Italy: Likely Economic Consequences of Communist Participation in Government
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.VKUfu/ feriifn Aiuiirnnr Cmo IBT*
,Keu Judgment!
present governingChristian Democratic IDC) minority government supported in Parliament by tbc Communists (PCI) and four minorlikely to be reviewed after the presidential election in December. Polilical leaders will be under strong pressure to opt for some form the Historicoalition including both the Christianand the Communists. This pressure would be intensified by any further gravitation of voters toward the two largest parties in Ihe parliamentary cctions eapeeted inC-PCI coalition is formed, our analysis uggests:
The Communists probably wouldeavy Input Intopolicy formulation.
DC-PCI governments, like their predecessors, would havecurbing labor costs and public sector spending.
The economy would proceed in lecular decline, punctuated by stop-go policy moves, should labor costs and public spending continue to soar
Failures in the economic area could cause the PCI toeturn to the opposition and reassessment of strategy.
Any economic achievements would tend to consolidate the DC-PCI al'iancc.
PREFACE
Thb paper attempts lo indicate how the Kalian economy would perform in bull the short and mediuermsovernment. We assume that inovernment or succession rrf governments Communist Party mem ben (woo Id be excluded fromoreignlikely obtain economic posts. PCI input into economic policy would be considerable, partly for thb reason and partly because of the strong economic orientation of the Communists. Other assumptions are as follows:
The governmental partners would continue to operate within the existing framework of democratic institutions.
A DC-PCI government would not abro**ate Italy's internationale*ample. Italy would remain in the European Community and would not rencuncu trade obligations of the Ceneral Agreement on Tariffs and Trade (CATT) or similar agreements.
Iniernaiional creditors, both private and official, would not "red-line" Italy because of Communisl Involvement In the government
Italy: Likely Economic Consequences of Communist Participation in Government
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The political appeal ol the Communal Historic Com prom lieemarkable considering it does not Include any specific program. The Communists have merelyeneral notion lhat theajor parties would share the powers of government; they have never spelled cutpoliciesovernment would implement or the goab it would pursue. Tlie iii parties that d'i*cllv or indirectly supported the previous Andreotti governmentrogrammatic accord last July in which general agreement was reachedumber of economic issues. Althoughaveandate for continued austerity and offered valoblc insights regarding areas on which the DC and PCI could agree, il was loo limited in scope toorkable program. Thus, in predicting what "Conomicistoric Compromise government would pursue, wc must supplement what we know of the economic policies of both the DC and PCI with an estimate of their respective rolesoalition.
L^J'c expect that tlie Communists would gradually assume the upper hand in economic policymakingC-PCI government. The Christianability to influence policy Is limitedack of broadly agreed upon economic programs^ Split by factions on ihe left and right, Ihe DC hu frequently had (rouble choosing between conflicting economic strategies espoused by its coalition partners. More often than not it has come down on both sides of ihe fence, so lhat government economic policies have been ineffectual compromises.
The Communbt Partyore consistent economic philosophy and clearer goab as well as an able staff of technicians. &pd while tbe Communists would allow ihe Christian Democrats to retain their high priority security and foreign affairs posts} the PCI would almost certainly demand and get some important economic ministries. This would give theound base from which lo advance their ideas.
We recognize the inherent danger in weighting our estimates heavily upon Ihc stated policies of Ihe PCI. These policies are indeed subject to revision Nevertheless, certain apparently significant consistencies run through the party's many public pronouncements on policy questions. Moreover, the PCI normally takes some time to condition its rank and file before making fundamental changes in the party line, although the PCI's discipline and organization do give it greater doctrinal flexibility than other parties have.
At any ralr. lhc i'i oltalinist monolith. To some degree tt mini, 'ikr, hold together pen-ms of differingind satisfy cnt*in special (ntrresls. PCI leaden arey the needatty splitarge-scale allenatiori of ordinary voters
Polky Goof.
The Communists havr let et-ooornic sUbilbalion as their Initial policy Coal Hence they went along wilh. and indeed encouraged, lhe austerity program* instituted by lhe Andreolli government. (Fci leaders wo-ald use corrvenllonal policy toolsheck capital flight aad control inflaiionTParty chief Enrico Berlinguer luc worked long ind hard to achieve hu ruafof Historic Com prom iseQnd is unlikely to undermine hu potttion by championing reckless or radicalhileoderate course, however, he must respond to lhc rising espcctations of hb party's base, psrtscularly in the trade union* (To placate theie groups,ikely lo hold out Ihe prospect of income redistribution, expanded employment,reater investment bi schools, housing, hospitab, and transport facilities"}
The PCI agrees with the DC on the need to avoid the large public sector deficits now looming and would work inward agreement on measures to strengthen the tai system. The Communists would press, as they have in the past, for higher direct la it* on individuals and tougher enforcement measures Higher indirect Uses and increased public service charge' abo would be likHy. given traditional difficulties in collecting direct Uses and persistent losses on public service* the DC may oppose the Communal push for greater relianceectairly tough set of lai measures is lilurly to emerge.
