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-SPECIAL' REPORT
THE ITALIAN ECONOMIC OUTLOOK
CENTRAL- INTELLIGENCE .AGENCY
OFFICE N* E ,
> JMW,DATORrREVIEW '
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Il
November3
THE ITALIAN ECONOMIC OUTLOOK
Italy's economic boos isittlo at several points. Industrial output iaecord high, but nervous Italians send their funds out of the country as Inflationary prossures persist and balance of payments deficits run on. The economic outlook is also clouded by widespread apprehensions about tho concessions to Socialist viewpoints that will have to be madeenter-left government Is to be formed and kept going. To allay these the Italian Socialist Party has indicated that it intends, for the present at least, toconservative financial policies dosigned to prolong tho boom within tbe framework ofinstitutions.
Postwar Economy
Italy drew economic strength from military defeat. The public debt was effectively wiped outallopingthat was arrested No large publicwere required foror for support of Restrictions on the free movement of labor were repealed, price controls were lifted, and othereconomic policies of the Fascist regime were discarded. While the state sector of the economy was still verythe free play of market forces aftor World War IIa new spirit ofand promotedadvances in industry.
The fortuitous discovery of new energy sources also helped fuel theust after the war, natural gas was discovered in great quantities in the Po Valley and became the principal fuel
of the Mllan-Genoa-Turlntriangle. Theof fuela was directly responsible for the riseetrochemical industry that has madeeading European producer of plastics and other synthetics.
The success story ofls part of the larger experience that Italiansas their miracolo eco-noraico. The miracle is' a of dynamic growth in such fields as sewing machines,calculating machines, steel, and autos. 9roduction ofautos doubled0nnually. utput had redoubled Last year's figure0 was twoalf times as high again.
The miracolo operated up1etting ofprice stability. The large numbers of unemployed and underemployed in Italy permitted
production to expand without an unduo rise in wages. Workers' incomes did go up, but labor productivity Increased even faster, and profit margins wero high. The reinvestmentigh proportion of business earningsteady growth of GNP, which rose soreercent annually (in constant prices)0 The rate of Increase in GXP wasercentercentercent again Last year, the riseittle over 6still among the highest In the world. The percentage increase this year will be lower, but substantial nonetheless.
Inflationary Pressures
Industrial expansion now has proceeded far enough to take most of tho slack out of the labor market. On top of the economic forces, newpatterns also makeighter labor market. Tbe industrial labor reaervaby tbe ruralhas dropped sharply; nearly half the workers were on the farm just before World War II, whereas the proportion now is little moreuarter. In addition, population growth no longer outstrips the demand for labor. Italy's rate of population Increase has beenraction of one percent annually In the past decade.odd million people, Italy ls still one of tbe more crowded countries In Europe, but the population problem is well on the way to solution.
The number of workers completely without Jobs has been steadily diminishing and in some areas has booneliminated. bout five and one halfof the labor force was unemployed, accordingtatistical series that is approximately comparable with US unemployment figures. The rate of unemployment was down to an average of thrae and one half percent1 and will be less than three percent thishalf current rates of unemployment in the US. The Italian statistics do notubstantialof underemployment and are not indicative of the higher unemployment figures io the south. Thoy do, on the other
ITALY'S GROSS NATIONAL PRODUCT
hand, indicate the shortage of labor in tho industrial north that has strengthened the band of labor unions in collective bargaining negotiations. have recently had to make far-reaching wage and other concessions to theentailing increases in labor costs ofoercent.
Labor militancy feeds on the rising cost of living, and the familiar wage-price spiral has been one of the important factors responsible for anthat the EuropeanMarket.Commission describes as "serious." Theindex went up more than seven and one halfndnother eight-percent rise was recorded for the twelve months following. The country'ssupply expanded someercentnd it will probably go up by much the same percentage again this year. Persistent government deficits accountignificant amount of the increased money supply.
The inflation has adversely affected Italy's balance of payments In two ways. First, the demand for foreign goods has climbed with the increase in purchasing power and with government measures to lower the barriers on food imports in order to keep the cost of living down. Second, rises in the priceB of Italianhave reduced Italy's competitive advantage inmarkets, and exports have lagged behind the Increase in imports.
PERCENT OF ITALIAN LABOR FORCE UNEMPLOYED
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Italy has traditionally had an excess of imports over exports, but the gap now is so wide that it can no longer be covered by earnings from "invisibles" like tourism and emigrant remittances. In the years8and "invisibles" helpedurplus in the balance of paymentsnnually. The fall in the surplus toillion2 came as soberingof the fragility of the boom. Soberness has deepened into concern with theof financial statistics pointingalance ofdeficit this year that will come closeillion dollars.
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Bevoral economic signsto widespread uneasiness. New Investment decisions are being postponed. In part, this ls due to the increasingof selling new securities to finance business expansion. Saverslear preference for bank deposits over stocks and bonds; somo Italians are sending their money out of the country entirely.
