GNI-per-head rankings: The sad stories of Greece and Italy

My co-fellow at Bruegel, André Sapir, has published a paper on the Bruegel website comparing the recent economic history of Belgium and Italy.[1] In 1990 the two countries were very similar in terms of income per head. Now Italy is some 20% poorer than Belgium.

It is interesting to extend the growth comparisons of EU countries beyond Belgium and Italy. This is done in Chart 1, reporting the rankings according to Gross National Income per head of the EU countries.

Countries currently in the euro-area are in blue, non-euro-area countries are in yellow, average European figures[2] are in green and Italy and Greece are in red, for reasons that will sadly become clear below. By clicking on “Replay”, the rankings – and the underlying GNI per capita levels – move between 1990 and 2017.

A few interesting developments appear:

• Italy was 6th in the ranking in 1990, very close to Belgium. It climbed to 5th position in 1994, then it started its relentless fall in the rankings – to 7th position in 2000, very close to France, and further down in 2017 to 11th position, below both the euro-area and EU average levels and not far from Spain in 12th position.[3] So, in close to three decades, Italy lost six positions in the ranking of income per head.
• In the same period Spain roughly maintained its ranking, between the 12th and the 13th position; similarly, Portugal moved only between the 14th and the 16th position.
• Ireland climbed 14 positions in the ranking between 1990 and 2017, ending in the first position. Its path, however, was very unstable; it lost 10 positions during the Great Recession, while strongly recovering after 2015. Furthermore, the choice in the chart of Gross National Product instead of Gross Domestic Product does not fully eliminate the statistical distortion due to the posting in Ireland, for tax reasons, of large profits by multinational companies, nor the effects of the location in Ireland of aviation leasing companies – so much that the Central Bank of Ireland has promoted the calculation of a Modified Gross National Income figure. In 2016, this was estimated to be 30% lower than GDP.
• Germany occupied the first position in 1991-1995 but then lost heavily to reach 8th position in 2005. However it subsequently recovered, to end 5th in 2017.
• Sweden and Denmark have switched positions between 1990 and 2017, the former was 3rd in 1990 and 6th in 2017, the latter was respectively 7th and 2nd in the two years.
• The United Kingdom’s position has remained about constant around the 10th position.
• Greece started 11th in the ranking in 1990 and was 17th in 2017, having heavily suffered during the Great Recession – in particular after 2010.
• It is only in the last few years that some central European countries – such as the Czech Republic, Estonia and Slovenia – climbed towards the median country in the ranking.

The evidence in the chart is insufficient to draw conclusions about the determinants of the growth ranking of the EU countries. It is, however, sufficient to suggest that some interpretations are more likely than others.

As far as Italy and Greece are concerned, the explanation must be specific to these countries: no other country lost as many positions as they did over the entire period.

As far as Italy and Greece are concerned, the explanation must be specific to these countries: no other country lost as many positions as they did over the entire period. In particular there is no prima facie evidence that the euro caused their losses. Indeed, the quasi-constant ranking of Spain and Portugal, not to mention the stellar performance of Ireland, leads one to exclude factors common to other peripheral countries, like the euro-area fiscal rules or the adoption of the euro, as the cause of the relative impoverishment of Italy and Greece.

This conclusion finds further support from the fact that the loss of ranking of Italy and Greece does not coincide in time with the adoption of the euro: Italy started losing positions nearly 10 years before, even if there was an acceleration after 1999; Greece’s fall in the ranking only gained momentum in 2010, nearly 10 years after its adoption of the euro.

One other hint from the chart is that a decay lasting close to three decades, characterised by persistent losses of total factor productivity such as the one suffered by Italy, must have structural (i.e. supply) causes rather than originating with demand factors. Prominent candidates among these causes are Italy’s dismal record when it comes to economic flexibility and competitiveness, resource misallocation[4] as well as the inability to efficiently adopt Information and Communication Technology (ICT) due to poor management hiring practices.[5]

What is striking is that the relative, long-term impoverishment of Italy, and its causes, receive very little attention in the public debate. Quarterly or, at most, annual growth rates are widely commented upon in the media, while the long-term relative decline is mostly ignored; insistence on fiscal expansion to rekindle growth from Italian governments, in particular the current one, is the economic policy implication of this wrong perspective.

What Italy would need, but no government seems able to deliver, is a programme of structural innovation, concentrating on measures bringing higher growth over relatively short time spans so that the market would see better debt sustainability prospects and the electorate improving living conditions. Since Italy is characterised by poor flexibility and competition in both product and labour markets, resource misallocation and poor implementation of ICT, the growth bonus that could be brought about by a robust, well-targeted and sequenced programme of structural measures could be significant and capable of stopping (and hopefully reversing) the long-term Italian decay.

What Italy would need, but no government seems able to deliver, is a programme of structural innovation, concentrating on measures bringing higher growth over relatively short time spans so that the market would see better debt sustainability prospects and the electorate improving living conditions.

The much faster fall in the ranking of Greece has probably had more to do with demand factors. As I argued in a post in 2015, the devastating GDP drop in Greece was caused by the interaction between the particularly intense fiscal contraction, driven by the programmes agreed with the troika, and the inability of the Greek economy to substitute reduced public demand with increased private demand, in particular investment and exports. My summary assessment was that, because of the weakness of the private sector, Greece was not capable of moving from an economic model dominated by public demand and the production of non-tradable goods, to an economy with a more vibrant private sector producing tradable goods.

The tentative conclusion from the limited evidence provided above is that more complex stories than the euro or the specific euro-area fiscal rules, specific to individual countries, are needed to explain the performances of individual countries – including the very sad ones of Italy and Greece.

 

This post was prepared with the assistance of Enrico Bergamini and Leonardo Cadamuro.

 

Endnotes

[1] The paper is also forthcoming in the Journal of Common Market Studies.

[2] Euro 19 includes current euro-area countries, EU 28 also includes EU non-euro countries. However, for Estonia, Latvia, Slovakia, Slovenia, the Czech Republic, Hungary and Poland the data begin later than 1990 and enter the chart when they are available, the ranking thus gets longer as the years pass by. Data are missing for Cyprus, Luxembourg, Lithuania, Malta, Bulgaria, Croatia and Romania. These data limitations mostly affect the lower part of the rankings.

[3] The IMF estimates for GDP at current prices in Purchasing Power Parity dollars (WEO Report database April 2019) show that in 2018 income per head in Spain surpassed that in Italy.

[4]Sara Calligaris, Massimo Del Gatto, Fadi Hassan, Gianmarco Ottaviano and Fabiano Schivardi. 28 June 2016. Italy’s productivity conundrum: The role of resource misallocation.

[5] Bruno Pellegrino and Luigi Zingales. NBER Working Paper Series. Diagnosing The Italian Disease. Working Paper 23964 http://www.nber.org/papers/w23964 National Bureau Of Economic Research.