Could Italy’s economic stagnation also be due to a failure to protect property rights?
Giacomo Lev Mannheimer // 08.01.2016
Every year, several international organisations and think tanks monitor the index of economic freedom of different countries worldwide. Sometimes those indicators receive some attention by the media, but in most cases the coverage is only superficial and does not delve deeper into the methodology and criteria underpinning their results. Yet a deeper analysis of those data could lead to some useful and interesting insights, as economic freedom is strongly correlated with growth and prosperity.
An important component of any such ranking is the degree of protection of property rights. And rightly so, because certainty about what economic agents can do with their property and whether they will be able to keep it and the returns from it is essential for long-term productive investment. The Fraser Institute’s Economic Freedom of the World Report, for example, divides its ranking into five areas, one precisely consisting of the level of security of property rights, determined in accordance with the data of the World Economic Forum’s Global Competitiveness Report. Similarly, the Heritage Foundation’s Index of Economic Freedom indicates, among the key ingredients for economic freedom, the protection of property rights.
Italy’s performance on those rankings is unsatisfactory to put it mildly. The Economic Freedom of the World Report 2015, based on 2013 data, gives Italy a score of 5.7/10 in the “Legal System and Property Rights” category, ranking it 65th among the 157 countries surveyed. Its low grade is all the more striking when compared with similar countries – according to geographic proximity and socio-economic features – which in fact score much higher. Spain, for example, gets 6.4; France, Portugal, and the United States score 7.0; Germany gets 7.8. Italy’s 5.7, by contrast, is less than the score reached by Bosnia and Herzegovina (5.8), Botswana (6.0), Greece (5.8), and Morocco (6.1) – all countries with significantly lower median incomes, and often facing important rule-of-law challenges that have a bearing on the security of private property rights. Other results next to that of Italy are those reached by Tanzania (5.5), Montenegro (5.6) and Zambia (5.5).
Moreover, Italy’s overall score has fallen in recent years. In 2000, in fact, it was equal to 7.7/10. The decline has been mainly determined by that of some sub-categories, namely “impartiality of the courts”, “protection of property rights”, and “integrity of the legal system”, and occurred mainly in the period between 2005 and 2010. As for the sub-category specifically related to the protection of property rights, Italy gets lower results than all the comparable countries. Indeed, this sub-category is a good predictor of countries’ scores in the indicator as a whole.
Heritage’s Index of Economic Freedom paints a similar picture. This comprehensive annual ranking compiles an overall score from four categories (Rule of Law, Government Size, Regulatory Efficiency and Open Markets), each of which gets a score from 0 to 100. In the “Property rights” sub-category, Italy achieves a score of 55/100. Again, it is a relatively low score, considering the one reached by its main socio-political and commercial partner countries: 90/100 for Germany, 80/100 for France and for the United States, 70/100 for Portugal and Spain. Italy’s result is even lower than that of countries such as Botswana, Bhutan or Slovenia. India and Malaysia rank at the same level as Italy, just slightly higher than Colombia, Costa Rica or Ghana, which get a score of 50/100. Again, it may be interesting to look at the time series of the results obtained over time, to try to understand what went wrong, and when. It turns out that in 2005 the score of Italy was equal to that of Spain and Portugal: 70/100. It is an important finding, because it confirms what has already been suggested by examining the results of the Freedom of the World Report, namely that the decline in the protection of property rights took place largely between 2005 and 2010.
What is behind Italy’s decline since 2005? It is hard to point at definite factors, but there is reason to believe that changes to the legislation on eminent domain contributed to the worsening climate. Indeed, since the early 2000s, public authorities can take property and lands without any title or expropriation procedure, paying a lower amount of compensation than the market value to the owner, pursuant to an alleged and arguably discretional “public interest to economic and social development”. To add insult to injury, the sum paid by way of compensation is taxed. And what about the recent but extensive case law according to which the illegal occupation of houses and apartments can be justified (and hence is immune from prosecution) by reasons of “urgent need and social solidarity”?
Some might even argue that Italy’s distrust of the importance of the full protection of private property is deeply embedded in the country’s culture. Whether or not this is the case, the decline witnessed over the last decade must be confronted. International rankings’ findings – like any other – should be evaluated critically. The Economic Freedom of the World Report, indeed, is based on the results of a survey: what it verifies is therefore more the perception of economic freedom, rather than economic freedom in itself. The Index of Economic Freedom, on the other hand, relies on several sources, but does not specify any meticulous methodology to draw its conclusions, which could therefore be alleged to be somehow discretional. More generally, caution should be exercised when even comparing big trends such as the protection of property rights and economic growth. Yet both rankings suggest a trend that is too consistent to be ignored. Italy should take the steps to turn the tide on the protection of property rights, which is likely to enhance business confidence and foreign direct investments, thus boosting economic growth.
Giacomo Lev Mannheimer is a Fellow at the Istituto Bruno Leoni.