Italy: Globalisation and the Knowledge Economy

Andrea Gavosto

Chief EconomistTelecom Italia

OECD ConferenceParis, October 9, 2006

22

Is Italy“the sick man of Europe”?

33

Output

90

95

100

105

110

115

2000 2001 2002 2003 2004 2005 2006

GermanyFranceItalyUK

Jan 2000=100Monthly Industrial Production 2000 – July 2006

Source: Global Insight

Italy hasn’t recovered its year 2000 level of output

44

Italian Market Share

Source: Elaborations of ICE data

Italian share of world exports

3

3,5

4

4,5

5

5,5

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

volumes

55

Foreign Direct Investment

0

20

40

60

80

100

1990 2001 2003 2005

Italy

France

UK

Foreign Direct Investment as a % of GDP(in US$)

Italy: limited attractiveness . . .

. . . and limited reach abroad

Source: Unctad, Global Insight, and ICE for 2005 estimates4,54,2

43,7

2,9

1,41

0,5 0,5

0,1

Japan France SouthKorea

USA UK Finland Germany Belgium Italy Spain

Foreign Direct Investment in China(billions of euros, 2004)

Source: Estimates based on Eurostat data and Chinese Ministry of Trade, 2005

66

Is it decline?

Probably not.It is a long lasting adjustment to

Single European MARKET

Single European CURRENCY

GLOBALISATION and competition fromEastern Europe and Asian producers

77

Italy: Loss of competitiveness in the Euro Area

Real Exchange Rate vis-à-vis Euro Area

(1999=100)

Note: A increase in the index implies a loss of competitivenessSource: European Commission, Price and Cost Competitiveness (second quarter of 2006)

Price deflator, exports of goods and services

60

70

80

90

100

110

120

130

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Nominal unit wage cost, manufacturing

60

70

80

90

100

110

120

130

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

88

Italy’s Foreign Trade

Trade Balance by Region, 2005(millions of euros)

NB: Data do not include Russia and Middle East, since trade balances are particularly affected by energy prices..Source: ICE / Istat

North America14,265

Asia-12,691

Euro Area-12,201

Central and Eastern Europe

-341

Central and South America

1,052

The main problem is in the Euro Area

99

The Manufacturing Industry

1010

(euro millions) Trade Balancedk Machinery 37,506dj28 Metal products 7,276dn36 Furniture 6,953db17 Textiles 6,034dc Leather & leather goods 5,970di Non metallic mineral products 5,646dh Rubber & plastics 4,728df Coal, oil refining 4,132db8 Clothing 3,925dl31 Electrical apparatus 2,437dm35 Other transport 2,346de22 Publishing 419de Paper & paper products -731dl33 Medical & precision instr. -1,128dd Wood & wood products -2,156da Food, beverages, tobacco -3,920dl30 Office equipment -5,225dl32 Radio and televisions -5,482dj27 Metallurgy -8,933dm34 Vehicles -10,511dg Chemical products -10,664

0

1

2

3

4

5

6

7

dcdb

18db

17dn

361

dj28 dk di df dd dj2

7 dhde

21 dl31 da dl3

2dl3

3 dgde

22dm

35dm

34 dl30

2000 2005

Italy is much more specialised in‘Made in Italy’

Leather & leather goods

Clothing

Textiles

Furniture

Note: (1) EU 7 is based on Austria, Belgium, France, Germany, Portugal, Spain, UK. A valuegreater than 1 indicates specialisatoin, less than 1, de-specialisation.

Source: Quarterly Report, Isae, February 2006

Italy’s Manfacturing Specialisationrelative to the UE 1

Italy’s Trade Balanceby Sector,2005

1111

Italian exports market share in volume

Source: Elaborations of ICE data

Italian share of world exports

3

3,5

4

4,5

5

5,5

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

volumes

Italian share of world exports

3

3,5

4

4,5

5

5,5

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

volumes values

and values

1212

• From 1991 to 2004 the stockings district of Castelgoffredo suffereda 35% decrease in volumes because of changes in consumer tastesand the invasion of low cost Chinese products.

• The reaction was:

One example: Stockings district of Castelgoffredo (Mantua)

•Innovation, new products using new fibres such as “seamless” stockings

•New distribution strategies, retail sales and franchising

•Horizontal integration, by entering new markets such as underwear and clothing

•Specialization in high value added products such as medical stockings

•Research and marketing, to better meet consumers’ needs and fashion trends

• The district is now flourishing and has become a world leader (60% of European production and 30% of world production).

