An Italian Lesson For China

There is an indirect lesson for China in Italy’s part in the eurozone crisis. It is drawn out by Daniel Gros, director of the Centre for European Policy Studies in Brussels, who asked a straightforward question, what is holding Italy back? Though he acknowledges that the country has underperformed economically over the past decade both relative to its eurozone peers and relative to its earlier self, he also observed that Italy’s three most important measurable growth factors actually improved in both absolute and relative terms over that time:

  • Investment in physical and human capital; the former is high and the latter is improving rapidly.
  • Structural indicators in terms of product and labour market regulation (all improving absolutely and relative to Germany according to OECD indicators).
  • Investment in R&D (improving).

The only indicators that have deteriorated absolutely and relative to the core of the eurozone, Gros finds, are those for governance. Italy’s performance has deteriorated dramatically over the last decade on the three governance indicators the World Bank considers most important for an economy: the rule of law; government effectiveness in general; and control of corruption. Italy now ranks lower than any other eurozone country on all three.

China ranks even lower than Italy on those three measures. Over the past decade its progress on governance has been mixed (better on rule of law and government effectiveness, worse on control of corruption). This Bystander has noted before the political boulders that are strewn along the path of further reform in China, particularly those caused by the tight intertwining of Party, state and government which can make vested interests robust and persistent.

We don’t underestimate the difficulty of changing a country’s political culture to support good governance of the body politic, yet Gros’s tart observation about Italy–that “progress on these (three governance) fronts might in the end be more important for growth than the reforms now being imposed by the EU,”–could apply equally to China as it moves into its next phase of inevitably slower growth.

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