Feb 27, 2012

Capital and Institutions First

Good article about the lack of competitiveness (read "productivity" in a broad sense, if you find "competitiveness" vague and misleading) of Southern Europe countries (link).

We all know that when residents of poor countries emigrate to rich ones, the same weak bodies and flawed characters that produce very little at home suddenly explode into economic vigor.

If Southern Europe lacks competitiveness, the part of the cost structure that needs to be reformed has to do with rents paid to capital rather than the sticky wages of workers.

The European periphery was rendered uncompetitive by toxic patterns of capital allocation, for which both Northern Europe’s financial institutions and Southern Europe’s regulators ought to be held accountable.

The wages workers are paid for the goods and services they do produce are in line with the rest of Europe’s.

Knowing a little of my country and some Italians, I quite agree.
In my experience, it's not workers per se that are less productive, less trained or have less potential. And from what I know those who did move outside of Italy indeed perform well abroad. Maybe there's a little selection bias since those who move might be better than those who remain on average. But I believe this is not so strong and in my experience I did not find large intrinsic difference in the people I worked with within Italy and outside it.

The real and large difference is in the "system", or in the capital depth in a broad sense as social and physical capital. It's the fact that the same person may not find himself in the right condition to perform and behave well (and live better). He may not have the right infratructure and the right incentives.

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