How is Italy so rich, given its high corruption and crime?

Question

Much of Italy's territory is de facto controlled by organized crime, rather than the State.

The corruption of its long time leader, Silvio Berlusconi, was all but record breaking.

Given the above one could believe that, economically, Italy should struggle; it should be similar to Venezuela or something?

Yet this is not the case: Italy has the eighth-largest nominal GDP in the world, the ninth-largest national wealth and the third-largest central bank gold reserve.

As far as I'm aware, organized crime and governmental corruption are both believed to have a severely detrimental effect on a country's economy.

How, then, does Italy manage to have such a good economy?

Answer 1

There are several false premises in your question.

1. Italy is not as rich as you suggest. Total size of GDP is not an indicator of how rich a country is. Even an extremely poor country like Zimbabwe might have a higher total GDP than an extremely rich country such as Liechtenstein just due to the sheer size of the country.

   If we compare Italy in terms of GDP per capita, corrected for PPP, which is a more appropriate measure of how rich or poor a country is, we find that Italy's GDP is below the EU average (see OECD 2023).

   Hence in a European context Italy is actually one of the poorer countries.

2. Italy is actually not that corrupt. Italy is one of the more corrupt countries in the EU, but globally, it ranks only 45 out of 178 countries (see Transparency International; lower ranking means more corruption).

   Venezuela ranks 177 out of 178 in terms of corruption. So you are comparing apples and oranges here. Italy is actually in the top quartile of countries with low corruption. Sure it has high corruption compared to developed countries but very small corruption globally. The level of corruption in Italy is in no way comparable to the level of corruption in Venezuela.

3. Your claim that corruption or organized crime is believed to only have a negative effect on economy is also not entirely true.

   There are studies that even find small levels of corruption can have positive impact on economy because they help business to avoid red tape that might be a hindrance to economic growth, but the effect is non-linear, and differs for different industries and even countries. For example, Thach et al 2017 find low levels of corruption to have positive effects on economic growth.

   It is fair to say that high levels of corruption are detrimental to an economy, but low levels of corruption usually do not have severe negative impact and sometimes studies find even positive impact.

   Similarly, organized crime does not just have negative effects on an economy per se. In fact organized crime can sometimes be a solution to provision of public goods. For example, if the state does not provide a security force, firms will be inclined to pay protection money to mobsters. A protection racket does not just protect the owner of a business against the mafia itself but against other criminals as well. As long as the protection money the owner of the establishment pays is not too expensive it won't necessarily have a detrimental impact on the economy. It is comparable to taxation and provision of public goods. As long as taxes are used to provide public goods that have more value to the economy than the value of the deadweight loss to the economy from taxes and value of public funds, then the tax will have a positive not detrimental effect on the economy. Of course, again some organized crime, such as let's say organized car theft rings, are negative for an economy and do not provide any public goods, so this has to be examined on a case by case basis.

Answer:

Hence given the false premises the answer is simply:

Italy is not that rich, it is actually one of the poorer members of the EU. Hence it is not some sort of shining economic success story. Italy is still rich compared to developing countries in Africa and Asia, but this level of wealth is consistent with Italy's not too high level of corruption and its organized crime.

Countries grow in the long term primarily through accumulation of technology, capital and human capital (see Acemoglu Introduction into Modern Economic Growth). This growth can only occur in an environment that has 'inclusive' institutions that are conducive to economic development (i.e. property rights, free labor markets, free enterprise etc; see Acemoglu and Robinson Why Nations Fail). High levels of corruption and organized crime can be signals that country has bad institutions, but this is always a question of degree. A country with a bad extractive institution in one area (e.g. giving discretionary power to approve new building projects to an unaccountable bureaucrat that can then extract bribes) can make up for the shortfall in this area by having excellent institutions in other areas.

Venezuela is not a good comparison for Italy because it has orders of magnitude worse corruption and crime than Italy. Moreover, Venezuela has terrible institutional quality, much worse than Italy (see World Bank). As long as an economy has decent enough institutional quality the growth depends primarily on technological progress or human capital accumulation etc. and low levels of corruption are not that detrimental.

Answer 2

There is a consensus that the key problem of Italy is low productivity, due to several causes.

The following is a paper by Banca d’Italia (Italian central bank) about the problem of productivity in Italy:

https://www.bancaditalia.it/pubblicazioni/qef/2018-0422/QEF_422_18.pdf

Illegality and corruption are also an obstacle to growth. The problem of their impact on productivity and growth is dealt with in the paper by Banca d’Italia in section 5.5 Business environment, p. 58

Bureaucracy, enforcement of contracts (Italian justice is very low) are negative factors. Moreover,

“the presence of criminal organizations, tax evasion and corruption jeopardize the ability of markets to allocate resources efficiently, and it does so through two main channels.

empirical evidence demonstrates that the consequences of corruption, crime, and tax evasion on Italy’s productivity and growth are sizable.” (p. 61)

The other problem is the big Government debt.

The following is a recent paper by some of the leading economists in Italy about the sustainability of Italian public debt and its impact on growth:

Il debito pubblico in Italia: perché è un problema e come se ne esce(2019)

(unfortunately I didn’t find an English translation).

From the abstract:

This paper discusses the macroeconomic effects of Government debt, reviewing empirical evidence and the main mechanism through which a high debt can cause a reduction of growth. High levels of debt, in addition to representing a potential constraint on investments, weakens the effectiveness of economic policy and the ability to enforce counter-cyclical measures to stimulate demand.

