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2007 OECD Economic Surveys: Italy 2007

image of OECD Economic Surveys: Italy 2007

This edition of OECD's periodic review of Italy's economy finds a welcome economic recovery under way with improvements in export and labour market performance.  But medium-term prospects remain challenging: total factor productivity shows little signs of resurgence, high public indebtedness threatens fiscal sustainability and population ageing looms large.  Without further reforms to restore economic dynamism, living standards will be dragged down relative to other countries.  This survey discusses policies undertaken by the government to address these challenges, notably to boost competition in public markets, achieve fiscal sustainability, and make fiscal federation work - all in support of growth and adjustment.

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Italy's key challenges

The Italian economy rebounded significantly in 2006. Growth has remained well above its potential rate, also entailing a sharply lower public deficit. The main motor has been strong foreign demand and an evident adjustment process among Italian exporters that has allowed them to benefit from the better external conditions. Even so, Italy’s export structure remains heavily biased toward low skill production, hence highly exposed to cost competition by emerging market economies in the present era of globalisation. The process of deindustrialisation has also not triggered a take off in services sectors, as in some of the more successful OECD countries. This macro-structural weakness can be traced to a lack of total factor productivity growth, reflecting the shortcomings in efficiency, process and product innovation. A main policy challenge is to raise human capital and market competition to spur both the supply and demand for innovation and skills, imparting needed dynamism to the economy. Employment creation has been a main bright spot in the economy, but needs to go further by rebalancing employment protections to reduce labour market duality. A large regional gap and still low formal labour market participation may be part of the current problem but are the source of significant unrealised growth potential. Reducing the drag of fiscal policy on the economy will involve sustaining a rapid pace of consolidation beyond the current upswing, while also raising spending quality to allow lower spending and tax-to-GDP ratios.

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