Back on Track? A Micro-Macro Narrative of Italian Exports
Government of the Italian Republic (Italy), Ministry of Economy and Finance, Department of the Treasury Working Paper No. 1
88 Pages Posted: 23 Mar 2018
Date Written: January 31, 2018
Between 1999 and 2016 – after the European Monetary System crisis of the mid-Nineties and the subsequent large swings among European currencies that ended with the adoption of the euro – Italy’s goods exports increased nearly twofold at current prices. Yet, they fared worse than foreign sales of the main euro-area competitors until 2007 (with the exception of France) and fell more intensely during the subsequent “Great Trade Collapse”. Only since 2010 signs of improvement have emerged: Italy’s exports have grown on average half a percentage point faster than the demand stemming from outlet markets and their share on world trade has remained broadly stable, after a protracted decline. Moreover, the negative growth gap vis-à-vis Germany has narrowed significantly. These facts raise two closely related questions. First, what are the main factors explaining Italy’s less favourable export performance relative to the other main euro-area countries since 1999? Second, are the recent signs of recovery the result of a successful structural adjustment of Italian firms or rather the fortuitous consequence of cyclical and hence temporary factors? Addressing these questions can help contribute to the debate on Italy’s structural weaknesses and persistently low productivity and GDP growth, as well as to gather some useful insights into Italy’s export outlook. We employ an extensive set of alternative indicators, based on multiple macro datasets as well as micro-data, to conduct an in-depth analysis of the dynamics of Italian goods exports since 1999, also exploiting the comparison with its three main euro-area competitors (France, Germany and Spain). We start by providing the aggregate picture and dig deeper into the geographical, sectoral and firm-level dimensions. We then analyse export determinants such as external demand, price and non-price competitiveness factors, including competition from emerging markets, the linkages between domestic demand on the one hand and financial and capacity constraints on the other hand. Finally, we try to map our descriptive evidence into a country-sector first and then a firm-level econometric exercise, in order to bridge the macro and the micro dimensions. We argue that the relatively unsatisfactory performance of Italian aggregate exports in the first sub-period, conveniently delimited by the inception of the euro and the eve of the global financial crisis (1999-2007), is the result of the interplay between three factors. The first is the significant appreciation of the real effective exchange rate for Italy, which compounded relative price dynamics and a nominal appreciation that were, on the whole, stronger than those of its main competitors, the latter owing to the different composition of trading partners across countries. These effects may also have been amplified by the higher exchange-rate elasticity of small exporters – as suggested by the literature and confirmed by our empirical findings – which in Italy have a relatively larger weight on aggregate exports. The second factor is the initial specialization in productions that were particularly exposed to the increasing competition of low-wage countries (China in particular) on world exports: we roughly estimate that this exposure could explain at least one tenth of the Italian under-performance on world markets relative to Germany. There is evidence of quality upgrading on the side of Italian exporters, possibly as a reaction to such competitive pressures, although not more pronounced than in the other main euro-area competitors. The third factor, which is intertwined with the previous two, is the size distribution of Italian firms and in particular the large number of small exporters, which struggled to: i) defend their exports in the face of the exchange rate appreciation; ii) keep pace with external demand; iii) successfully face competition from low-wage countries. In addition to these “domestic” factors, Italy’s relative export performance was further penalized by the exceptional growth in exports of both Germany, boosted by large price-competitiveness gains in turn also linked to exceptionally subdued wage dynamics, and Spain, in part favoured by the country’s initially limited penetration into world markets. Against the backdrop of these unfavourable developments before the crisis, over the recent six-year period, in a context of weak internal demand, Italian exports have significantly supported GDP growth and have outpaced the demand stemming from destination markets. Exporting firms have proved capable of adjusting to a shifting external environment more effectively than before and to brave the recessionary phase; they have also managed to reduce the negative growth differential vis-à-vis their main competitors, namely German exporters. 3 To what extent do these facts signal a successful structural adjustment? On this, our evidence is mixed. On the one hand, cyclical or temporary factors may have been at play: price competitiveness was mainly helped by the nominal depreciation of the euro, although some relative-price adjustment vis-à-vis Germany was also in place, while favourable, possibly short-run, developments of world demand in specific sectors led to a positive contribution of Italy’s sectoral specialization. These positive effects were, however, partly counteracted by the cyclical weakness of domestic demand, especially in 2012-2013 against a backdrop of tight financial constraints, which exerted a drag on exports. On the other hand, the specialization of Italy’s exports shifted towards sectors (vehicles and pharmaceuticals) that are less exposed to competitive pressures stemming from Chinese producers, and towards productions that are particularly effective in activating domestic value added (food and beverages). Moreover, the selection process triggered by the exceptional difficulties encountered by micro and small firms both before and during the global financial crisis might have structurally strengthened the population of Italian exporters, making it more resilient to negative shocks and more capable of taking advantage of new opportunities.
Keywords: exports, competitiveness, specialization, firm size
JEL Classification: F14, F60, L11, L60
Suggested Citation: Suggested Citation