Italy’s buddy system is Europe’s biggest economic enemy

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Luigi Zingales left Italy 25 years ago and plans stay put in the United States, partly because he thinks his home country is a slow-motion suicide. Almost all of its key economic and financial indicators, from the size of the national debt to the jobless rate, are going in the wrong direction.

Why is the deterioration so bad? Mr. Zingales, who has a PhD in economics from the Massachusetts Institute of Technology and has taught at the the University of Chicago's business school for 20 years (save for a brief stint at Harvard), has an unusual theory: nepotism.

He thinks the economy is in a permanent rut because friends and relatives of the rich and famous, whether lightweights, incompetent or dishonest, have come to positions of power in government and business. Nepotism, and its evil twin cronyism, have wrecked social and labour mobility, pushed hundreds of thousands of young, ambitious and highly frustrated Italians out of the country, and created epic inefficiencies as contracts are awarded to the undeserving.

He is not alone. A 2009 study by Bank of Italy economists Federico Cingano and Paolo Pinotti revealed that political connections work wonders for private companies. Managers of companies are appointed local governments all the time. The result? The profits of the newly politically connected companies rose 5 per cent on average and raise a company's profits by as much as 20 per cent.

Nepotism and its evil twin cronyism thrived under Silvio Berlusconi (prime minister three times between 1994 and 2011), who vowed to run Italy like a business, but instead, Mr. Zingales notes, ran it as "his business," appointing a mistress to political office while former employees, incredibly, became the public regulators of the prime minister's own businesses.

Born in Padua and a graduate of Milan's Bocconi University, Mr. Zingales has written (or co-written) two books that make him something of an authority on the influence of private interests. Saving Capitalism from the Capitalists (2003) argues that governments should protect themselves from lobbying for the sake of safeguarding a free market, while A Capitalism for the People (2012) warns that now the United States is in danger of following in Italy's footsteps.

Mr. Zingales, who will speak at Toronto's Grano series next Thursday, tells The Globe and Mail that he worries about the very future of the euro zone. If Italy were to withdraw and revive the lira, its economy is so big (No. 3) that losing it could make the whole common-currency project collapse. German economist Jörg Asmussen, a member of the European Central Bank's executive committee, agrees. "The future of the euro will not be decided in Paris or Berlin, or in Frankfurt or Brussels," he said recently. "It will be decided in Rome."

Why does Italy threaten the euro zone's existence?

The real problem is that it has not it has not grown for the past 15 years. If you don't grow, it's very difficult to maintain public finance stability. Combined with negative population growth, it is deadly.

How do you explain the plummeting growth rates?

It's one thing to catch up to the economic frontier, quite another to be at the economic frontier. So when you are a country with low wages and low productivity … you can grow pretty fast. But once you get there, you need to be efficient, you need high levels of research and development, a lot of things that Italy does not have. One of the things I am working on is to see to what extent the lack of growth in Italy is the failure to adopt the information technology revolution.

And you have a hierarchical, corrupt system, where you basically appoint your friends.

Nepotism is an Italian invention, right?

Nepotism was invented by the Catholic Church in Rome. The explanation is that the church was a monopoly. There was no competition. You would not lose too many followers, because no one knew where else to go. So you could afford to appoint idiots to high positions; the temptation to do it is high. There is a one-to-one relationship between market power and nepotism and cronyism.

Are American nepotism and cronyism a problem?

I don't think the United States is as bad as Italy. What I am saying is that United States used to be much better and that it is slowly drifting in that direction.

[In the Wall Street Journal last year, he warned that political connections increasingly count more than innovative ideas; young U.S. entrepreneurs often learn how to lobby before learning how to run a business.]

What will trigger a revolution in Italy?

Italy really needs as substantial revolution … a change in the entire ruling class. I'm really surprised that nothing is happening. I expected much more social unrest, given how terrible the situation is. How long can we last like this, I don't know. I think if the [Italian debt] crisis had lasted a bit longer, we probably would have had a revolution. But the European Central Bank came to the rescue and now we're back to the [complacency] that was prevalent before.

Do you think Italy will bolt from the euro zone?

I think it's more likely that Italy will leave than stay in. What I am saying is that Italy is not sustainable as it is. Generally, when things are not sustainable, they are not sustained.

This interview has been edited and condensed.