Italy - Economy
As the Italian economy, the world's sixth largest, has expanded since the 1950s, its structure has changed markedly. Agriculture, which in 1953 contributed 25% of the GNP and employed 35% of the labor force, contributed in 1968 only 11% of the GNP and employed only 22% of the active labor force—despite continued increases in the value of agricultural production. Agriculture's contribution to the GDP further declined to 8.4% in 1974 and 5% in 2001. Conversely, the importance of industry has increased dramatically. Industrial output almost tripled between 1953 and 1968 and generally showed steady growth during the 1970s; in 2001, industry (including fuel, power, and construction) contributed about 30% to the GDP. Precision machinery and motor vehicles have led the surge in manufacturing, and Italy has generally been a leader in European industrial design and fashion in recent decades. Services in 2001 accounted for approximately 68% of the economy.
Despite this economic achievement, a number of basic problems remain. Natural resources are limited, landholdings often are poor and invariably too small, industrial enterprises are of minimal size and productivity, and industrial growth has not been translated into general prosperity. The rise in petroleum prices during the mid-1970s found Italy especially vulnerable, since the country is almost totally dependent on energy imports. In addition, because economic activity is centered predominately in the north, Italians living in the northern part of the country enjoy a substantially higher standard of living than those living in the south.
Partly because of increased energy costs, inflation increased from an annual rate of about 5% in the early 1970s to an annual average of 16.6% during 1975–81, well above the OECD average. Inflation was brought down to 14.6% in 1983 and to between 4 and 6% during most of the 1990s. In 1997 it was reduced to under 2%, its lowest level in 30 years. Inflation was expected to stay at around 2% by the end of 2004.
From 1981 through 1983, Italy endured a period of recession, with rising budget deficits, interest rates above 20%, virtually no real GDP growth, and an unemployment rate approaching 10%. Unemployment hovered around the 10 to 12% range for most of the 1990s and at 9% into the 2000s. Between 1985 and 1995, GDP growth averaged 1.9% a year. It was expected to be quite low in 2003, at 0.7%, but to improve in 2004.
Italy's large public debt, public sector deficit, low productivity growth, and burdensome and complex tax system, are generally blamed for the poor state of the economy. A rigid labor market and generous pension system are also seen as responsible for a sluggish economy. The Silvio Berlusconi administration by 2002 had abolished an inheritance tax, a move which was popular among affluent Italians. Tax cuts for low- and middle-income households were planned for 2003, and the corporate tax rate was reduced. Berlusconi also attempted to loosen labor laws to increase temporary work contracts and to ease hiring and firing practices. The government in 2002 was geared toward implementing spending cuts to spur consumer spending and corporate research and development. Pension reform, called a "financial time bomb" by economists, was proposed by the government and resulted in strikes in parts of Italy in mid-2003.
One of Italy's strengths is the thriving state of its small firms, which are often family owned. Out of a total of 35,000 joint stock companies, 13,000 have fewer than ten employees. These small businesses are able to succeed in niche markets. Italians spend more than other Europeans on clothes and shoes, and are second only to Spaniards in for spending in bars, restaurants, and hotels. Because many Italians rent their living spaces, expenditure on housing is low.