Italy and a Needed Public Investment Boost: The Demand and the Supply Side

Abstract

The controversial nature of public investment as a countercyclical demand stimulus has contributed to obscure the issue of its long term fall, with many governments feeling justified in making deeper cuts for public investment expenditure during both phases of the economic cycle, and many others favoring public-private partnerships and other forms of blended financing. In addition to the overall fall, an asset substitution process has progressively reduced the truly social part of public investment, which in developing and developed countries alike may be well below the mark of 1-2% of GDP. This negative trend is made more dramatic by the fact that virtually the only public investment with a reach beyond the single countries is of public- private nature and thus explicitly excludes multilateral assets of pure public good nature, such as intercountry infrastructure and multilateral social welfare programs. The situation is especially dramatic for Italy, where the fall of public investment has contributed to the decline of key components of the country human and social capital endowment. This article explores some of the most important dimensions of this phenomenon, concentrating on the supply rather than the demand side effects, and proposes a solution based on a conditioned expansion of European public investment, concentrated in highly productive assets such as education and infrastructure.