansion can then lead to changes in nominal values -- prices, wages and exchange rates -- leaving real variables, including the unemployment level, unchanged .2/

‘The ability of Italian labor to raise substentially its real wages must also be explained. One possible explanation is the formation of the CCU,a confederation of the three large Union confederations, in 1969, which permitted a common front in wage negotiations and perhaps

increased union bargaining power. Another (not preclusive)

l/ Indeed, according to the natural rate hypothesis (accepted by many monctarists) the equilibrium unemployment rate is determined in part by labor market imperfections. The level of the real ware is given at a point of time; it seems to me, in the ltalian context, that a monetarist could accept the view that the natural rate of unemploynent rose after 1969 due to real wage increases outstripping productivity.

explanation {is the disappearance of the labor surplus in the 1960's which

; 1/ had characterized the Italian post-war economy.- I think this is an

imvortant part of the explanation for the faster rise of wages, but not

probably a sufficent one. A greater degree of labor scarcity can

explain a higher real wage, but can less easily explain (for a given

degree of scarcity) its higher rate of growth except in the transition

period of adjustment to the new scarcity.

Before concluding this section, I should briefly discuss another

viewpoint on the underlying causes of the Italian crisis. Socialist

economists such as L. Spaventa argue that union militancy was a response

to years of neglect of social investment. He also says that economic

mismanagement, particularly in the fields of agriculture, energy and

technological development, left Italy vulnerable to the international

4

shocks of the 1970's. Spaventa's argument is related to what I suspect

is a more general view among Italian economists on the proper role

of government. In this view, unless the state takes the lead in certain

fields, such as agriculture and technology, or provides a general economic

. 2/ . : stimulus, sustained growth is not likely and the Italian crisis is

rooted in gencral failures of government.

It is true that government inefficiency has been endemic in

Italy, and those functions government does perform should be performed

effectively; but one might argue that a reduction in the role of

‘1/ See Schmitt, pp. 62-3 2/ Sce Ciocea, et. al.,. passim.

government would be a more desirable path for the country to follow. Thus, government involvement in the Italian economy is probably as great as in any western industrial country, viz. the public corporations, government control of the capital market, the widespread use of subsidized credit and other features of Italian economic life, for example bailing out failing firms; these have reduced the role of the market, and in the process of favoring certain sectors (e.g., in access

| Vege. to capital) have penalized the non-favored sectors.— It is difficult to conclude that greater government intervention is a desirable direction for Italy to follow. Nor is it clear why sustained growth requires

continuous government stimulus.

IItl

The Crisis of 1974 . | The fourfold increase in the price of oil in late 1973 and

1974 proved more damaging to Italy than the other major industrial

countries. Before the oil-price increase, Italy was already experiencing

inflationary and balance of payments problems. The Italian econony,

after stagnating in 1970-72, in part because of the sharp increase in

wages and disruptive strikes in 1969 and again in early 1973, was

recovering rapidly in mid-1973.2/ This recovery was out of phase with

the cycle in the rest of the industrial world, and was in full swing

when activity was flattening out elsewhere. This was one reason for

the widening of the trade deficit. In addition, the world-wide

i There appears to be a widespread failure to recognize that a subsidy to one sector is equivalent to a tax on the non-subsidized sectors, and that, to some extent, the stagnation of Italian agriculture may have been induced by a policy of encouraging industrialization.

2/ Recovery actually started in late 1972,

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upsurge in commodity prices struck Italy particularly hard because of the country's heavy dependence on raw material imports.

In tenrs of growth and investment, 1973 was th: best year since 1969, and the government, anxious for a sustained recovery, did not try to brake the boom; there were some steps taken in 1973 to tighten monetary policy primarily because of capital outflows, and price controls were imposed to try to control inflation. By the end of 1973, inflation, measured by the consumer price index, was running at a 12 per cent annual rate; the current account swung into deficit and was $2.5 billion for the year.

The rise in oil prices turned a vorry ing deficit into an unprecedented one, since Italy imports nearly all its cil and about 80 per cent of its total energy consumption. The 1974 current account

‘deficit reached nearly $8 billion. The rise in oil prices greatly accelerated the inflation rate:, wholesale prices rose by 17 per cent in the first three months of 1974 over the previous quarter (not annualized) and the average for 1974 was 40 per cent above 1973. Consumer prices in December 1974 were 25 per cent higher than a year earlier.

