ITALY: ECONOMIC IMPACT OF A LARGER COMMUNIST ROLE (W/ATTACHMENTS)

Created: 12/27/1977

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MEMORANDUM

Italy: Economic Imoactarger Corcnunist Pole

From an economic perspective, tho most likely form ot greater Communist involvement in tho Italianarticipation 'n the parliamentary majoritywould notituation more unstable than the present governing formula, voting with the majority in parliament] is not likely to gain the Party much greater say in economic decisionmaking. Under the terms of the "programmatic accord" established last July, the PCI already is consulted on, and holds veto power over, all major legislation ln the fields of economics and public order. (For that Party, the main impact of entering the parliamentary majority is probably symbolic. tep in Italy traditionally signalsarty is qualified to enter the cabinet and would be interpreted by PCI rank-and-fileromise of greater governmental concessions later ontj As long as they retained firm control of the economic ministries and the Bank of Italy, the Christian Democrats would remain dominant in economic policy formulation.

The international financial community is unlikely to react adversely to PCI participation in the governingey factor since short-term indebtedness to foreign banks amounts to about S7 billion. Bankers would continue to set limits on their exposure based on the surety of their investment and relative rates of return. These in turn depend on the effectiveness of government policies In improving the trade accounts and defending the lira, as well as governmental attitudes toward foreign property rights. (The government's present policies probably would not be undermined by an increase in the PCI role^ The commitment of the PCI to austerity is strong, and admission of the Party to the parliamentary majority would enhance the ability of PCI leaders to sell austerity to the Party base. Moreover, the Communists have repeatedly denied that they intend to expropriate foreign investment ororatorium on debt repayments. Many businessmen would prefer to see the PCI being gradually admitted to the governing process rather than risk the chaos that could result should the Party stop cooperating with the Andreotti government and exert its influence with laboregative manner.

Qjjven if the PCI were toreater governmental role than we think likelynamely, formal coalition status with the Christian Democratswe would not expect an abrupt break with past economic policies. Although the Partyefinite plan of medium-term objectives, it would be flexible in implementation, ready to modify ideological preferences in order to gain political advantage. (See the attached discussion of these objectives.) The Party would use the promise of future reform to justify continued collaboration with democratic parties to its membership. ]

PCI participation in the government should not represent an imminent threat to EC policies orThe Party supports EC integration,nited Europe as an important counterbalance to both US and Soviet influence. While Party economists nave advocatedtrade policies in the past, more recent' Party documents reject this approach. The PCIadical reform of the EC's Common Agricultural Policy for the benefit of Italian agriculture"^ut would be unlikely to press this issuo is doing so would disrupt tho European ConmunitQ.

Articles

ITAlYi COMMUNISTS IAY OUT ECONOMIC OBJECTIVES

Tie Italian Communist Partyopingmprove iu credentiabotential governing patty, recently issued iu medium-term economic pbn after months of intern* inlrapariyecent decline in the Oinsuaa Democrats'CI paiUapabcc in government gives the document parUcubr

[Secretary Ceneral Berlinguerdered Communbt theoreticians to come un wttha statement of ccjectives that would pacify pariv members resiles over PCI rupport of Ihe current austerity croeraitQTr* partv leaden see nolternative t0 austerity ind advance the pian as aprogram thai would brin-aboul stable economic growih and social progress. Tht plan offers ouinden (he bat opportunity to assess PCI policy positions since6 election campaign. Perhaps Its most striking featurescemphaiis on demesne economic planninehilt away rrom protectionist, measure! earlier favored by parly tmmwnittt. *

The plan sets out PCI -rrmimum objec .iveTeriod of about five vean PCI leaders argue lhat Ihe mediurs-term focui is realistic, given falv'i economic situation this Icajo vague their long-term objectives for the grand transformation'* of Italianrrhey apparendyhis approach will answer cntia who demand that iv party disavow allegiance lo Soviet style plans for control of the society*}

Reaction lo the pbn has been oiird- The reiilivelv niodoclrtnaire tone of the document probably hai contributedrowing .mpressicnialv Out ihe Cooimunisis ate moving away from the classicmodel Stil etanv Christian mmnHl have been cnticabjDeputy Srcretarv Calloni. for example has criticised lite pbo for inherent "duplicity- and has predicted that its implementation would mean the end of die free market in Italy!)

What the Plan Says

A voluminous and turgid document, the medium-termivided intoIhe political arrangements and cultural

MUlndei the conwders prercquinte lo extracting Italy from its economic

difficulties. In particular, lhc plan urges an end lo lhe longstanding "diKriminalluonil the left- and admission of all parties lo Ihe governing proem The second section, which coaiaicis the core of the prcr,ram.iuny of more or teu specific proposals. It advances the party's rfeas for economic planning, public fiiijuce agriculture, labor and industrial policies, and relations with the Third World and the European Community

