ITALY

Italy's economy is 63.4 percent free, according to our 2007 assessment, which makes it the world's 60th freest economy. Its overall score is 0.7 percentage point higher than last year, partially reflecting new methodological detail. Italy is ranked 28th out of 41 countries in the European region, and its overall score is equal to the regional average.

Italy scores highly in business freedom, trade freedom, investment freedom, and monetary freedom. Starting a business takes about 13 days, which is far below the world average. The tariff rate is low, although the country's inefficient bureaucracy implements some non-trade barriers that also deter foreign investment. As an EU member, Italy has a standardised monetary policy that yields relatively low inflation, despite government distortion in the agricultural sector. Freedom from government, property rights, and freedom from corruption are relatively weak. As in many other European social democracies, government spending and tax rates are exceptionally high in order to support an extensive welfare state. Corruption is not severe relative to some other nations, but it is high for an advanced economy. Enforcement of government regulations and judicial decisions are further impeded by an inefficient civil service.

Background

Since World War II, Italy has been a central force in European integration and the military structure of NATO. Italy faces some serious economic challenges, however. The state's large pension liabilities, labour market rigidities, and bureaucratic burdens remain unaddressed, and it remains to be seen whether the limited reforms made by former Prime Minister Silvio Berlusconi will be repealed or augmented by his successor, Romano Prodi. Despite strong international competition, small and medium-sized enterprises continue to thrive in manufacturing and high design, particularly in the northern regions. Tourism and services are among the most important sectors.

Fiscal freedom - 68.5 per cent

Italy has high tax rates. The top income tax rate is 43 percent, and the top corporate tax rate is 33 percent. Other taxes include a value-added tax (VAT), a tax on interest, and an advertising tax. In the most recent year, overall tax revenue as a percentage of GDP was 42.2 percent.

Monetary freedom - 80.8 per cent

Italy is a member of the euro zone. Inflation in Italy is relatively low, averaging 2.1 percent between 2003 and 2005. Relatively stable prices explain most of the monetary freedom score. As a participant in the EU's Common Agricultural Policy, the government subsidises agricultural production, distorting agricultural prices. The government also retains the power to introduce price controls. Items subject to rate setting at the national level include drinking water, electricity, gas, highway tolls, prescription drugs, telecommunications, and domestic travel. Consequently, an additional 10 percent is deducted from Italy's monetary freedom score to account for these policies.

Investment freedom - 70.0 per cent

Italy welcomes foreign investment, although the government can veto acquisitions involving foreign investors. The government does not block foreign investment, and the tax code does not discriminate against foreign investments. Foreign investment is closely regulated in the defense, aircraft manufacturing, domestic airline, and shipping sectors. Investors cite excessive bureaucracy, inadequate infrastructure, and a rigid labour market as major disincentives. Foreigners may not buy land along the Italian border. There are no barriers to repatriation of profits, transfers, payments, or current transfers.

Financial freedom - 60.0 per cent

In Italy's modern financial sector, credit is allocated on market terms, and foreign participation is welcome. Italy's banking sector was dominated by the state until a recent series of privatisations and consolidations. Government ownership of banks has fallen sharply, and only two major financial institutions (Cassa Depositi e Prestiti and Bancoposta) remain state-controlled.

The six largest banks account for over 54.6 percent of total assets. Regulations and prohibitions can be burdensome, and approval is required to gain control of a financial institution. Italy has the EU's fourth-largest insurance market. The government has adopted reforms, including privatisation of the stock exchange, that are intended to revitalise Italy's underdeveloped capital markets.

Property rights - 50.0 per cent

Property rights and contracts are secure, but the delivery of justice is extremely slow, and many companies choose to settle out of court. Corruption is more common than in other European countries, and many judges are politically oriented.

— Courtesy: The Heritage Foundation

Quick Facts

 *           Population: 57.6 million

 *       GDP (PPP): $1.6 trillion

          0.9% growth in 2004

          1.2% 5-yr. comp. ann. growth

          $28,180 per capita

 *           Unemployment: 8.0%

 *           Inflation (CPI): 2.2%

 *       FDI (net inflow): –$2.5 billion

 *       Official Development Assistance: None

 *           External Debt: $922.5 billion (2005 estimate)

 *           Exports: $435.9 billion

          Primarily engineering products, textiles and clothing, machinery, vehicles, transport equipment, chemicals, food

 *           Imports: $423.2 billion

          Primarily engineering products, chemicals, transport equipment, energy products, minerals, nonferrous metals, textiles, clothing, food, beverages, tobacco