The external deficit forced the authorities to act. Italy had formally abandoned a fixed exchange rate in January and February 1973, but the central bank still intervened in the exchange market to support

“the lira. In the first five months of 1974, although the lira was allowed to float downward, the Bank of Italy also engaged in heavy support

intervention, losing about $1 billion per month for January-May. Since

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Italy only had about $2 billion in foreign exchange available at the start of the year, and was unwilling to draw down its gold reselves, iatervention on the scale performed required external assistance,

In the past, the Italian authorities, whem they wanted to improve the reserve position, would request the state corporations and credit institutions to borrow on the Euro-currency warkets and turn the foreign exchange proceeds over to the central bank. The borrowing would be repaid when the ex ternal Situation warranted. This so-called compensatory borrowing had reached $7 billion by early 1974 and further use of the Euro-currency market would have forced italy to pay unacceptably high interest rates. Consequently, the Italians turned to official lenders and in the course of 1974 borrowed from the IMF (both a stand-by credit and the oil facility), the European Community (EC) and the Bundesbank for a total of about $5.9 billion. The IMF imposed conditions (seconded by the EC) on Italy to Limit domestic creditt expansion, and the size and central bank financing of the Treasury deficit.

The negotiations with the IMF provoked a political crisis and the fall of the (fourth) Rumor government which had been formed the previous summer, marking a return to the center-left formula. The centerleft coalition (Christian Democrats, Republicians, Socialists and Social Democrats) had dominated Italian governments since the early 1960's. “Although the crisis ended with the (fifth) Rumor government, and the

acceptance of the IMF conditions, the political situ@tion was unstable throughout the yeart!. the Socialists in particular were unhappy about

1/ Rumor tried to resign again in June, but his resignation was not

accepted and he stayed, until December to put through further restrictive measures.

<) pene oc me =, . ee

~24-

supporting restrictive policies. The need for perljicmentary support on the left, and the unsettled labor situation, limited the degree of deflation the government could carry out,

In fact a strong stabilization program usimy; both monetary and fiscal policy, was carricd out. ‘the main tools off monetary policy were a limit on bank lending and the import deposit sicheme 2! whose effect, in addition to adding to the cost of imports, was to absorb monetary base. The effect of the monetary squceze was to send interes:t rates soaring (short-term rates were over 20 per cent in June) and to slow down the growth of monetary base in the second half of the year. In July a wide range of direct and indirect taxes increases were impo-sed which absorbed !

about 2-1/2 per cent of GDP.

.- The restrictive policy produced dramatic effects; indeed some

economists have charged that it was overdone. The rat.c of inflation decelerated: the wholesale price index was nearly flat between October

1974 and June 1975 and consumer price inflation was cut nearly in half

by the middle of 1975. The extemal situation also re:sponded strongly;

the lira strengthened on the exchange market and the current account deficit fell from $8 billion in 1974 to $500 million in 1975. The main reason

for this sharp improvement in trade and current accoumt was the fall in

l/ This 1. yuired importers to deposit at the Bank of Ttaly for a fixed period a given proportion of the value of their imports in a noninterest bearing account. The foregone interest om the deposits adds to the cost of imports, acting like a tariff, and the deposit itself, since it is held at the central bank, reduces the monctary base.

-25-

imports (volume fell over 11 per cent between 1974 and 1975) while at the same time export volume managed to rise slightly despite the reeession in world trade. As in 1963-64, the Italian economy had responded val.

quickly to restrictive policy.

| These successes vere brought at a high price. GDP fell 3.5 per cent in 1975 and industrial production over 9 per cent. Unomploynent rates did not show much variation because of the policy limiting layoffs; but the number cf lost hours due to short-time work compensated by the state, more than doubled. Finally, total fixed investment fell by about 13 per cent.

Because the correction of the inflation and balance of payments problems depended on deflation, it was feared by many economists that economic recovery would bring a renewal of these problems. The breathing spell enjoyed by the Italian economy in 1975 was not used to effect basic changes, i.e., a redirection of resources towards investment and exports. Indeed, the rigidity of the economic systeu was increased significantly in January 1975 by the agreement between Confindustria (the employers association) and the unions, which increased the degree of indexation, so that when the system was fully in place in Fabrunry

1/

1977, the degree of indexation was roughly 100 per cent.-

1/ Faustini gives a very detailed account of the seala mobile; the system is also described in OECD Italy 1977, pp. 15-18.

