Exploring Italy's Growth Challenge: A Model-Based Exercise

Abstract

Since the mid-1990s, Italy’s economic growth faltered, primarily due to sluggish productivity growth. This article investigates the root causes of the slow growth. Firstly, it benchmarks Italy over time visa-vis euro area and OECD countries in the area of human capital, product market regulation, taxation structure and innovation. The analysis shows that Italy's gaps in these areas have grown over the last 15 years and are particularly large for human capital. Secondly, it uses a set of stylized simulations in QUEST R&D model of the European Commission to assess the potential impact of a package of growth-enhancing reforms in these areas. The simulations show that structural reforms could boost productivity and GDP growth significantly. Important reforms are ongoing. Given the very nature and the size of the gaps, it is important that the reform momentum is maintained.