Learning economic lessons from an Old World master

An IMF report uses Italy to highlight the dangers of a bloated, unproductive public sector, but it is just pertinent to Canada

The International Monetary Fund (IMF), in a study released with its latest Global Financial Stability Report, chided Italy, a perennial underperformer famous for its large, unaffordable and growth-stifling public sector.

Why does this matter to anyone outside that beautiful, historic Mediterranean country?

Because the follies of the modern Romans aren’t unique. They suffuse Canada and other supposedly better-run nations: the United States, France, and the United Kingdom, for example, and emerging countries of India and Brazil.

The IMF took Italy to task for its turgid bureaucracy, expensive tax burden, and other policies that make it slow, expensive and difficult to start or run a business.

Italy also ranks poorly in the World Bank’s ease of doing business index. Unemployment has exceeded European Union averages for decades; economic growth has been flat in most of those years.

Demographically, Italy is in bad shape, too. With a very low birthrate, its growing elderly population requires ever more pension and health-care funding. Low-skilled immigration surges while educated and skilled young people emigrate. Public debt has exploded; debt servicing is a serious diversion of funds from other government services – a problem that is metastasizing.

Successive Italian governments have recognized these ills but few reforms have been made.

Many of Italy’s ills are echoed in Canada, just less exaggerated and masked by other things. Our productivity growth rate is abysmal; an educated, skilled workforce, and abundant capital and raw resources have created substantial employment in new, innovative sectors, as has occurred in the United States. Poor diffusion and adoption of new technology means little efficiency and productivity gains versus, say, Germany. Canadian export growth is tepid, as our firms have been slow to seize opportunities overseas. Public debt is soaring again, hence debt servicing crowds out other needs.

The Canadian economy is overly dependent on traditional extractive industries and still protective of mature, possibly uncompetitive industries (autos and aerospace, for example). Meanwhile, taxes rise and public sector spending escalates; from decisions made in Ottawa, as well as those made in some of the major provinces: Ontario, Manitoba, Alberta, and British Columbia specifically. Real estate and construction bubbles have masked the serious problems in the Vancouver and Toronto regions, as overseas immigrants seek safe havens for themselves, their families, businesses and money.

If foreign capital inflow and the federal and provincial debt-financed spending is removed, the economic reality of Canada is not much better than Italy’s. In the recent World Economic Forum study on global competitiveness, Canada is not even in the top 10 countries; Singapore is first, then the United States, then some European nations and Japan.

What has inexorably grown year after year in Canada is its huge, expensive public sector – whose spending has, in fact, not increased our prosperity but stifled it. Its main functions, it seems, are to increase spending on programs that are unproductive, such as the CBC, and to, in many cases, duplicate the private sector (financing mortgages for businesses); or funding millions of staff to regulate, hinder and penalize private sector investors; or to redistribute money, creating disincentives for people to seek gainful employment and thus pay taxes, which will ultimately support government programs.

Public sector spending represents nearly 40 per cent of gross domestic product. And there’s likely nothing new to be discovered that government can or should do that isn’t already being done by individuals, companies and non-profit organizations.

In the future, there can only be diminishing returns from increased government ‘investment.’ Perhaps the returns will be negative.

If we didn’t have a strong, healthy flow of well-qualified immigrants, easing our own demographic challenge, we’d look just like Italy – except with worse weather, food, art and wine.

Ian Madsen is a senior fellow at the Frontier Centre for Public Policy.


italy, economic lessons

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