-26-

Economic policy became expansionary over the course of 1975; m 1ectary policies loosened (the import deposit scheme and the bank credit ceilings were ended in March), and in August a large fiscal reflation package was adopted. The monetary aggregates grew rapidly, particularly in the second half of the year, and M2 increased in the 12 months ending December 1975, by 24 per cent. Interest rates fell steadily till the end of 1975, the short-term rate reaching about 8 per cent in Decenber. Recovery began in the fourth quarter of 1975, and, at the same time, the trade and current account deficits widened. The central

bank supported the lira in the exchange market keeping the effective & exchange rate (an average exchange-rate which weights bilateral rates by

trade shares) nearly fixed. However, foreign exchange reserves were meager, and on January 20, 1976 the crisis exploded with the announcement of the "closing" of the foreign exchange market -- im actuality the suspension of official quotations and central bank support. It is not necessary to give a detailed account of the vicissitudes of the lira during 1976; it declined, with a few intermissions, steadily between January and May, at one point trading at more than 900 lire per dollar (on January 20 the rate was 688). By the end of the year the effective depreciation was about 20 per cent from a year earlier.

The immediate causes of the sharp fall in the lira were, I

1/

believe the overly rapid expansion of the money supply in late 1975— and

1/ At least one observer, Monti, on the eve of the crisis, on the basis of an examination of the monetary aggregates, warned of impending trouble.

’

-27-

and the deteriorating political situation. Other economists have stressed the role of recovery and the sharp rise in imports at the end of 1975. Since the political situation throughout the period was of such great importance, it would be useful to summarize briefly the key political developments before returning to our discussion of the economic situation.

A Moro government was in office since December 1974, and was based on a truncated version of the center-left coalition: only the Republicans joined the Christian Democrats in the cabinet but the Socialists provided parliamentary support. In June 1975 the Conmunists hes scored substantial gains in the regional elections. The shaky governing coalition fell apart in January, prior to the exchange crisis, because of disagivements over economic policy and, more immediately, the abortion question. This government was replaced with a minority Christian Democrat government, which in turn fell April 30 because of lack of Socialist support, leading to early elections in June. The Communists greatly improved their showing over the 1972 election (but only marginally over 1975), but the results were something of a victory for the Christian Democrats as well, since they rebounded from June 1975; the held the same percentage of seats as in 1972 and remained the largest party. The

poor showing of the smaller parties, including the Socialists and the

strength of the Conmunists, made a return,to the old formulas politically

impossible (although, arithmetically, a slim center-left majority was

possible) and brought the Conmunists openly into the political discussion.

~28-

the Andreotti government that was formed in July war again a minority Christian Democrat government with the oprecwont of the Communists and other parties of the: so-called constitutional arc to abstain. In exchansa for their support via "non no-confidence" the Communists received important Parliamentary positions and their agreement is necessary for the passage of legislation. The Andreotti government was reformed in March 1976 after a crisis in January 1978 provoked by the Communist demand for greater participation. The new government included the PCI in the parliamentary majority (as well as the other parties of the constitutional are except for the Liberals) but the cabinet again was composed only of Christian Democrats. The economic performance of the Anreotti government must be viewed in the light of the delicate political balance throughout this period. The immediate effect of the lira depreciation in early 1976

“was on the rate of inflation, ‘particularly at first on wholesale prices, which jumped 16 per cent in the first four months and rose 30 per cent over the year. Consumer prices increased more than 20 per cent during the year. Although it is often stated that the depreciation caused the price rise, I would argue that the immediate cause of the inflation was the monctary expansion which increased prices through the route of the exchange rate depreciation.

In response to the repeated exchange crises throughout 1976,

the authorities used a broad range of policies. To control capital outflows they imposed a panoply of exchange controls or tightened existing

ones. Monetary policy swung into restraint as the discount rate was raised,

reserve requirements inercased and ceilings were again placed on bank lending. Fiscal policy also became restrictive, particularly after the ‘formation of the Andreotti government; a large package of tax and public utility tariff increases was assembled. Renewed exchange market pressure in may and again in October led to the adoption af extreme measures -- an import deposit scheme in May and a tax on foreign exchange purchases ‘in October.

