Tuesday, November 27, 2012

What's the matter with Italy? A reply to Krugman

Krugman has noted in a recent post that productivity in Italy, when compared to France, has been dismal, particularly since the late 1990s, after the launch of the euro. He correctly points out that the size of the Welfare State should not be the main culprit, since in France it is also large (larger according to him). The graph below shows the real GDP in both countries (1980=100) in domestic currency.
Note that since the launch of the euro Italy's GDP is considerably below that of France. In other words, Italy has grown considerably less than France since 1999. The real rate of growth of France was around 1.6% while that of Italy was closer to 0.7%. It should come as no surprise for those that think that the evidence is strong for the Kaldor-Verdoorn Law, which says that productivity results from the need to innovate when the economy is close to full employment, that productivity is higher in France. It's the lack of demand, caused by restrictive policies and the need to reduce debt in Italy, that explains the lower levels of productivity. Blame it on the euro!

PS: Just for fun, below the graph of Real GDP in Italy (Output) as a share of the French. Go back to Krugman's graph and see the similarities.

5 comments:

  1. Confirmed -- and no need for an R-squared, I should think:

    Italian unemployment: http://qvmgroup.com/invest/wp-content/uploads/2012/05/ItalianUnemployment.png

    Italian Gross Capital Formation as % of GDP: http://kushnirs.org/macroeconomics/capital_formation/capital_formation_italy.html#p1_3

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    Replies
    1. Yep, there are several ways to skin the cat. The surprising thing is that Krugman only cites supply side reasons for the productivity slowdown (e.g. regulations and the composition of output produced for exports).

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  2. Faltaría un gráfico con los índices de desempleo comparados de los dos países.

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    1. Empleo mejor, pq no tenes el problema de los cambios en la tasa de participación.

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  3. ¿Pero esa se calcula?

    Porque crecimiento -más en un contexto de unión monetaria y en series cortas- no implica necesariamente aumento del empleo de modo proporcional. Qué se yo, una economía puede ser más rural que la otra y creciendo más que la otra, urbana, el desempleo podría quedarse recto y durito, ¿o no?

    Saludos

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