A Historic Compromise government would come up with programs similar to those of the cenler-left governments"iait would bo more likely to carry them ouj. Communist proposals for infrastructure improvement in the areas of housing, public Iraniporlallon, education, and health cue all echo center-left sentiments and would require massive ouilayssWhile weespect thjoverning parly would try to hold the line on new cipmditurei at first pamjleaderscome under heavy pressure from below ice increased social investment. The Communists have loudly advocated increases for yean, depioring the failure of past governments to modernizeocioeconomic infrsjlructure.
ommunists probably could not fulfill their promise tu finance capital spending increases by trimming (he bureaucracy and implementingn menial ec-momie^ Strong vestedert irulaHy the DC interest in maicuining patronage^tre likely toempo at streamlining Moreover, ei forts to economize by releasing redundan> labor from slate enterprises or the bureaucracy would jeopardize Communist relations with the
tinlv linkage uf govrrnmenl transfer puinw-nti lo ihr iml-of-living imlrt will keep pullirrg currml uitLyi up
telotlem With lo
Historic Compromise pwmmrni probably -oukl *skind obtain. torn* toocrujoro frnmed Ubo^ Tb* PCI is well aware that Irar possibility it can deliver laborhe irurnp card Inleal handtgnd would prHMr modrrhe duration of union moderallon would depend in large pari on iheffectivenessping prombM on issues iuch as social investment, elimination ol tai inequities, and protection of labor prerogatives and employment.
The PCI don not have absolute conlrol over the Italian labor movemenl bui. as the behind-the-scenes force In ihe largest of the three worker confederations. It has more Influence in labor than any other political party. Since the, the PCI has more often than not used Ihii potion toooperative union stance toward the government: ihe PCT-domina'cd confederation was instrumental late last year,am pie. in celling the major labor organizations to propose an arrangement that amounts losocial contract in all but name.
overnment including the Communull just might aland morehance than its predecessors on the critical problem of tearing labor costs. The odds arc better for obtaining union cooperation lo reduce absenteeism and enhance worker mobility^
Any rapport developed wilh Labor would be hard lo maintain if. as seems likely, government-indoced austerity led lo further deterioration in the employment situation. Unemployment already is officially placed atercent. Since Ihe. Italian unions have became more sensitive to shop floor pressure and less inclined to accept guidance from parent political parties. This tendency is more pronounced in ihe Christian Democratic and Socialist unions than in ihe Communist ones, although many vocal Communist workers have become distrustfularty leadership lhat they believe ready to subordinate bread-and-butter goals lo questionable political ends.
A successful incomes policy would depend in large .pert on the realization of substantia) changes In the wage indciallonwhich the wages of most Industrial workers are automatically aligned with ihe cost-of-living indeiuarterly basis. Organized labor seems to regard this system as its mosl important single achievement. Qthoogh Communis! economistsare eonvinced of the need lo reduce tlie system's inflalion'sry impact, Ihey to far have been insable lo gain much acceptance of that view within the labor nyovemewj Any tigniftcant modification of ihe wage irtecharuSni is ettrcmrlv >mlikely. unless the government can convince the unionss committed to and activelyuD employment program-
The urgency of Ihc labor coUullie Weep rise in ml wipe rale* of Ihc JJean Wage level* now appear lo be ippfoaelilng ihc am where ad lillonal incrcaxi can be achieved only al ihe cent of sharp declines In In vert merit and employmentunion leaders teem aware of this, bui Iheir apparento rriodeTite wage demand* and (heir ability to bring the rank and file along have yet to be tested in actual bargalninz) Worker* probably will blame dieany leveling off of real wage rale* or for ihe unemployment lhat big wage hike* could brine,
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on the private sectoristoric Compromisearc difficult to predict because PCI policy statement* have(and keyed largely lo public rrUllug On the one hand,Urcs* ihe need for more ceo (rallied control over invertmentdecisions. On the other, ihey promise toital
Al the very least, we eipect ihal government interference In ihewould be increasedC-pCl government, continuing aunder thePCI mitialry would try to eipand
governmentalninvestment, residential construction, and food procculngJThe Inclusion in governmentarly whose basic approachhessentially dlrigtste andinevitably would lead lo greater governmenul Influence over economic activity.
Large-scale rutiooaliialKin of private industry is highly unlikely. The PCI has consistently rejected ihe idea of massive state takeovers, asserting lhat economic control can be achlchrough coordinated economic planning and more effIcient marageroent of sUte-owncd firms. Since state-ownedarrof>agc and burrVned with severe losses, tbe PCI labebbcredited policy.