The effect of the exchange controls, import measures, and the sharp rise in interest rates in the summer, as well as the June election, despite its ambiguous outcome, was to stabilize the lire. The improvement in the exchange market did not come via the trade account which showed little response to the lira depreciation of deflationary measures in 1976, In 1976 real activity was vigorous and the inflation rate stayed high.

As in 1974, the Italian authorities turned to the IMF in 1976 and began discussions which at first proved inconclusive. After ‘the elections, negotiations were concluded in April 1977 with the granting of a SDR 450 million standby credit to Italy. The stand-by negotiations depended in turn on protracted negotiations between the government, the unions, and Confindustria over the issue of labor costs and productivity. ‘At the heart of these negotiations was the issue of the scala mobile, which the government and employers wanted to modify but which the unions proclaimed to be untouchable. The Confindustria-union negotiations, concluded

in January, produced only some minor changes in the scala mobile.

-30-

There were other anreenonts -- on holideys, vacations, abscnteéisn, overtime, multiple shifts and labor mobility -- which may prove of more significance in the long-run,

In addition, the government acted to “£fiscalize" a part of the social insurance charges paid by business in order to reduce labor costs, and concurrently enacted increases in indirect taxes to poy for this measure. Since an increase in indirect taxes feeds into the scala mobile and raiscs wages, negating the meesure's bencfical effects (this is an illustration of how the scala mobile frustrates economic policy) the government wanted to offset this effect by "sterlizing" the impact of the taxes on the scala mobile. The government was forced to retreat under a storm of criticism from the unions and the left and instead, as a compromise, the unions agreed to reduce the weight of certain items in the scala mobile basket. While the agreements on labor costs and productivity were limited, and 100 per cent indexation is still in effect, the willingness of the unions to negotiate on these issues is itself significant and an implicit recognition that they were on the defensive on these questions,

The Letter of Intent to the IMF in connection with the new 1976 standby (as well as undertakings given to the EC in connection with a new loan from the Community) as in 1974, contain conditions on the

expansion of domestic credit and the size of the public sector deficit.

-31-

The public sector deficit conditions are more stringent than fu 1974 since they limit not only Treasury borrowing but the deficit of the "onlarged'" public sector, whici includes not only the central govermecnt, but also the social security agencies and the locel authoritics.

The 1976 conditions are extensions of the 1974 ones inscfer as they try to limit credit growth end public sector deficits. In eddition, there are some new elements, notably an inflation target; thus the If has set conditions not only on the size of policy instrurents but also on achieving specified outcomes,

The impact of the stabilization progrem was felt over the course of 1977 as GDP fell after the first quarter, and for the year as a wnole rose by only 1.7 per cent. At the same time, the inflation rate, especially wholesale prices, fell sharply, and the IMf's inflation target, weasured by a cost-of-living index, was more than achieved. The If had set goals for reducing the current account deficit; in fact, there was a $5 billion swing in 1977, which was mich larger than required, and a large surplus of $2.3 billion was achieved. This improvement was due in part to the effects of weak economic activity on import and export volumes, as well as to the effect of the Lira depreciation which also strongly benefitted tourism. Once again, the Italian econony had responded quickly and dramatically to a deflationary policy. The strengthened external position has allowed Italy to repay some of its

official borrowing, although official debt, when combined with external

borrowing done by the commercial banks is still considerable. The 1976

TR pn ere te a en eee ey nen wae ee ee

ter ek wees $e meme capes ew sone + REE oe

-32-

emergency measures of the import deposit scheme and the Lorcipn currency tax care off during 1977. If Italy athoves to its strbtilincction presrc: over the next few years, a period of slow grovth esa be expected. Lhe 1976-77 cxpericuce has again illustrated Itsly's inebility to cchieve

the goals of eccnemiec growth, price stebility and externel boleuce. IV

Italien econcnic performance over the past few years bos been disheartenirg. Since 1973 GDP I:as grown 8.2 per cent, an annual

averege of ebout 2 per cent. Consumer prices have risen at an annual

average rate of over 17 per cent and the cumulative current eccount deficit for (1974-76) was $11.4 billion before turning positive in 1977. External borrowing rose about $9 billion until end-1976. O€¢ course,

“

all the industrial economies turned in unimpressive records over the

/

past few years, but, except for GDP growth, the Ltalian performances is among the worst.

