Roger Abravanel, internationally renowned business consulting guru (he was for a long time the director of McKinsey in Italy) and successful essayist, has become pessimistic. "By now the double dip is upon us all over the world and Italy risks becoming the sick man of the world". The horizon is dark and it is useless to have illusions. Changing the premier is right, but it is not enough. In his opinion, austerity and growth are not incompatible, but we need a culture of competitive growth that we don't have. Yet three major reforms would make us turn around: the labor market, pensions, liberalization of services. Abravanel explains his point of view in this interview with FIRSTonline.
FIRST online – Engineer Abravanel, what is happening in Greece demonstrates how difficult it is to combine austerity and growth: an impressive austerity plan is causing a violent contraction of GDP, with the consequence that tax revenues are decreasing and the deficit is increasing. More austerity, less growth, more deficits, more austerity in a perverse spiral leading to ruin. But then are austerity and development incompatible?
ABRAVANEL – They are not incompatible, but they are decidedly difficult to combine, as the history of numerous public redevelopments demonstrates. Putting the state's finances in order usually requires, in the short term, tax increases and cuts in public costs and investments, which inevitably affect consumption. The psychological component also counts a lot, because if people think that the future is black, they don't spend and companies don't invest. The key is to have austerity but at the same time develop credible growth programs that give confidence in the future. If this does not happen, the cursed spiral strangles the economy: austerity- economic contraction- less tax revenues- more austerity and so on.
FIRST online – Does this also apply to Italy? Can we really think of reconciling austerity and growth, leveraging on zero-cost reforms?
ABRAVANEL – The Italian situation is unique in its kind, because we have not grown for at least 10 years and this does not depend on austerity, because our debt has always been very high. Our lack of growth depends on structural factors and a widespread lack of culture of growth.
FIRST online – How do you get out?
ABRAVANEL – By now the double dip is upon us all over the world, because they are slowing down the BRICs which have been the only area of real growth since the global financial crisis began. Their slowdown leads to the slowdown of exporting economies such as Germany, Japan and ours. That US is slowing down because the deleveraging of mortgage-indebted households is not offset by job creation. Politicians find it hard to agree on what to do and that's why everyone is talking about a second 1929. The most probable scenario is a very long crisis that will make citizens of Western economies much poorer and those of emerging economies richer. albeit at a lower rate than in recent years. The catastrophic one that everyone wants to avoid is the failure of large banks and some states. Unfortunately, Italy plays an essential role, because our ills can cause the bankruptcy of the euro and consequently the global catastrophe. In 2006 we were described as "the sick man of Europe" by the Economist but now we risk becoming "the sick man of the world". Yet when I talk around it doesn't seem that people realize that this crisis is different from the others and everyone thinks that changing the prime minister (which is also sacrosanct) would solve all the problems.
FIRST online – So to unblock an economy that hasn't grown for a long time, which has very high social security expenditure and record tax evasion, what should we do, in your opinion?
ABRAVANEL – These days everyone is talking about growth, I spoke about it in unsuspecting times in 2008, with the launch of my second essay "Rules" (of which I give the proceeds to charity). We can do many things that can restart the economy and that the USA cannot do: 1) drastically liberalize the labor market, creating an unemployment benefit for young people who lose it, 2) lengthen the retirement age which, in addition to cutting costs, it increases GDP because those who retire today at 60 would continue to work and pay taxes; 3) create new rules to liberalize both market (taxi, pharmacies, commerce, motor liability insurance) and non-market (local transport, water, waste, electricity distribution) services.
FIRST online – They seem like logical reforms, why aren't they done?
ABRAVANEL – The problem is the lack of a culture of economic freedom and competition which continues to protect those who are small and encourage them to remain small. Article 18 encourages you to stay under 15 employees because you cannot fire them above. The tax evasion of millions of small companies is tolerated "because otherwise they would go bankrupt". Motorists who defraud insurance companies with the most frequent whiplash injuries in the world and who are protected and not prosecuted are the cause of an insurance sector in Italy that is among the least innovative in the world. Liberalizing means respecting the rules so that the right ones are born. This does not happen with us, because the civil judiciary has the times of Gabon, the regulators are not good, and the school does not prepare citizens and workers with the right life skills. It is a culture of growth problem which, even if we wanted to, would take years, if not decades, to create.
FIRST online – Unfortunately we won't have much time: if unfortunately Greece were to declare default, Nouriel Roubini claims that the contagion would overwhelm us too within three months. How do you see it?
ABRAVANEL – I am a natural optimist, but this time I am a pessimist. I believe that Italy risks bringing down Europe and in part definitively destabilizing a world economy on the verge of the abyss due to the serious faults of her politicians. What worries me, however, is not so much the fact that we will all be poorer and leave a worse world to the new generations. I am concerned that after 29 we had Nazism, Chinese communism, the holocaust and the Second World War and that we have outbreaks of war almost everywhere, above all fueled by Islamic fundamentalism which has a culture of death and not of life. Therefore, I am concerned not with the millions of poor and new poor, but with the possible millions of deaths.
Attachments: Profile of Robert Abravanel.pdf
