Diagnosing the Italian Disease

We try to explain why twenty years ago Italy’s labor productivity stopped growing. We find no evidence that this slowdown is due to the introduction of the euro or to excessively protective labor regulation. By contrast, we find that the stop is associated with small firms’ inability to rise to the challenge posed by the Chinese competition and to Italy’s failure to take full advantage of the ICT revolution. Many institutional features can account for this failure. Yet, a prominent one is the lack of meritocracy in managerial selection and promotion. Familism and cronyism appear to be the ultimate causes of the Italian disease.