Unravelling Italy’s Economic Odyssey: From Il  Sorpasso to Il  Ristagno

By Priyanshi Garg

Introduction:

As absolute fanatics for an Italian football club, we have always kept Italy in our sights as a topic of interest. This naturally inspired inquiry into the economic workings of the Mediterranean country. The Italian economy post-World War II is our starting point. We found this to be of particular interest because Italy has been one of the richest economies since then. ‘IL sorpasso’ was an event when it became the 4th richest country in the world in 1987, overtaking the UK. Its quiet decline since the 2010s and recent negative experiences with growth would help us realise some of the difficulties related to maintaining economic growth.  Structurally, we envision this essay to familiarise the reader with the current state of the Italian economy first. Further, we move on to some political and historical background on Italy’s post-war economy. Then, we use the Solow model to analyse the growth period of Italy from 1950-80 and highlight the findings. Finally, there will be continuous comparisons with Germany and other WWII participants, the reasons for which should become evident by the end. These are some of the ideas we aim to resolve while elucidating Italy’s growth experience. In particular, Italy matters today because of its central role in the EU’s fiscal framework debates, its stubbornly high debt overhang, and its globally significant industrial clusters — from luxury goods to its northern manufacturing belt, which remain critical to Europe’s economic architecture.

Presently, Italy’s economy stands at 2.05 trillion US$. We can see that the GDP grew fairly steadily in the latter half of the 20th century, after which it shot up to almost 2.5 trillion US$, immediately followed by a minor downturn that has settled into a GDP of around 2 trillion US$ since the mid-2010s. Italy's GDP is the focus of comparison here, particularly in relation to other post-WWII "winners" like France and the UK, which rank among the top three economies. Notably, Italy closely follows in the fourth position. However, a noticeable trend emerges from the 2000s onwards: the gap between Italy and other leading European economies has widened. Interestingly, Germany emerges as the number one country. One of the most brutal powers directly at loggerheads with the Allies has built the most flourishing economy in all of Europe in the aftermath of WWII. Discussions regarding the reasons for this fact naturally lead us to raise the same questions for Italy, and enquire why it continues to lag. Hence, it is only logical at this point to take a look at the political factors in post-WWII Europe to understand the reasons behind these intriguing observations.

Political Landscape: The Role Of Italian Bureaucracy.

After World War II, America introduced the Marshall Plan (April 1948–December 1951). This was an economic agreement between the USA and Europe. The objective — to aid the recovery of Europe after being absolutely ravaged in the war. Italy, along with Germany, received one of the highest shares of financial stimulus after France and the UK as part of this agreement. The Iron Curtain went up during the same period, and Western Europe’s hesitance to allow Germany to return to its pre-war industrial capacity was vanquished by the USA’s security and political concerns over the virulent spread of communism from the Soviet Union. The demand for steel from the Korean War (1950–53) was another blessing on the Italian economy, alongside the fact that markets in Europe were beginning to be integrated (The European Common Market was founded by Italy, Treaty of Rome, 1957). 1958-63 is known as Italy’s economic miracle. The growth in industrial output peaked at over 10 percent per year during this period — only Japan and West Germany did better. Italy was practically fully employed, and in 1963, investment reached 27% of GDP. The success was partially due to the decision to foster free market policies and to open up international trade. After such magnificent growth, a decade of plateauing reigned in Italy’s economic progress. This plateau took a downturn in the late 1960s, which was brought to a boil in 1973, with petroleum prices rising because of OAPEC’s decisions in Saudi Arabia. Italy fell to the well-documented phenomenon of stagflation, where economic growth is slow and inflation is high. It entered its first post-war recession in 1975. This continued well into the mid-1980s, at which point the Italian government launched a recovery plan for its economy. It was at the cost of increasing debt, which had rapid results, but also a long-term cost. With ‘il sorpasso’ over Britain in 1987 and a ‘secondo sorpasso’ in 1991 over France, it seemed all was well for some time.

