Weakness into strength: Italy and the globalized economy

Article published on Aspenia online – by Andrew Spannaus –

Italy is no stranger to criticism when it comes to perceptions of the country’s economy: Italian businesses are too small and family-controlled, its financial markets are poorly developed, and as a result Italy cannot keep up with the changes brought about by globalization. These are faults we have heard about for years, focusing on the country’s inefficiencies and weaknesses, with serious consequences as regards Italy’s international image, borrowing costs for its (very high) public debt, and clout within the European Union.

But what if some of these weaknesses are actually points of strengths in a world where the assumptions of globalization are changing rapidly? We have seen examples of this phenomenon in the recent period, as despite all of its problems, Italy is able to weather storms that have harsher effects on other, more “advanced” economies in the Western world.

For an American who first came to Milan in the 1990s, some significant differences with the United States stood out immediately. One was the importance of family connections and local identity, manifested in various different ways. Italians often strongly identify with their province of origin even many years after they have left for a big city; and they tend to have family in those areas that loads them up with food when they go to visit, with products such as olive oil and wine, sausage and sweets. In short, there is still a surprisingly direct connection with agriculture and local products from around the country.

There is also a more direct link with traditional industry: while one could grow up in the suburbs of a big city in the United States barely aware of the existence of actual factories – as well as the social class of people who work in them – most towns in northern-central Italy have “industrial districts” with a concentration of production facilities, many owned by entrepreneurs or artisans from the same area.

It would be a mistake, of course, to consider these small and medium-sized enterprises (SMEs) as merely local actors; indeed, it is surprising to see the extent of their role both nationally and internationally. An example can help make the point. Upon visiting a small business in the province of Brescia in the early 2000s, I was amazed to learn that a little metal forging company with less than 15 employees produced the highest-quality joints for oil and gas pipelines throughout Asia; and that its main competitor on the global market was the company next door! As happens in many areas, a grouping of SMEs in the same sector often generates a highly productive and flexible cluster supplying larger corporations and projects.

It is well-known that these SMEs make up the vast majority of businesses in the Italian economy, whose characteristics are the subject of continuous debate over the presumed need to grow in size and go beyond the family ownership structure that has dominated for decades. In response to constant nudges from the academic world and management class, the role of independent managers is growing, although ownership still tends to be in the hands of the original families.

In business literature, this model is often seen as a weakness; there is plenty of criticism of the idea that “small is beautiful”, and a constant drumbeat about the need for larger companies and the development of new financial mechanisms to fund growth. Yet there are reasons why these ideas, that sound good in theory, still provoke considerable resistance among Italian entrepreneurs.

Let us take the case of finance. Italy is a bank-based economy. The majority of business funding comes from banks, as opposed to only around one-third in the United States, for example, where equity markets play a much larger role. While this can make it harder for Italian companies to fund expansion, it also helps prevent the type of speculative growth that leads to bubbles and widespread bankruptcies.

If we look beneath the hood a bit, we will find that the resistance to seeking outside capital is based on the very down-to-earth, pragmatic approach of Italian entrepreneurs, as well as a broader distrust of many of the processes brought about by globalization.

Consider what happened in the late 1990s. One of the sectors that was less reluctant to jump into the markets was banking and asset management: around the turn of the century Italian small investors were enticed by high-yield foreign bonds and the rapid rise of technology companies. This phase did not last long, being punctured by the Argentine debt crisis and the collapse of the dot-com bubble in 2001, followed by plenty of scandals regarding unwise use of derivatives as well.

Those events helped reinforce doubts about the wisdom of jumping into the financial markets with both feet, a reluctance that was ultimately beneficial for both investors and the banking system as a whole. Indeed, Italian financial institutions ended up being much less exposed to the sub-prime crisis than other banks in the Euro area, such as those in France and Germany.

Despite this, a narrative persists that Italy never fully recovered from the crisis of 2008-2009, leading to years of pain and stagnation. Yet the reality is that the country’s economy had bounced back fairly quickly, before the austerity measures implemented by agreement between the technocratic government of Mario Monti and the “Troika” led to a deep recession in 2011-2013.

Much could be said about the response to the financial crises of 2007 to 2012, but what interests us here is the contrast between the dominant economic model among Western countries, and the specific characteristics of the Italian economy. The two elements we have already mentioned make the point: the benefits of maintaining production facilities, in particular with specialized industrial districts, and the more conservative financial practices that have kept Italy “backwards” in terms of financial markets.

Now it is clear that the type of short supply chains of Italian industry can be an advantage, rather than a disadvantage, due to factors such as the populist reaction to the loss of manufacturing jobs in the West, the clear need to reduce dependency on fragmented global production and transport networks, and lastly the geopolitical risk of relying on competitors in key industrial sectors. As the Western world finally realizes just how vulnerable it has become through decades of globalization, Italy’s “smallness” and local connections provide some measure of protection.

These characteristics cut both ways, of course. Although Italy may now be further ahead than others in ensuring resilient supply chains, it is still a country with a dearth of large enterprises, thus missing out on opportunities for a greater role internationally. Yet here as well, perceptions are often skewed: as Marco Fortis has reminded us repeatedly in Aspenia and elsewhere, Italy’s businesses are not only among the most productive in Europe, but the country is a leader in terms of industrial diversification and high value added exports.

The financial context also affects the ability to grow, as relying on bank credit or even directly on family resources may be prudent, but can certainly also represent a limiting factor. The question is whether Italians are ready to accept the trade-off of a more “modern”, globalized economy that brings with it less security and a change in the model which allowed the country to grow.

There are plenty of areas where this is already happening, of course: just think of large-scale distribution or Amazon, which over the years have strongly reduced -but not eliminated- the numbers of neighborhood shops in many different sectors, another element that provides a more personal connection for consumers with the productive side of the economy. Yet there is still plenty of resistance to the type of flexibility promoted by free-market economists and demanded by the European Union. And the political class and institutions definitely have to take this into account. Over the past decade several political parties have achieved great success by being openly critical of various aspects of the globalized economy: from the League to the Five-Star Movement to Fratelli d’Italia, the mistrust of big banks, the EU, and the mechanisms of international trade has been abundant.

On the flip side, the technocrats who have found great respect among international institutions have proven much weaker facing Italian voters, when they have been willing to do so at all. This should be no surprise, because many of the “reforms” invoked from above are based on a model different from that prevalent in Italy. Societies change over time, and the country is certainly different today than it was in the 1970s and 80s, yet assumptions about how the global economy should function are also changing, creating room for a reconsideration of some of the special features that characterize the Italian economy and society.