1313

The ServiceIndustry

1414

Italy’s market share in world exports of services and goods

SERVICESSERVICES

GOODSGOODS

1515

Internationalisation of main Italianservice corporations

(present in 70 countries)

% of total revenues

100%World

1%Other

6%Asia

8%America

7%Africa

7%Other Europe

27%EU

45%ITALY

1.4%Others

1.2%North America

9.1%Europe (Germany, FranceHolland etc.)

12.1%Central and South America (Brazil, Argentina, Bolivia, Cuba ecc.)

76.2%ITALY

% of total revenues

(present in 40 countries)

% total premiums written

3%Asia

4,15%Other

1.75%Israel

3%Austria

3.5%Spain

20%France

20.4%Germany

39.6%ITALY

4.5%Spain, Romania, Bulgaria, Slovakia, Russia

95.5%ITALY

% of total revenues

12.2%Europe, USA, Asia Africa

87.8%ITALY

% of total revenues

< 1%Others

26.2%Other Europe

73.7%ITALY

% of total revenues

1616

Service exports

Exports in cross-border services(not including turism)

Italy France Germany Spain UnitedKingdom

Japan

1992-94 1996-98 2000-02

USA

USAJapanUnitedKingdom

SpainGermanyFranceItaly

Share of world exports in turism

Source: Elaboration of OCED and IMF data

1717

Next generation networks will enable global services

1995 2000 2005

•Relocation of production: a wide range of services can now be undertaken abroad(eg: tax consulting services, call centers, software, IT services, financial information and secretarialservices)

Mobile Connectivity

BB Connectivity

Inve

stm

ent i

nten

sity

A PERIOD OF GREAT INVESTMENTS BY TELCOS

2010 2015

Contents and New Value Added Services

Contents and New Value Added Services

Next Generation Networks

(fixed and mobile)

Next Generation Networks

(fixed and mobile)

About 13% of US service jobs¹ can beoffshored where labour costs are lower•Offshoring of services raisedmanufacturing labour producitvity by 3-5% between 1992 and 2000²

¹Garner (2004)²Amiti e Wei (2005

1818

The Endowment

1919

Why is Italy lagging behind? Human capital

300

350

400

450

500

550

600

Hon

g K

ong-

Chi

naJa

pan

Kor

eaSw

itzer

land

Finl

and

Bel

gium

Cze

ch R

epub

licN

ethe

rland

sN

ew Z

eala

ndA

ustra

liaC

anad

aSl

ovak

Rep

ublic

Icel

and

Ger

man

yS

wed

enP

olan

dLu

xem

bour

gLa

tvia

Nor

way

Spai

nU

nite

d St

ates

Italy

Portu

gal

Gre

ece

Turk

eyU

rugu

ayM

exic

oTu

nisi

aB

razi

l

Scores of 15-yr old studentsin maths

Average score

Oecd Average

Fonte: Oecd, Pisa 2003

2020

Italy: Attracting Talent

Source: OECD

Foreign Students as % of all university students Reference year: 2004

New

Zea

land

Aust

ralia

Switz

erla

nd

Uni

ted

King

dom

Aust

ria

Fran

ce

Ger

man

y

Belg

ium

Can

ada

Swed

en

Den

mar

k

Irela

nd

Cze

chR

epub

lic

Nor

way

Portu

gal

Net

herla

nds

Uni

ted

Stat

es

Icel

and

Hun

gary

Japa

n

Finl

and

Spai

n

Gre

ece

Slov

akR

epub

lic

Turk

ey

Pola

nd

Kore

a

28%

20%

18%

16%

14%

12%

11%

10% 9% 9% 8% 5% 5% 4% 4% 4% 3% 3% 3% 3% 3% 2% 2% 2% 1%

0,5%

0,5%

ITAL

Y2%

2121

Why is Italylaggingbehind? Infrastructures

-

1.000

2.000

3.000

4.000

5.000

6.000

France

Germany

Portuga

lSpa

in

Average

(exp

IT)

Italy

Vehicles per km of highways

0,0 20,0 40,0 60,0 80,0 100,0

Spain

Italy

United Kingdom

France

Germany

Total extension of railroads per area(2001)

Notes: This indicator compares the total extension of railroads to the square root of the total area of the country (Germany=100)Source: Elaborations by Ance, data from Eurostat and Union Internationale des Chemin de Fer

2222Source: Oecd, Banca d’Italia

29%

18%13%

US EU15 Italy

ICT investment as % of total gross fixed capital formation%, 1995-2002

Why is Italy lagging behind? Expenditure in ICT