Economic shortsightedness is jeopardising Italy's G7 ambitions

Italy is hosting the 50th G7 summit in Fasano. Ahead of the meeting, Prime Minister Giorgia Meloni’s government announced an ambitious Africa-centered development plan and invited the leaders of several African countries and the African Union to attend  — the largest number of representatives from the continent at a G7 summit since 2017. Ms Meloni unveiled her Africa initiative, known as the Mattei Plan, at the Italy-Africa Summit earlier this year. It aims to establish international development partnerships focused on energy, growth, and immigration.
 

The plan is named after Enrico Mattei, the founder of Italian oil giant Eni. In the 1950s, Mattei broke the monopoly of the major oil companies by offering developing countries more favourable partnership agreements. These agreements often allowed developing economies to retain 75 per cent of the profits, in contrast to the less equitable terms imposed by the dominant oil giants. Mattei also viewed state-owned enterprises (SOEs) as an essential component of national development strategies and considered personal entrepreneurship a public duty.
 

Ironically, Eni is now part of Ms Meloni’s €20 billion ($21 billion) privatisation plan, which involves selling SOE shares to reduce the public debt. Ms Meloni’s privatisation programme is a misguided combination of outdated theories and failed policies. The economic rationale for reducing public debt through rigid fiscal rules is based on a misinformed and short-term view of government finances that overlooks the long-term macroeconomic impact of mission-oriented public investment, especially its ability to crowd in private capital and stimulate economic growth. Italy’s economic history is a case in point. Both private and public investment declined between 2009 and 2016, and started to rise only after public investment increased in 2019.
 

Ms Meloni’s privatisation plan is indicative of Italy’s short-termism, aimlessness, and absence of a serious industrial strategy. Well-governed SOEs can boost economic development and create technological spillovers, sectoral complementarities, and economies of scale and scope. Moreover, SOEs can provide patient capital and enhance a country’s technological capabilities, both independently and through their supply chains. To be sure, Italian SOEs have not always been conducive to transformational change. In fact, their historical trajectory reflects the country’s economic struggles.

The energy crisis of the 1970s, for example, affected state-owned steel producers, as technological efficiencies and demand shifts led to widespread job redundancies. With layoffs proving politically toxic, intense price competition resulted in heavy losses and budget shortfalls, leading to increased state support. This, in turn, led to excessive government influence and triggered calls for privatisation.
 

In the 1990s, Italy initiated the largest privatisation programme in continental Europe, dismantling much of its industrial backbone instead of fostering innovation. For example, while the telecommunications conglomerate STET allocated 2 per cent of its revenues to research and development (R&D) between 1994 and 1996, our calculations show that its privatised successor, Telecom Italia, spent roughly 0.4 per cent on R&D between 2000 and 2002. The semi-public firms that survived, like Eni, often lacked a mission-oriented, whole-of-government industrial strategy.
 

These trends reflect the broader challenges facing the Italian economy: Political and managerial shortsightedness, lack of direction, inadequate public and private investment in R&D, and insufficient human-capital formation. The labour-market reforms of the 1990s and 2000s led to precarious work conditions, disincentivising long-term investment in skills and training and reducing productivity. Ms Meloni’s flawed privatisation plan is representative of a broader global trend. Although the International Monetary Fund has recognised that austerity does not reduce debt-to-GDP ratios and hurts growth, European policymakers still cling to obsolete fiscal rules that push governments to sell industrial assets to reduce public debt. Instead of promoting sustainable industrial strategies, this approach provides only short-term relief.
 

Despite Ms Meloni’s attempt to present an innovative development vision, her government’s embrace of outdated theories produces failed policies that jeopardise the G7’s economic agenda and partnership with Africa. Instead of fostering a greener, more inclusive economy driven by investment and innovation, Ms Meloni has adopted the same shortsighted approach that is responsible for many of Italy’s problems. Despite its branding, Ms Meloni’s government has failed to live up to Mattei’s legacy of public ownership and international cooperation. To address Italy’s economic challenges, policymakers must walk the talk and adopt a forward-looking industrial strategy.

Mazzucato is founding director of the UCL Institute for Innovation and Public Purpose. Giovanni Tagliani is a researcher at the UCL Institute for Innovation and Public Purpose. ©Project Syndicate, 2024