Three Ideas to Boost Productivity

Italy recorded a decline in total factor productivity (TFP) since the mid-1990s and this decline accounts for most of the economic stagnation that characterized the country in the last twenty years. In a recent report with Sara Caligaris, Massimo Del Gatto, Fadi Hassan and Gianmarco Ottaviano (Italy's productivity conundrum: A study on resource misallocation in Italy) we focus on the role that resource misallocation has on the evolution of TFP. Misallocation grows as long as market imperfections hamper the flow of resources from less productive firms to those more productive. We find that resource misallocation in Italy increased since 1995 and that its impact on the dismal evolution of Italian productivity is important: if in 2013 misallocation had remained at its 1995 level, Italian productivity would have been 18% higher in manufacturing and a hefty 67% higher in services.

In order to better understand the pattern of misallocation, we group firms by industry, geographic area, and firm size. Then we decompose our measure of misallocation into a "within-group" and a "between-group" component. The "within-group" component is the main driver of resource misallocation for any of the groupings and it started to increase sharply since 1995, the same year when aggregate TFP started its long-standing decline.

This finding implies that in order to raise productivity, Italy should not focus on policies aimed at switching resources between sectors, geographical areas and firm size classes; but rather on policies aimed at allocating capital and labour to the best performing firms within these categories. This means that Italy should focus less on moving capital and labour from, e.g., textile to electronics or from the South to the North, than on facilitating the mobility of workers and capital towards the most productive firms within the textile sector or the Southern area. This represents both an opportunity and a challenge. An opportunity, because moving factors within sector or area is less costly than across them; but also a challenge, because it is harder to determine what prevents high-productivity firms from expanding and low-productivity firms from shrinking within the same sector or geographical area. More generally, setting the framework conditions for the proper functioning of market-driven reallocations could be more effective than pursuing traditional industrial policies aimed at 'picking the winning sectors'.

The increase in misallocation is to a large extent due to the fact that low-productivity firms are more likely to survive nowadays than twenty years ago and this fact points to the inefficiency of the institutions and regulations that govern the process of firm restructuring. We see the following aspects as particularly relevant. First, the regulation of firm bankruptcy procedures and the efficiency of the judicial system in reallocating the assets of distressed firms. These have been subject to various reforms in the recent past, whose results should hopefully become apparent over the next years. Second, the process of credit allocation by banks that might lead to 'zombie lending', whereby credit is extended to low productivity firms to keep them from going bankrupt. Third, the diffusion of financial operators specialised in firm restructuring and turnaround, such a private equity firms. The market of private equity funds is still underdeveloped in Italy, possibly due to their regulation and to the constraints on firm restructuring.