An important part of the reason for this relatively poor performance is the heavy relience on imported oil by the Itclinu econem:.

In response to the ceficit created by the oil price increese, Itcly

a .

Te ee : A/ The GzCD Econcnie Outloo!: July 1977 in a spec¥.cl section on "the Adjustment Process since the Oil Crisis" presents comparative

statistics for the OECD countries for a number of important variables for the period 1973-76,

mee ree | re ee ee Se ee : Eee

followed a cowbination of external financing, desmestic deflation end

re

. JS depreciations: Yotel douasttie dcand grew for 1973-76 by less than

. ; A ad . , ain rtd - 1 per eccnt, considerchly lower then the Otcn averoge. Largely becnuss

of this deflationary policy, the foreign balance as a share of GDP roce 6 per cent, over 1973-77, |

The depreciaticn of the lira was also substential. On the basis of Dank of Italy calculations, the effectiwe exchange rate fell neerly 34 per cent from 1973 to end 1977; yet the improvement in Italy's competitive position has been relatively slight, because the inflation differential between Italy and its trading partne:rs was only a few percentage points lower.

The secming inability of depreciation tro cause more than a temporary change in competitive position hes led nearly all Italien economists to rule out the use of. depreciation in: present conditions.

A depreciation, it is argued, cannot improve the trade balance because import prices and consumer prices will rise and, .given the scala mobile, nominal wages and prices will follcw. In order for a depreciation to improve the trade balance, real incomes mus: be reduced -- the econeny must reduce its total absorption of goods ~- and -given limits to the possible compression of profits, real wages must. fall, which is prevented by 100 per cent indexation. Monetarists, and ot!hers, respond that the

increase in costs and prices after a depreciatiom must be accomodated by

l/ Given the OPEC surplus on current account, it :is generally agrecd

~ that the non-OPEC countries should not try to celiminate their deficits entircly. However, the Italian authorities did have to climinnte that part of the current account deficit that couldl not be financed. Also there was a substantial deficit prior to !the oil crisis.

~34-

monetary expansion, But, a refusal to acconodare the Price jncrease linposes losses of output and employment just ag under an erplicity deflationary policy. As it turned out, because of the inoeileetivenese oF depreciation, aud linits on obtainable externa) financing, ltely dig rely heavily on domestic deflation (relative to ebroad and to Vhat is needed for full-cinployment Srowth).,

The argument that has just been made is not un endorsement of the "Vicious cirele hypothesis" which in some Stetements of this hypothesis secms to view depreciation ag an exogenous cause of inflation, that in turn leads to further depreciation. The Eiypothesis, stated in so bald a fashion, ignores monetary factors and the initial cause of the depreciation. In my view, neither the 1974 nor the 1976 Italian inflations were caused by depreciations, It is true that in 1976 the Sharp rise in Prices paralleled the fall in the lira; but there had been a répid monetary expansion in 1975 (as well as a sharp recovery in activity and imports in the latter part of the year) vhile the effective exchange rate Was virtually pegged. I think it is more convincing to to view the subsequent cepreciation and inflation as adjustments to this monetary expansion, (as well as a reflection of the Tecovery in activity.) However, I do think it is reasonable te argue that -- for

i ‘4 i i 1 y ; ‘a - ye fa ~—= ao 1 a ed 4 given external disequilibrium and fixed real wage changes in exchange

~35-

If labor costs are controlled, the policy dilemmas that have faced successive Italian governments could be more readily resulved; by the use of demand maragenent and exchange rate paiicy, full employment, price stability and external balance would be more achievable. This view is close to that of Modigliani-Padoa-Schioppa. However, I would like to register a dissent to some extent from the policy inplications they draw. Accepting the real wage as given, the authors argue that lebor costs must be reduced jn other ways, primarily by raising productivity. T he desirability of increasing productivity is obvious and there seems to be’ ample room in Italian industry to get productivity improvements -- at least of a once-over kind. However, I think it is misteken to accept 100 per cent indexation, because it perpetuates a rigidity. in the system, which can repeatedly reproduce the conditions in which the contractual real wage is inconsistent with the policy goals of internal and external balance.2/

Suppose, for a given contractual real wage, labor costs have been reduced by some combination of productivity increases and reduction of social insurance charges, and that wages are consistent with internal and external balance. If contractual nominal wares nov rise faster than productivity, real wages will again be inconsistent, and are meade rigid

1/ In Modigliani-Tarantelli the authors do call flor a reform of the scala mobile.

