Professional services reform in Italy

The Berlus­coni gov­ern­ment has announced a pack­age of emer­gency mea­sures to lib­er­al­ize the Ital­ian econ­o­my that includes a “con­sti­tu­tion­al” change to speed up the lib­er­al­i­sa­tion of pro­fes­sion­al ser­vices.

The mea­sures includ­ed a plan to amend the con­sti­tu­tion to make a bal­anced bud­get manda­to­ry, a sec­ond con­sti­tu­tion­al change that would force “closed pro­fes­sions” to lib­er­alise ser­vices, a speed­ing up of wel­fare reforms, and oth­er struc­tur­al reforms designed to boost Italy’s stag­nant econ­o­my. via FT.com.

Italy’s chal­lenge is not, in fact, its cur­rent fis­cal deficit. That’s a rather mod­est 4.5% of GDP accord­ing to the IMF. The prob­lem is that the con­sol­i­dat­ed Ital­ian pub­lic debt (long-term) is about 120% of GDP. That, too, might be sus­tain­able in a high-growth econ­o­my, but Ital­ian growth rates are mis­er­able; pro­ject­ed to be about 1% this year. In a cli­mate of bear­ish pes­simism about South­ern Europe, Italy’s sov­er­eign debt looks dis­count­able.

The coun­try has a huge pub­lic pen­sion lia­bil­i­ty (14% of GDP says the NY Times) and, although unem­ploy­ment at 8% is low­er than in oth­er parts of Europe, it has very low labor-force par­tic­i­pa­tion rates (61% for men, vs 75% else­where in Europe).

The “con­sti­tu­tion­al” reform to open up pro­fes­sion­al ser­vices appears to relate, among oth­er ser­vices mar­kets defi­cien­cies list­ed in the IMF Arti­cle 4 Con­sul­ta­tions report, to the re-intro­duc­tion (con­trary to the EU Ser­vices Direc­tive) of min­i­mum fees for lawyers.

Pro­fes­sion­al ser­vices (accoun­tan­cy, legal, engi­neer­ing etc.) are among the most impor­tant ser­vices inputs to pro­duc­tion. The pro­duc­tiv­i­ty of these indus­tries play a key role in the pro­duc­tiv­i­ty of the econ­o­my as a whole because near­ly every oth­er busi­ness relies on them. Here’s a clas­sic paper on the impact that more com­pet­i­tive Busi­ness Ser­vices (the Bal­ance of Pay­ments cat­e­go­ry that includes pro­fes­sion­al ser­vices) had in allow­ing the Anglo­phone economies to out­pace the con­ti­nen­tal Euro­pean economies in the ear­li­er part of this decade (Inklaar, Tim­mer and Ark’s 2007 “Mind the Gap!”).

If you find the econo­met­rics eye-glaz­ing, just skip to the com­par­isons of con­tri­bu­tion to growth in Table 3 of the paper to get an idea of how much dif­fer­ence it makes to have a com­pet­i­tive price from law firm, accoun­tants, engi­neers etc.

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