Growth: Murdered on the Orient Express

The growth of the GDP indicates the pulse of the economy, and its stagnance constitutes very bad news, almost economic death. Although it is an event that affects each and every one of us, paradoxically, no single individual feels personally responsible for it. The situation closely parallels Agatha Christie’s famous novel Murder on the Orient Express, in which the solution was hidden by the obscure connection between individual and collective responsibility. That same connection obscures the relationship between individual behavior and economic growth, despite the best efforts of economic analysts to clarify the issue.

So then why not reformulate the economic question like in a mystery novel? Simply replace the abstract notion of economic causality with the more concrete one of individual responsibility and start asking who is impeding economic growth, rather than “what.”

In crime dramas, the police investigators starts looking for clues by examining the circumstances in which the crime occurred and identifying the murder weapon. The latter is easily identifiable: it is the “growth trap”—the same growth trap that for centuries has prevented the development of less wealthy countries and that, as noted by Mancur Olson in his book The Rise and Decline of Nations, leads to the decline of a country.

According to Anne Krueger’s analysis, which is confirmed by Andrej Schleifer, the frightful [growth trap] device is based on the (concealed or tacitly acknowledged) appropriation of rent seeking by distributional coalitions at the expense of those who, through productive investments, increase their own and society’s collective incomes. Aided by the scale economies at its disposal, rent seeking pushes production agents with declining profits out of the market, thereby conquering new beneficiaries and political clout.

The talented entrepreneurs, discouraged or prompted to seek their fortune elsewhere, leave the field to the rent seekers; the used resources are not replaced, and the “cake” shrinks. Just like in the game of musical chairs, at the end of every turn, the number of players decreases, and with it, so does the GDP.

So if rent seeking is responsible for the economy’s death, who reaps the benefits of the practice? A first category are the benefactors who are aware of their status, like tax evaders, or those who receive any sort of government assistance under false pretenses, forcing other taxpayers to pay for the social services they are receiving. It is hard to say how many fit into this category. However, we know from the Italian National Statistical Institute that the hidden portion of the taxable income amounts to approximately 17 percent of the GDP. When we consider only autonomous workers and real estate, which by themselves account for about one-sixth of all taxpayers, that figure rises to 50 percent.

One-sixth is also the proportion of Italian families that receive government aid by reporting to the Index of the Economic Conditions of Italian families, more dire conditions than are found in other data sources (for example, an underreporting of bank accounts compared to the figure reported by an investigation by Banca d’Italia, the central bank). So more than one out of six Italian families are consciously taking part in illegal income, without any consideration of the source of the corruption. With the recent incursions of the Guardia di Finanza, a military body essentially dealing with financial crime and smuggling, into the northern Italian ski resort town of Cortina d’Ampezzo, and Forcella, in the Abbruzzo region of central Italy, we are dealing with a groupings that cut across geography and income brackets. The offenders are scattered all along the social ladder, from the most affluent classes to the most humble, and each instance represents competition for income and privileges, eroding both the physical and social capital of the country.

The second category, consisting of the unaware beneficiaries, is much larger. It includes all those who work in sectors protected from international competition by virtue of the current policies or the characteristics of the product they offer. The extra income, which is unrecognized by the beneficiaries because it’s perfectly legal, comes in the form of the highest markups, and that allows the protected sectors to protect their revenue at the expense of the sectors exposed to foreign competition.

The European Central Bank estimates the average markup of the third sector, services, between 1981 and 2004 to be 87 percent; this is 31 percent higher than the sector’s average in the euro zone and 60 percent higher than the national and European markup in manufacturing.

This bottleneck, added to the hidden costs of administrative and judiciary inefficiency, brings the number of unaware beneficiaries of this income (workers in the services and public administration sectors) to more than 60 percent of all Italian workers. The legal and illegal, aware and unaware beneficiaries form an intricate web—the income web—whose reach and deep roots are due to two factors: first, the proliferation of income that allows the reduction of the number of those who are excluded—those who end up paying for everyone’s privileges. Second, to the families, capillary clearing houses of incomes, which limit the drama of the excluded by transferring resources from those who have privileges to those who don’t—from employed parents to their unemployed young-adult sons and daughters, from the elderly owners to the families with children. This is a social process that places the family downstream from the blocked-growth economy.

We placed all the tiles in the crime. At this point, Hercule Poirot would summon the various social and professional categories that represent the 24 million Italian families, much like he did with the passengers of the Orient Express. With the exception of the poorest families, who are completely excluded from the flow of income, he would explain to a speechless and surprised audience that, just as in the novel, all those present are guilty. Whether they are aware or unaware beneficiaries of the income web, they all collectively dealt the lethal “rent seeking” blow to the motionless growth.

It’s not the case to get into the complex issue of sanctions for episodes of collective responsibility. It’s sufficient to have ascertained that the income web represents a fundamental connecting element between individual action and societal outcomes. And that the behavior of citizens and authorities—the former too eager to compete over the reciprocal privileges, the latter too inclined to let this sort of competition go uncontrolled—allowed Italy to drift for a decade towards stalled growth.

The widespread awareness of these responsibilities is a necessary conditions for change. Furthermore, it constitutes the foundation of a long-lasting policy of growth for the country.