~36-

by 100 per cent indexation. It is unlikely thet the econony will repeatedly have reserves of unused once-over profuctivity casas avaticule (and there is a limit to the extent soctal insurance charges enn be assumed) to alloy a return to consistency between the contrectucl real wage and policy objectives. It would be trusting to luck to execet nominal contractual wages and productivity to keep growing in step, once consistency has been achieved. Moreover, the spstem could be do-

steabiliced by other events, e.g., a decline in the terms of tr

i)

de. In my opinion, it follows from the compelling logic of the Modigitani- Padoa-Schioppa argument, that 100 per cent indexation, by fastening an unchanging relative price on an economic system, will repeatedly

4

render the system unstable, once the other remedics proposed are exhausted. ° ot There is a line of argument, proposed by Spaventa, which

maintains that the Italian economy will only achieve sustaineble growth

if the external constraint is broken by greater government involvement

in certain areas, and I think it is useful to discuss what is a feirly influential position. The existence of the externs! constraint on

growth is derived as follovs. For a Siven income-elasticity of import ‘demand, the rate of growth of italian GDP will be limited by the economy's ability to increase its exports in line with its import requirements.

The rate of growth of exports is in turn dependent on the rate of

Srowth of foreign markets and import-elasticities abroad. Foreign growth

-37-

therefore limits potential Ttalian jrowth, aud indeed, because ltalian jiport elasticities are alleged to be higher than those abroad (because

of Italy's heavy dependence on food, energy and ether ray material imports) foreign income must grow faster than Ttakian for external balance to be maintained. Since foreign growth is likely to be slower in the future than in the past, while Italy's need for fast Srowth is still pressing, a conscious policy of import-substitutien, particularly in the fields of energy and agriculture, must be pursued to loosen the external constraint on growth.

This argument puts Italy in the position of a less-developed country facing, what the development literature calls, a foreign exchange constraint, In that literature it is recognized that for the constraint to hold fairly restrictive assumptions must be made about the inability to reduce imports, expand exports, or substitute factors of production, assumptions that many econamists feel are unjustified for evenan underdeveloped country, let alone an industrialized economy like Italy,

All the ramifications of this question cannot be pursued here, but I shall consider two lines of argument. First, the exchange constraint position, resting as it does on a Sivem import-elasticity, seems to say that: domestic supplies are fixed at each income level, and there is a fixed relationship between GDP on the one hand and food or energy consumption on the other. This assértion ignores the ability of relative Price increases to reduce comsumption and expand

Production for a Siven level of income and thereby lower the import-

elasticity. Second, the exchange constraint Srgurame assumes either fixed exchange rates or the inability of a depreciation to Improve the trade balance for any given income level. The difficulties involved

in a depreciation with a given fixed real Wage have been discussed at -length, but it is an interesting question whether the advocates of the exchange-constraint position agree that allowing the real wage to Vary would, by rendering exchange rate flexbility a usable policy instrument, loosen the exchange constraint and raise potential Italian growth.

The exchange-constraint position might at this point be restated -- deliberate policies of import-substitution are an administrative alternative to the market solution of depreciation when real weges cannot be lowered, The state must allocate resourcés

: into certain sectors because the market resronse is inadequate, since relative prices in those sectors are kept too low by an overvalued exchange rate, However, if the state transfers resources into these sectors, it must reduce resources available to the rest of the econony, including, it is almost certain, workers’ income, The reduction in real income the workers would not accept via a depreciation

