Italy: Less-Sure Footing

Despite a decade of strong growth led by small businesses, economists say Italian industry must diversify and adapt to greater competition.

By , Staff writer of The Christian Science Monitor

WHAT European country enjoyed the fastest economic growth in the 1980s, a boom in high-performance small industries, renewed profitability of its publicly owned industrial giants, and growing exports in everything from traditional consumer goods to specialized machine tools? You may have been tempted to answer Germany, but the correct answer is Italy. Yet after economic growth over the past decade that put it second only to Japan among industrialized countries, the land of Fiats and Benetton enters the 1990s on less-sure footing.

No one is forecasting any economic disasters, or even a very serious slowdown. The Organization for Economic Cooperation and Development (OECD) expects Italy's economic growth rate to drop slightly from 2.6 percent last year to 2.5 percent in 1991. Higher oil prices will push inflation to a 7.25 percent annual rate by the middle of next year, the OECD says, and that in turn will send interest rates, already the highest in real terms in industrial nations, climbing still farther.

Yet signs are multiplying that a robust Italian economy is facing difficulties in some of the very areas that have been its strength over the past decade, economists say.

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A concentration of the country's export-dependent industries in such traditional sectors as clothing, shoes, ceramics, and automobiles, could become a problem as newly industrializing countries improve the quality of their production in the same sectors. Statistics from ICE, the National Institute for Foreign Trade, show Italy with the highest concentration of its manufacturing in traditional sectors of any industrial country.

Italian shoe production plunged 25 percent between 1986 and 1989, for example, and despite an upturn in the beginning of 1990, shoe producers are predicting further shrinkage of production. Italy's nearly 9,000 shoe manufacturers export 80 percent of their production - two numbers that indicate both the small scale of production and the industry's dependence on exports.

At the same time, Italy has the weakest presence among industrial nations in the high-tech sectors that are expected to enjoy fast growth over the next decade.

``The most dynamic sectors in the world economy will be areas where Italy is not specialized, and that will create problems,'' says Lelio Iapadre, director of ICE's economic research department.

ITALY'S small companies, which employ a larger share of workers than in any industrial country but Japan, and which played such an important role in the phenomenal growth of the past eight years, will face tough odds in trying to improve export performance. Small companies will have a harder time making the investments needed for continuous innovation, and global marketing, a number of economists here say.

Finally, with a national debt equal to annual economic output and an annual deficit at about 11 percent of gross domestic product (GDP), inflation and interest rates will be kept up. Not only does that make the bank loans small companies are dependent on for investment more expensive, but some economists worry that public borrowing needs dry up credit sources for the private sector.

Italy's growth over the past decade wasn't so much a ``miracle,'' as some pundits have labeled it, as it was a reaction to a lag compared to other industrial countries. The harder part, some economists predict, will come in the 1990s.

The growth of the last decade ``was a restructuring of technological capability and production means, not a launching into new sectors,'' says Alberto Heimler, a research economist at Confindustria, Italy's confederation of business owners and managers.

The problem for the next decade, he says, will be enlarging capacity, and diversifying.

Some economists say that part of Italy's boom in the 1980s was the result of a ``catch-up effect'' from the '70s, when unstable social conditions, ranging from terrorist attacks to labor unrest, discouraged industrial investment.

Fabrizio Barca, a senior researcher with Bank of Italy, says small companies grew in part because they had the flexibility and specialization to quickly supply larger companies with parts and products they needed. Yet in a recent report on small Italian companies, Dr. Barca warns they could face their own damaging ``technological lag'' if financing remains difficult because of high interest rates. Unlike larger companies that generally have deeper pockets, small companies are more dependent on banks - which are often very small, (Italy has more than 1,000) and reluctant to lend to high-risk small firms.

Other economists worry that the much-touted ``family networks'' that have created many of Italy's companies - Benetton apparel is the creation of three young members of the same family - lack the financial resources to expand and innovate.

``The smallness that was so many companies' strength over the past 10 years will for some become a disadvantage in the future,'' says Luisa Picozzi, director of quarterly reports for ISTAT, the national statistics institute.

First among answers for Italian industry's problems, economists say, is bringing down interest rates.

But that is unlikely to happen soon: the government is expected to miss its spending target for next year and still suffer a deficit of nearly 10 percent of GDP, more than double the percentage of any other major industrial economy.

And much deeper spending cuts seem unlikely. Austerity measures have already cut government spending to match receipts: It is huge interest payments on past debts that keep Italy in the red.

At ICE, Mr. Iapadre says Italian companies can continue growing not necessarily by expanding themselves, but through partnerships with other companies, both domestic and foreign.

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