However, the 2000s have a different story to tell. A major factor that had started to gain relevance is the absurdity of the Italian bureaucracy. Italy’s public administration is one of the worst among developed economies, according to studies by the IMF. The World Bank places Italy at the 58th position when it comes to Ease of Doing Business. Counterparts like France (33), Germany (22), and the UK (8) are far ahead of Italy. Start-up costs in Italy are the highest in the European Union. About 75% of business start-up costs are tied to the mandatory step of hiring a notary. Construction is also one of the most time-consuming activities in Italy. The process takes longer and is much more expensive than the EU averages on these indicators, 176.5 days and 1.9% of the warehouse value, respectively. The amount of red tape in Italy is problematic, and it is making the country fall dangerously behind its neighbouring nations. By contrast, recent research suggests that Italy's slowdown was more likely caused by the failure of its firms to take full advantage of the information and technology revolution. While many institutional features can account for this failure, a prominent one is the lack of meritocracy in the selection and rewarding of managers. Familyism and cronyism are identified as the ultimate causes of this Italian disease.

Superimposing Solow On The Peninsula.

To understand Italy's economic story after WWII, we can use the Solow growth model, which helps explain how a country’s output is influenced by capital, labor, and technological progress. The formula looks like this:

Y=A K^alpha L^Y=AK^αL^1−α

Where:

Y is the output

A is Total Factor Productivity (TFP)

K is the capital stock

L is labor

α represents the output elasticity of capital

This model shows how the combination of capital, labor, and technology shapes economic growth. Now, let's apply it to Italy's post-war recovery.

From 1950 to 1970, Italy’s economy surged, driven by not just investments in infrastructure but also rapid growth in TFP. The Marshall Plan played a major role in this, providing the country with capital, helping rebuild its infrastructure, and transferring technology from the United States. This wasn’t just about replacing what was destroyed during the war but about reimagining how Italy’s industries operated, making them more efficient and modern.

One of the interesting patterns in Italy’s post-WWII economic journey is the decline in labor force participation. While the labor force shrank — especially in the 1960s — the economy still flourished. This can be explained by the spread of labor-saving technologies. These innovations didn’t necessarily create more jobs, but they did make existing workers much more productive.

Between the 1950s and 1970s, Italy’s TFP grew impressively, rising from around 0.6 in the mid-1950s to much higher levels by the 1970s. The Marshall Plan’s impact was significant here, supporting industrial modernization and enhancing productivity. Italy’s alignment with global institutions, including NATO, also helped integrate the country into international markets, boosting the flow of capital, knowledge, and strategic partnerships. However, things took a turn in the 1970s. The 1973 oil crisis caused inflation to surge, and Italy, already struggling with public deficits, faced major economic challenges. By the 1980s, Italy’s growth was more driven by increasing debt than by improvements in productivity. While capital stock continued to grow, it wasn’t accompanied by a rise in efficiency. This debt-fueled growth gave a temporary boost to the economy, but it masked deeper structural problems.

When we reached the 2000s, Italy’s growth began to stall. Despite relatively high TFP compared to other countries, Italy struggled to keep pace with technological changes. Its failure to adopt new technologies, particularly in the ICT sector, further hampered growth. Familyism and cronyism also played a role, preventing merit-based business practices from taking root and stifling innovation. Even though Italy’s TFP remained higher than many of its peers, the country’s political and economic systems couldn’t keep up. Bureaucratic inefficiencies and a reluctance to modernize held Italy back, leaving it lagging behind countries like Germany and the USA, which adapted more effectively to changing global conditions.

Italy's rapid post-war growth in the 1950s and 1960s was powered by reconstruction and capital expansion. However, from the 1980s onward, rising debt took priority over productivity gains, and Italy's failure to adapt to the digital age in the 2000s locked in economic stagnation. The Solow model highlights this trajectory—initial success was driven by capital accumulation and efficiency, but Italy's reluctance to modernize politically and technologically led to decline. Despite early progress, structural weaknesses have prevented sustained prosperity.

Appendix:

Setting The Stage – A Cursory Glance At Italy’s Economy:

Sources: 

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Priyanshi Garg is a third- year BSc student in Economics and Finance with a Minor in Entrepreneurship at Ashoka University. Her passion lies at the intersection of financial analysis, economic reasoning, and marketing strategy. She has built a strong academic foundation in these areas, complemented by hands-on experience in market research.