Ricardo Hausmann had a nice piece in the FT yesterday arguing that the real problems in Greece are not really fiscal, but what Hausman calls an inability to export – what I would call a lack of competitiveness. This morning I happened to read some of Michael Porter’s “Comparative Advantage of Nations.” There is a long section in the book on the rise of Italy, entitled “Surging Italy.” The book was first published in 1990, and so the documented rise of Italy occurs in the 1980s. Porter writes of the strength of Italy’s small businesses in clusters such as fashion and design. There is mention of the small towns of Valenza Po and Arezzo, where “the trade surplus in precious metal jewelry was $2billion and nearly half of world jewelry exports.” By 2003 exports had fallen to 1.3 billion euros, and in 2010 they were down to 600 million euros. According to one description of the OroArezzo trade fair in 2003, buyers at the fair were concerned about high prices and the availability of cheap imports from India, China and Turkey. [DDET Read more]
The same story is true in many other industries, and in other countries in difficulty in Europe, such as Greece. The Italian current account balance has moved from a surplus of 4% of GDP in the mid 1990s, to a deficit of around the same size today. What can explain this turnaround, and lack of competitiveness? Firstly, government policies are an issue. But fiscal policy is a side issue, not the main game. Italian laws make it difficult for business owners to close their businesses, so while the number of jewelry businesses in Arezzo has declined from around 1600 in 2003 to 1500 in 2010, the number of inactive businesses has risen to over 200. The local governments response to this decline in 2003 was to embark on 20+ million euro expansion of the Business and Convention Centre. Government policies try to hold fixed a rapidly changing world, rather than dealing with the new realities.
The second issue is the euro. Italy can no longer hide behind competitive devaluations, however this is not a major issue. The real exchange rate today is only around 5% above 1980s levels. Finally of course is the rise of India and China, and other emerging markets, and their increasing openness to trade. In the 1980s Chinese and Indian jewelry exports were essentially zero. In 2010 India was a major jewelry consumer and accounted for 20% of world jewelry exports.
In Europe there are two responses to these developments. Globalisation can either be rejected or be embraced. Policies such as making it hard to shut down businesses support anti-globalisation, since globalisation is going to require firms and people to be adaptable and nimble. It is unfortunate that this might mean that the historical jewelry businesses in Italy have a future far less grand than the past. However, it is simply a fact that there is really no way to avoid this. Italians (and Greeks and others) must become more nimble and adaptable. Embracing globalisation means accepting that the future will be very different to the present and the past. It requires workers to be well educated, flexible, and talented. This is the real challenge for Greece and Italy. [/DDET]