The extent of the capital flight ls Indeterminate,it has been estimated as highillion dollars so far this year. Mot all the capital flight reflects fears about economic conditions in Italy. Some of it was promptedpercent withholding tax on dividend income. Theregistration of dividend receivers under the new taxlarge blocks of securities acquired bywith low declareda new burden on tax evaders. They hava reacted by selling their securities and sending the lire in suitcases to Switzerland. The money may be kept in Swiss banks orIn foreignood part comes back to Italy again In the guise ofby Swiss business firms, which are in fact acting for their unnamed Italian principals,
A strong government could do much to restore business Tbe present caretaker governmentesturetabilization program withproposals for increases of certain taxes, for measures to stimulate exports, and for tax inducements to modernizeand encourage low-cost housing construction. Banks are more restrictive inloans to theirarliamentary group hasa new law to curb the sharp increase infastest rising component of the cost-of-living Index.
tronger Italian government would find itto bold the line against inflation and payments deficits. One reason ls the generalIn Italy that creditmust be approachedIt isto curb, say, real estate speculation but that investment tending to increase production and bring down costs should be encouraged. Second, there is little stomach for the contest with labor that would follow an attempt to impoae anpolicy" limiting wage Onions argue, with justice, that labor is Just now catching up with past Increases in productivity. They also point out that wage scales in Italy are still far lowor than going rates in other Common Market countries.
A third reason is thenecessity of honoring past commitments to correct some of the glaring inequities of the Italian economic The disparities between north and south, for example, necessitate continued large
expenditures. Somoercent of the population lives in the south,redominantlysetting where perearnings are half what they are in the north, where birth rates areercent higher, and where unemployment and underemployment are chronic.
he government created tho Fund for tho South, with investment resources that were directed initially toin agriculture and such "social overhead" as roads, water supply, and electric power. The government ls also trying to attract industry to tbe south by such measures aa taxand subsidies. Last year's Investments there, totalingillion dollars, werehird of the amount Invested in northern and central Italy. This proportion, whicha considerable Increase over previous years, will go
still higher if officialare realized. The concerns about inflation are not likely to weaken theto bring the south into tbe economic mainstream of the country.
Reassurances From the Left
Last year, the electric powor Industry in Italy was nationalized. The specter of further socialization now haunts the business communityossible consequenceenter-left government. If the fear proves unfounded, the stimulus to privateand general economicshould be conalder-able. There seems to be an even chance that events will take this happier courso, at least for the near future.
It ls not that the left in Italy ls jettisoning ita
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goals. Individual Socialists frequently issue bellicose statements that worry some businessmen. The Economic Report published by the Italian Socialist Party last month said enough about the needheof "an antitrust law withnd the necessity of "changes in the tax structure" to suggest that the party feels constrained constantly toits claims to represent the working class* But by and large, the Economic Report was remarkable for its attempt to allay conservativein the words of the report at one point, "to dissipatefears in the business communityenter-loft government would be, by nature, prodigal and spendthrift,"
The report eschewed Marxist clichtf and dialectic* It argued strongly against putting the blame for rising prices on wage increases, but it did notin fundamentalistagainst profiteering or in other doctrinaire allusions to class conflict. Theof the stock market betrayed none of the typical Marxistagainst that oft-maligned institution of high finance. The decline of stock prices was acceptedalid Indicator of the economy's malaise, and the Socialists went so far as topurchases of securities by the government to support the markett if other measures proved inadequate.
The report's concluding recommendations offeredto both workers and The former, urged the Socialists, should beby price freezes on key commodities like milk, sugar, and rice. There should be credit curbs on speculative activity, but residentialought to be Looking to the caoital-istSi the report implicitlyits rapport with their interests when it came out strongly for maintaining the foreign exchange value of the lira. The Socialists pointed with approval to the stand-by arrangements for currencythat the United States has made with central banks of other countries. Whileto condemn deficitthe report suggested that, for the present, it would be wiser to hold the line: for additional public spending should not be made without offsetting proposals to cut expenditures in another area.
Outlook
The assurances of thehave no appeal to CONFINLUSTRIA (Italy'sof the Nationalofhich is reliably reported to have determined that neither effort nor money must be spared in the continuing struggle against the left, CONFINDUSTRIA's suspicions are likely to be reinforced periodically, as the Socialists, undertaunts, feel compelled to reassert their militancy
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capitalist interests* Toiable center-left coalition under theseis admittedly to assume away one of the centralnamely, that political or uncertainty willto cramp the Italian However, if it turns out that the new government is in fact an enduring onep the forces for economic growth in Italy should carry the country over its present difficulties.
There are some uniquedefects of Italianbut the short-range Is much like that of all capitalist economies during boomone of coping with success. This moans occasional business relapse,financial crisis. But ln Italy, these will occurackground of dynamism andtrend lines. The spirit of business enterprise Isand venturesome. When governments are reasonably strong, this spirit isby practical political energy, as reflected in the ambitious but realistic plans for tbe south. Major plants being constructed or projected for the south will addto the country'scapacity ln chemicals, electric power, steel, and oil refining.
Both at home and abroad, the long-run outlook for Italian sales continues promising. The
domestic maraet lor Italiandurables, which hassteadily with risingis nowhere near The profitability of exports may have diminished, but the rising costs ofin Italy have their parallels ln recent costof other Europeanso that theposition of Italianin foreign markets is still strong.
A final point, but one of central importance, is that Italy's economic boom Is partider prosperity. ritical factor in the Italian prospect Is the performance of ;be Common Market. Italian duties are among the highest in the Community, and thetariff wall was lowered despite protectionist fears about competition from more efficient producers of the EEC. Yet the Italians were able to make dramatic price cuts in autos, home appliances, and other durables, and theyIncreasingly ln the commerce of the expandingmarket. hird of Italy's foreign trade is now with other EEC countries; as latehe proportion was littleifth. More and more, the Italian economy Is bound up with the fortunes of Europehole.
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