Time for another Renaissance

State of the Union / by Pietro Paganini*

dal Wall Street Journal di lunedì 1 ottobre, per gentile concessione di Competere – Spinning innovation

 During the Renaissance, Italy dominated the worlds of art, science and commerce. Those times are long gone. For the last two years Italy has been Europe’s slowest-growing economy. Gross domestic product moved up a meager 0.1% during the second quarter of 2007.
The problem isn’t lack of economic vitality as such.

The country is home to more than 500,000 small and medium-size businesses, whose owners don’t shy away from hard work. In this sense, the Renaissance spirit of capitalism lives on. The problem is that this spirit is lacking in the ruling political class.
Take Franco Giordano, for example. The leader of the Communist Refoundation party threatened last week to bring down the government unless the next budget increases the capital gains tax. Raising taxes is never a good idea, but doing so now—and especially on bonds and stocks during this current credit squeeze—would have been particularly dangerous.
A 10-hour cabinet meeting lasting until early Saturday morning produced conflicting news. Some press reports said Italian Premier Romano Prodi worked out a shaky compromise—hiking the capital gains tax hike to 18.5% from 12.5% only for shares and dividends but not for bonds. Later reports suggested there would be no tax hike at all.
This confusion will do little to instill investor confidence. Since becoming prime minister more than a year ago, Mr. Prodi has failed to lay the groundwork for growth. He has relied more on tax increases than spending cuts to bring down the budget deficit. Last year, Mr. Prodi hiked taxes for incomes above Œ40,000 and reintroduced the inheritance tax. And under heavy pressure from the unions, the government’s last action before going on vacation this summer was to scrap plans for raising the retirement age next year to 60 from 57 now.
Italy has the oldest population and one of the lowest birthrates in Europe, and the average Italian has to pay about a quarter of his income on mandatory state-pension contributions. No wonder that 4% of Italians with a bachelor’s degree left the country last year compared to only 1% a decade ago.
Not all of this is Mr. Prodi’s fault. His predecessor, Silvio Berlusconi, came in as a reformer in 1994 and again in 2001, but wasted too much time lowering direct taxes only to increase indirect ones. The Berlusconi government also left Italy with an enormous public debt, which stood at 107% of GDP last year and ties the hands of the current administration.
The challenge is to modernize the Italian economy and adapt it to the realities of global competition in the information age. It is no longer viable for Italy to rely on labor-intensive, low-cost products such as textiles when competing with countries like China and India.
Italy was one of the prime movers behind the infamous “bra wars” two years ago when it pushed the European Union to block the sale of Chinese textiles to protect domestic producers. Yet it can’t be the ambition of the country of Leonardo and Michelangelo to assemble products rather than design them, and to make shoes and undergarments
when we should be developing software and new medicines.
Italy even risks falling behind the fast-growing economies in Central
and Eastern Europe. In 2004, Italy spent only 1.1% of GDP on research and development compared to 1.3% in the Czech Republic. The EU average is 1.8%, and in the U.S. 2.7%.
Ironically, Mr. Prodi was president of the European Commission in 2000 when the EU embarked on its “Lisbon Strategy” to become the most advanced knowledge-based economy by 2010. The strategy famously called on all EU countries to spend at least 3% of GDP on R&D. Since returning to Italy, however, Mr. Prodi has done nothing to achieve this goal in his own country. Italy’s public universities remain isolated from the private sector and don’t compete for funding or the best students. Italian students have limited contact with professional life until they graduate, leaving them with little understanding of how innovation is tied to entrepreneurship.
Meanwhile, the state is also undermining private investment in R&D. Italy has the worst protection of intellectual property rights in the EU-15, except for Greece, according to the International Property Rights Index. And disputes over patents can often take four to five years in Italy’s slow-moving courts.
Creativity, ambition and hard work turned the Renaissance into a period of daring discoveries, innovations and growth. Those qualities are still alive among the Italian people. To unleash them, the country needs a proper legal framework and political leadership. So far, Mr. Prodi isn’t up to the task.

* Pietro Paganini, presidente di Competere – Spinning innovation