Conclusions

As illustrated by the papers above (by some of the most authoritative research centers and economists in Italy), corruption and organized crime is only one factor among many other that are an obstacle to economic activity (mainly because it discourages investment, together with other environmental factors as bureaucracy).

The main problems, as illustrated above, are the various reasons of low productivity and the high public debt.

This is the real picture of the Italian economic system, and the picture in the question that describes a country suffocated by corruption and organized crime is not realistic.

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Anyway, to say 'why Italy is (at least relatively) rich' one has to retrace all the economic history of Italy, at least since the Second World War.

The most important period, the 'root' of richness of Italy, has been the so-called economic miracle of the years since the end of fifties to the end of sixties:

https://en.wikipedia.org/wiki/Italian_economic_miracle

Just some other few words to give a balanced representation of Italy economic situation, and point out that, as Italy isn’t a country suffocated by crime and corruption, it is not a poor and backward economy living on tourism (as some comment suggested).

On the contrary, industrialization is an important reason of relative Italy’s richness.

The economic miracle was a period of industrialization:

In the north, beside the north-west ‘industrial triangle’ (Genova, Torino, Milano), characterized by steel and engineering industries, also the north-east triangle (Padova, Vicenza, Treviso) becomes established, characterized by manufacturing activity, spread also in Lombardia, Emilia Romagna, Toscana e Marche.

In this period of the history of Italy, until the late 1980s and early 1990s, among the big industrial realities that drove the economic boom we remember the automaker FIAT, the Montedison group, the manufacturer of office machines Olivetti, the engineering group Ansaldo and the steel group Ilva. (from Italian Wikipedia -Miracolo economico italiano, my translation)

The economic history of Italy since then has led Italy to become the second industrial country in Europe, after Germany, at least until the last few years. Now it is possible that Italy has been surpassed by France, but it is controversial.

In 2019, the industrial European production, came for 30% from Germany, for 17% from Italy, for 12% from France and for 9% from Spain (Eurostat data), as illustrated in the graph below:$^1$

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$^1$ ^{And often we are talking about sectors of high technological content, as in pharmaceutical industry and in automotive industry, in particular car components. For example, the most important German car manufacturer, as BMW, Porsche, Audi, Volkswagen import many parts from Italy. Electric motors of Taycan Porsche are produced by the Italian Marelli, the brakes of BMW Series 1 and 3 are by Brembo, headlights of Audi e-tron are by Marelli, wheel hubs of Porsche Cayenne are by Mazzucconi, steering dumpers of Volkswagen Tuareg are by the Turin’s company Cultaro and many others (source Automotive News and HIS Markit). See the graph and the data in this article, about imports by Germany from Italy of parts for assembly, brakes, motors, gearboxes and so on.}

Answer 3

Italy is 'rich' compared to the rest of the world, and is 26th in a list of countries by GDP per capita. European wise, France is ranked 23rd, Germany is ranked 19th, and Spain is 32nd, so Italy is fairly average within the European Country range.

While Italy does have a high rate of corruption and organised crime, its murder rate, as seen in this list is closely matching that of other European countries such as Ireland. However the way in which Italy differs from other European countries is through its organised crime. Italy has a long list of organised crime groups compared to other countries because of its ideal location for smuggling through the Mediterranean and into Europe, and because of extremely powerful families and mafia groups that gained traction after WW2. This is known as the Italian economic miracle, and is the biggest reason for the size of Italy's economy today, but the biggest reason for its crime levels.

The reason Italy has a lot of organised crime, but a low murder rate, is its resilience to crime. The government can prevent the obvious crime, such as murder, but cannot prevent crime that has been intertwined into the Italian society for years, such as the big crime organisations and mafia, that smuggle drugs and steal money. Resilience plays a large role in how crime can take hold in a country.

What you must realise is that organised crime rate does not necessarily mean a poorer economy. Having organised crime, such as drug smuggling and financial crime but at a rate which is prevented from getting out of hand by the government, can be beneficial for an economy.

https://en.wikipedia.org/wiki/Organized_crime_in_Italy

Mafia receipts have been estimated to reach 7–9% of Italy's GDP.

The Calabrian 'Ndrangheta, as of 2022, the wealthiest and most powerful crime syndicate in Italy, accounts alone for over 3% of the country's GDP.

To conclude: Organised crime will hinder a country's economy when it gets out of hand, but with enough government push back or regulation, only possible by having a large GDP, the crime can stay smaller scale, and help a countries GDP, or GDP per Capita. After all, no matter how you earn the money, it still contributes to the economy.

Answer 4

Italy is being propped up with bailouts from the European Union. They have been endlessly buying debt of countries including Portugal, Italy, Spain, and Greece.

Without their buying the European Debt Crisis would have required massive reductions in government programs.

Italy would not be able to borrow money except and if they were it would be at much higher interest rates to compensate lenders for the high risk.

Their standard of living is effectively being subsidized by the rest of Europe who must reduce their spending.

Answer 5

Simple: they are good at convincing EU bureaucrats into funneling copious amounts of bail-out money into their pasta-inhaling gullet. Most of the effects of high corruption and crime rates are neutralized by this golden parachute that is being constantly and perpetually deployed there.

High corruption and crime rates are a large problem in Italy and don't let those nitpicking and downvotey smartasses from your question's comment section convince you otherwise. The dogs bark, but the caravan moves on.