Italy must remove the barriers to foreign investment

Foreign direct investment (FDI) is an important economic indicator. The more a country is perceived by foreigners as attractive, the more it is likely to be engaged in fostering entrepreneurship and growth. Italy has performed badly in this regard: in the period 2005-2010, Italy on average attracted FDI equivalent to 1.4% of GDP compared with an EU average of 3.3%.

Since FDI is strongly correlated with GDP growth, it is no surprise that Italy has consistently been one of the slowest growing countries in Europe. In fact, according to the International Monetary Fund, in 2000-2010 Italy had the second lowest economic growth rate out of the 180 countries surveyed.

The new government led by Mario Monti, a former EC Commissioner for Competition Policy, should make attracting foreign investment a priority. But do Italians understand that foreign investments are an opportunity for creating growth and employment?

The case of British Gas (BG) suggests otherwise. A month ago, the company halted a long-nurtured project of creating a new liquefied natural gas (LNG) import terminal in Brindisi, Italy.

The authorisation process for the new facility began in 2001. With the benefit of hindsight, the BG story looks like a perfect comedy of errors, Italian-style.

Both Italy’s energy regulator and the country’s national government openly favoured the establishment of more LNG terminals in order to strengthen the country’s energy security and encourage competition in the market. As always happens with these facilities, NIMBY (not-in-my-back-yard) opposition was substantial, but in the Brindisi case it proved to be particularly virulent. Both the governor of the Puglia Region and the mayor of Brindisi got elected on platforms deeply opposed to the LNG terminal.

Investment was also hindered by the obscurity of legal provisions and the uncertainty of laws – not to mention the inefficiency of the judiciary. Multiple, confused norms provide ideal conditions for another Italian disease: corruption. When firms try to operate in Italy it is almost impossible to receive a clear answer, a yes or a no. There are multiple veto players at work, local versus national administrations, plus specific courts of law/legal jurisdictions, and all of them help in increasing uncertainty for investors. This is one reason why foreign investment in Italy is stalled at best.

Italy has a reputation for uncertainty, which is combined with an inflexible labour market (Italy is the 153rd country in the world for the intricacies of labour regulation, according to the WSJ-Heritage Foundation Index of Economic Freedom) and comparatively high taxes on business. The implicit tax rate on corporate income, according to Eurostat, is as high as 35% (up from around 20% ten years ago), vis-à-vis an average level of 20% for the Eurozone (down from around 24%). According to the World Bank’s report on the ‘Ease of Doing Business’, the country ranks 87th (out of 183), but it ranks 134th as far as the ease of paying taxes is concerned, and 158th on enforcing contracts (an indirect indicator of the inefficiency of the judiciary, which is critical in capital-intensive businesses such as energy and infrastructure that are likely to confront several legal challenges).

Easing the way for investors should be point one on Mr Monti’s agenda. In a fiscal crisis, the instrument to achieve that goal should be a radical simplification of the legal procedures that regulate investment.

The Italian legal codes need to be simplified. Likewise, the authorisation process needs more than some fine-tuning: different stakeholders need to be legitimately heard, but there should be a point in the process in which a final decision is taken.

‘Little else is required to a carry a state to the highest degree of affluence from the lowest barbarism but peace, easy taxes and a tolerable administration of justice’. Good old Adam Smith preached certainty of law and law enforcement as the pre-requisite of economic growth. The Wealth of Nations was translated into Italian less than 15 years after its publication, but sadly its conclusions are still largely ignored.