. 1 would come about by other means -- presumably taxation, ~ In my

view, if real consumption is going to be lowered in any case, it would

ee

1/ One could use the tax system to reduce workers’ {ncomes by less than a depreciation (without indexation),- but given the high wage share the difference in impact would probably be small,

ge Ae ry — TS sete eee me eee ee Pie eee . a ee

Me arse

-

-~39-

secu preferable to do so by. a depreciation with a fkexiable real wage,

which would have gencral effects on the balance of payments by acting

on all imports and exports and letting the market choose in which

industries Italian comparative advantage lies 2! Therefore, I do not

think that Spaventa's analysis weakens the case for real wage flexibility. There is a wide acceptance of the view in italy today that

sustainable growth depends on bringing aspirations into line with

resources, which means reducing consunption and raising investment,

The failure to act more decisively on labor costs, en essential

component of such a strategy, did not sten from intellectual

failure on the part of the government, but from the unwillingness of

the authorities to impose such a solution because of the economic

costs and political risks of an all-out deflationary program,

Whether sustainable growth will be achieved after the present

“

sacrifices remains to be seen,

1/ 1 do not wish to imply that there are not other grounds for state intervention in certain fields such as energy. But deliberate import-substitution in itself is inefficient if the goal is simply to reduce the import-elasticity. Optimal intervention depends upon the extent of market {mperfections.

~40-

References

Kevin J. Allen and Asndrew A, Stevenson, An Introduction to the Ttation ‘ woe OT SO Che Thadion Fooney, New York, 1974,

bank of Italy, fenual Renort, various issues, RFol¥-xtino, various LESUuas,

» Bolictiro, various issues,

i, “Tteisan Stebilicetion

a ernatacnv’l shocks: 1972-76," a study prepared for a Confere e ou Netionel Stabilisation Policies in lndustric] Countries, 1972-76, Brookings Institution, Rone 1977 (unpublished),

Giexgio kasevi, Paolo Onofri and Angelo Tentazs: c] constraints end gnte

Me

Paul Betts, "Crisis Point for Italian giant State Corporations," Financial Times (London), March 4, 1977,

PB, Ciocea, R, Filosa and GM, Rey, "Integration and Development of the Italien Economy, 1951-1971: A Re~exaninatijon," Eousa Nexionele del Lavoro Quarterly Review, 28, September 1975,

F, Cotula and S, Lo Faso, The Public Sector Deficit in Italy: Its Causes, Financing, and Policy Implications," im Bank for Intern:tional Settlements, Public Sector Deficits: Curran:

. - 8 eine abtedetenes ne rae era na a Problems and Policies Basle, 1977,

——

G. Faustini, Wage Indexing end Inflation in Italy,™ Pance Nation

2] del Lavoro Quarterly Review, 29, Dacember 1976,

By lo

M. Fratieonni, "Inflation and Uncnticipated Changes tn Output in Italy," in Karl Brunner and Allan Meltzer, editors, The Problem ef Inflation,

supplementary issue of Journal of Monetary Ecomonics, Volume 6, 1976, aoe OF on fs

e

Giorgio Fua, Occupazione e capacita prodittive: la realta ee ee ves ta realta Milan, 1976,

Robert J. Gordon, "World Inflation and Monetary Accomodation in Eight Countrics,"™ Brookinss Papers on Economic Activity," 2, 1977.

F. Modigliani and T. Padoa-Schioppa, "La Politica Economica in una Economia con Salari Indicizzati al 100 0 piu,’ Moneta ec Credito March 1977, ,

and E. Tarantelli, "Market Forces, Trade Union Action and

erred e ° . ‘ the Phillips Curve in Italy," Banca Nazionale del Lavoro Quarterly

Review, March 1977,

~-41-

11 Sole-24 Ore, "La Via Italiano al ristagno," July 14, 1977,

"piu debiti, meno lavoro," July 27, 1977.

International Monetary Fund, Intervpotionnl Fipencial Statistics various issucs ,

bd

Istituto Centrale di Statistica, Bolletino Mensile di Statistica, various issucs,

Ministry of the Dueget and Ministry of the Treasury, (Italy) Releszicons

x2 3 ~ ee Generale Sulla Situszione del Paese, various issues,

Mario Monti, Monetary Trends, December 1975, (published by Banca

3

Commerciale Italiana),

Organization for Ectnomic Co-operation and Development, Economic Outlook, July 1977, Paris.

, Economic Survey: Italy, March 1977, Paris,

H.O, Schmitt, "Sources of Growth: A Search for the Lost Italian . Miracle," IMF Survey, February 21, 1977,

Luigi Spaventa, "The Italian Economy on Trial," Chstlense, May-June 1975,

F, Spinelli, "The determinants of wage and Price inflation," in MM, Parkin and G, Zis, Inflation in Open Economies, Manchester, 1976,