The Communists toul con.prehemive economic planning as lhe fundamental solution to Italy's economic problems and beliltle Homes past efforts at indicative planning. Yet their program etpreiies the objective ofnd "rechanne:-Ing" lhe activities of lhe (tee market rather than lupplanting it. Tlie Commumin would substitute their own social priorities ior what thev regard as thr chaotic pattern of the market. Their proposed nwem of punning would control large-scale indusir-more closely lhan medium- and smail-scale Industry or sericulture. The Community say Ihey would develop and impose economic planshe legislativewill) the regional authoritiesaior role. Unlike their French counterparts, thev do not call for outright nationaiiiation ot industry In some undefined way, the bureaucracy would use "leven of direct and Indirect puolic Inter vent Ion'* to ensure that economic units follow pian directives. Theoresee worker surveillance playing an important role in policing business behavior

Labor and Indutlriil policial are intertwined The PCI favors eo-ernmerr mtervention lo assure that investment promotes both import substitutionrowth. Its program recommendi tlut investment be direcied into labcr-in tensive service activities rather than into theanufacturing seder To (osier fob creation in the backward South, the Communist!reeie on wb levels in cities to the north. Theyaid in favor of take-home pay at the expense of fringe benefits and social insurance. The PCI would enhance labor mobility through special assistance to people between pes. The procraaa includes ckdef supervision of state corporationsromote elfloent operation and tirhlations Is. More broadly, the Communists advocate government reviewecisions

The medium-term plan advocate* greater investment in agriculture, reactivation of fallow lanJ and replacement of small family farming units with "cooperative* arrangements. Communist economists hope to raise farm production and reduce Italy's Urge trade deficit* in food, which they regardrag on industrial growth According to the program, the Common Acncuttural Policy of the European Community has eiposed Italian agriculture to damaging coin petition from oilier EC members and is lhe main obstacle lo Italian self-sufficiency in food. The TCI demandsrofound change in the mechanism on which CC policy rests."

Regarding foreign economic policy, ibc PCI plan flatly rules oul protectionism. Thexpress concern thai integration ol the European Community ha: slowed and altrihuie this to the liilictentaemcnts pertormances ol the member states,emedy, they suggest joint management o( EC mcmDcis' ioroizn exchange reserves. The PCI proposes that the European Community develop gr-ater cooperation and exchange with Third World and Communist countries. InSouth relations, the Communists advocate commodityis. debt relief (or the poorest nations,e concessions to LDCj,

In the area of public finance, the medium-term pbnathernote, stressing measures aimed at reducing budztt deficits. It states thatinancing should be restricted to capiul projects. The PCI recommends greater etici: against tax evasion, higher and more progressive taxes on income and weai:h.urbs on public spending. To hold uown outbys. the Commumsu would abolish certain agencies that have been prime patronace vehicles ior the Christian Democrats andreeze on the hiring oi administrators. The PCI would lower pavrci taxes for social insurance, making up theloss with heancr direct taxation The* would reduce the present large cencits in the social insurance sysiem by scaling tlows health benefits. impos.nc some charges tor medical services, and tighterung up the policing of claims tor disability pensions..

Evaluation

The most controversial pan of the medium-term pbrf^-and the one that prompted the attack by the Deputy Secretary of the Christiane section on economic pbnninz.Qjw call for governmental control of th*roader and more strident in (he new plan than in earlier PCI pronouncements]Th? Communists would use economic planning to divert resources away from acm mei shown by the market to be more efficient and into activities to winch the- PCI assigns higher priority. To this end. the Communists seek greater Government influencepricing, employment decbions. crecUl allocation! and,nvestment.

In treating bbor and industrial policy, ihc plan follows earlier PCI documents in steering clear of the delicate issue oi wage reform, especially modification of the wjge Indexation sysiem or any admission lhat inflation and unemployment might be exacerbated by rapid wage inci"sses- Tlie pbn merely exhorts workers to ce more productive andague promise oi voluntary wage restraint once the grand transformation has been achieved.

(j'Cl agricultural policy.is misguided in its focus on self-sufficiency in food,ountry with such poor agriculture, self-sufficiency can be achieved only through a

wasteful propping up of the farm sector The Communisis fail Io tecognirc thai one of (he main benefits of Italian membership in 'he European Community hai been the elimination of small, ineificirul far mi. which hai freed labor foe more productive employmenjTTJisirally, the PCI haa earned forward iu past oppoin.cn to tlie Common AEricuIturalToliey.

The medium-term plan teems to ignore potential gains from Hade. The Communists not onlv urcc Utility in aencuiture but also press for expansion of import substitution industries to the exclusion oi export industries.Qjfl they plump for ECn. apparently believingooter.oic unified Europe would counterbwlarKc both CS andsuggestion that EC members pool their forcigii exchangempracticaTat belt so long as the different countries show wide variation in their payments balances} PCI rejection ot general protectioni>t

strongly endorsed import quotas and exchange controls, improvement inalance of paymentsoic realistic assessment of its vulnerability in any trade war may have prompted the changcj

PCI recommendations for public finance are largely directed towards the central government where the Chrunan Democrats have ceen Dominant. Paradoxically, the greatest progress toward reduction ot deficit spending has been at this level As in earlier PCI statements, little is said about tne eicalaun; deficit spending of regional and municipal governments, manv oi which are Communist controlledrTjommuntit suggestions lor refinancingntemng up the loeial security and health ijiiems would be inadequate to make the sysiems solvent}

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