. Nevertheless, theby theresist any effort to trim the stale lector, whichercent of CNP andh of the industrial labor force. The Communists undoubtedly regard the slate sectorotentially valuable polilicoeconornic instrument and once in govrrnmenl would seek firm, consolidated control over it
Q Historic Compromise government is unlikely to threaten the continued presence in Italy of foreign-based multinational corporations. Thesay vaguely that these linns just be watched. Once In power, they might demand ihat muhinaiioeuusarger proportion of iheir value-added In Italy^
Th* Inlernoliortol ArvgU
Ior Ii- ign invrstmrn* In Italyistoric <iim|Kiimnf government isimporUnn' nf jpprchensions> Cummunisli should not lie ruggerated. however, since labor problems and low fain nf returnequity already have madeather unattractive imrstment site? Foreign btiWnessmen would remain eilremrly cautious aixiut long-term cnmmilmrnts despite PCI assurances that repatriation of profit* would he allowed to continue.
The enormous capital flight that many fear would follow Communist entry into government is unlikely toarger Communisl role has been anticipated for some lime; the anaious already have had lime to seek foreign havens for their funds. Moreover, during lhe past two yean the government has enacted new controls lhat would dampen an upsurge in capital outflows.istoric Compromise government quicklytabilizationseemsfinancial panic probably would he short lived. If capital flows did become worrisome,istoric (Compromise government would quickly strengthen exchange controls further.
f^ommuntil involvement in the government should not represent an Immediate threat to lhe policies or instituliora of the European CommunitvTJ The PCI has come to support EC integration,nited Europe as an Important counterbalance to both US and Soviet influence.arge majority of the Italian public supports membership in the Community.
Eventually, however, the practical effect of trade policies, not Ideological sentiment, would determine the impact of lhe Hbloric Compromise upon the Community While tbe PCI presently eschews protectionist measures Guid party economists seem cognizant of Italy* vulnerabilityrade waJ the Communist commitment to trade liberalismecent developrnent.sentiments remain strong within the party and among it* labor supporters. On balance, we can sayistoric Compromise government would be more likely to turn to protectionismovernment of the center-left In anyistoric Compromise government probably would favor selective safeguard measures for threatened Indus!chemicals, andevice for maintaining employment.
The Communists, supported by the other parties, would be likely to pressevision in the EC Common Agricultural Policy in favor ofagriculture. Communist farm policy seems driven by desire forself-sufficiency,istoric Compromise government would be likely to enact various faim subsidy measures. Such measures probably would run afoul of EC obligations.
reii'ir>lrU In working (Lit pinum lor lrJg increwsn in Imthservices If to, UU* cent* and public tn-fnrM
rrvnmr iheir rhr. awl ihe reunnmyIlnundetJ)
Qjcal.jir mureercent annually. WU-nevef lhc mnmi started Iu pick up strain, high andd lo deter iotstkiri In lhc currrnl account, and lhc guirrnineni vould inpnnd byemand Restrictive demandand Ihr tor ol real *agr rain would inhlbal private Investment, tiuile apart from any investor vkiltnlmrw regarding Ommufiuli In ihr
Qtbingatural concomitant of slow economic growth, would br the mut dbhrartriilng Iraturr of thb scenario fo* the OmmunbU Inflation would br an Intractable problem. Public eapenditure would grow faster than total production on average, shifting more and more resource* Irom private control to Ihe public sector^
Bl -col Slake*
A Ifbtoric Comprombe government would raise high hope* in Italy. Sinceidely perceived as ihr "lastoliiical leaders havr lonearly all other constitutional variants having been Irted and foundwould be given lhe benefit of the doubt by modlthoughovernment would not be eipected lo change everything overnight, it would be eipected lo register vruble progress in tbe near term on at least some of Italy's more pressing problems If il did so even in one or two areas, say hcusing and education reform, many Italians would think the DC-PCI alliance was offromising start and view it as an improvement over mot of lhe coalitions and minority governments lhat preceded it.hristianommunist partnership lhat showed signs ofeal dent inroblems could endure in one form or another for years.
Both the Christian Democrats and Communists would face unpleasanl choices if the Historic Compromise failed lo live up lo cjpectatKi.il Although lhe Commonms would probably Iry to blame Christian Democraticoor performanceistoric Compromise government wouldraish Ihe self-promoted PCI image as an efficient, innovative, and dynamic party
0>cedthai prospect, the PCI would have lo weigh the pros and cons of staying in the government Although tome Communists would doubtless argue lhal ibe party should stay in and seek ways of circumventing complication* posed by esuting instil-jtions, the prevailing view would probablv be that the party should return lo the opposition and reassess its
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