Italy and two decades of economic decline. A model-based analysis with outsourcing and oligopolistic markets
12:00 - 13:30
The decline of the Italian economy over the last two decades is widely documented. During this period, the world economy has become highly integrated, and foreign outsourcing has become a standard practice for firms. While trade theory predicts benefits from the internationalization of production, Italy seems to have gained negligibly from it, or, rather to have lost. In a simple model, we show that this may be the case when competition policies are weak and productivity growth is poor. We study a small open economy with one oligopolistic and one competitive sector, which outsources part of its production process abroad. Advances in globalization entail lower trade costs of outsourcing. Contrary to the common wisdom, we show that national welfare is an inverted U-shaped function of these costs. There exists a level of trade costs, below which the economy loses from globalization because the competitive sector overproduces and the oligopolistic underproduces (the oligopolistic good has a higher marginal effect on welfare). Competition policies or policies that improve productivity in the competitive sector lower the threshold. These findings provide basic analytical insights to the ongoing debate on which policies might help to mitigate the observed Italian economic decline.