Uneven Regional Development in Italy: Explaining Differences in Productivity Levels

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1 Uneven Regonal Development n Italy: Explanng Dfferences n Productvty Levels Francesco Aello and Vncenzo Scoppa^. Abstract Many emprcal studes have analysed the convergence of the Italan regons, but no evdence s provded on the causes of dfferences n productvty levels. Movng from a recent approach focusng on dfferences n levels across countres, rather than n growth rates (Hall-Jones, 1999), the determnants of regonal dfferences n levels of labour productvty and Total Factor Productvty are nvestgated. Through an evaluaton of regonal stock of physcal and human captal, we carry out the decomposton of the output per worker n the contrbuton dervng from factor accumulaton and from TFP. The paper acheves two relevant results. Frst, the growth accountng exercse shows that regonal dspartes n output per worker are manly due to the dfferences n TFP, rather than n nputs accumulaton. Second, the estmaton of an econometrc model of the determnants of TFP, n contrast wth prevous studes, shows the mportance of some varables (nfrastructures, state nterventon, fnancal system, property rghts enforcement) n explanng Italan regonal dfferences. JEL Classfcaton: O47; R11; O Introducton In the recent emprcal lterature, stmulated by New Growth theores, and n the long-runnng debate on the lags n development of the Mezzogorno (Southern Italy) and problems of dualsm of the Italan economy, scant attenton has been pad to fnd the causes of the dfferences n regonal levels of output per worker. The man purpose of ths paper s to evaluate usng the Growth Accountng approach to what extent dfferences n levels of output per worker (rather than n growth rates) can be ascrbed to the quantty of nputs employed (physcal and human captal) and to what extent they are attrbutable nstead to dfferences n the effcency n ther use, that s to say, to dfferences n Total Factor Productvty (TFP). To ths end, new measures for human and physcal captal across regons are provded. Growth accountng does not explan, however, why factor accumulaton or factor productvty dffers so wdely across regons or countres. The second part of the paper attempts to sngle out the determnng varables n order to answer ths queston. It s underlned the fact that the man cause of the development gaps les n dfferences n TFP rather than n dfferences n factor accumulaton and an attempt s made to grasp the most mportant varables n explanng TFP through cross-secton regresson analyss. The varables consdered are those suggested by growth theores and by the tradtonal polcy debate about the dualsm of Mezzogorno: endowment of nfrastructures, structure and development of the fnancal system, enforcement of property rghts and crme rates, level of publc nterventon, etc.. The nvestgaton nto the dspartes n regonal development n Italy has much n common wth the recent studes examnng the hypothess of a process of convergence across Italan regons. These studes based on regressons of growth rates on the ntal ncome levels and other economc varables have produced mxed results. Yet, they have reached a substantal consensus as regards the followng two ponts: 1) there has been no absolute convergence (apart from a short perod up to the mddle of the 1970s), that s, there does not appear to be any tendency for less developed regons to grow faster than the more developed ones; 2) there s, nevertheless, a certan degree of condtonal convergence; that s to say, each regon tends to reach ts own steady state. However, there s no analyss on levels of productvty among Italan regons, as recently carred out on a cross-country level (Hall-Jones, 1999; Klenow-Rodrguez Clare, 1997b). Besdes, there are theoretcal and emprcal factors whch cast some doubt on growth rate approach and suggest the examnng of dfferences n levels. In the lght of these factors, n ths paper attenton has been focused on levels rather than growth rates: the am s not to fnd out whether there s, n fact, any convergence but to evaluate the prncpal determnants ^ Department of Economcs and Statstcs, Unversty of Calabra, 87036, Rende (CS). E-mal: f.aello@uncal.t; v.scoppa@uncal.t

2 n the persstent dfferences detected n productvty levels among Italan regons. The results obtaned show that many of the varables consdered mportant n the past nfrastructure, fnancal system, socal envronment whch have not resulted sgnfcant n the studes on convergence turn out, n fact, to be mportant for productvty. The paper has been organzed n the followng way. Secton 2 s a bref survey of lterature on convergence between Italan regons, Secton 3 offers some reasons to focus on levels nstead of growth rates. Secton 4 explans the methodology of growth accountng and Secton 5 presents data on the stock of human and physcal captal at regonal level, the decomposton of labour productvty and the determnaton of TFP. Fnally, Secton 6 s dedcated to an econometrc analyss to fnd out the effects of some economc varables on regonal dfferences n productvty. 2. Convergence n Italy: a bref summary of the lterature Neo-classcal theory suggests that the ncome of poorer regons wll converge, n the long run, to that of the rcher regons and that, as a consequence, the growth rate of a regon s nversely correlated to ts ntal level of per capta ncome (Solow, 1956). Ths process of absolute convergence takes place when the regons share the same steady state level, n other words, when exogenous varables - preferences, technology, demographc growth - are equal for poor and rch regons. As regards applcatons of the neo-classcal growth model to the Italan stuaton, the publcaton of Barro-Sala--Martn s work n 1991 restarted a wde and lvely debate on convergence. Ths study analyses convergence n Europe and, as far as Italy s concerned, the most mportant result to emerge s completely n contrast wth nterpretatons stressng the dualstc nature of the Italan economy. Wth reference to the perod , the two authors, n fact, show that there was a process of absolute convergence takng place at an annual rate of 2%. Smlar conclusons are obtaned n a more recent work by Sala--Martn (1996). However, other studes whch have examned the queston of convergence n the Italan economy have arrved at qute dfferent conclusons from those of Barro-Sala--Martn (1991). Indeed, many papers tend to exclude any process of absolute convergence, whle others clam that such a process took place up to the mddle of the 1970s but that the growth tendency of the Italan economy has been nverted n the last twenty or twenty fve years (Mauro-Podrecca (1994), Cosc-Mattesn (1995, 1997), Pac-Pglaru (1995), Celln- Scorcu (1997a, 1997b), D Lberto (1994), Pac-Saba (1998), Banch-Menegatt (1997), Faban-Pellegrn, (1997)). Mauro-Podrecca (1994), n partcular, show how the conclusons drawn from the evdence gathered by Barro and Sala--Martn were nfluenced by the use of data not tmely homogeneous. In order to overcome ths problem, the authors subdvded the perod nto three sub-perods based on the avalablty of homogeneous data wthn each tme perod 1. Ther results appear to exclude the possblty that there was a process of absolute convergence of per capta ncome coverng the entre country, even f, when labour productvty s used as a measure of regonal dfferences, t appears that growng convergence can be seen only n the 1960s and 1970s, but not n the last ten years consdered (Mauro and Podrecca, 1994). The use of a new data base allows Pac-Saba (1998) to overcome the problems found n the work of Barro and Sala--Martn and to evaluate convergence n Italy over the perod Ther analyss shows absolute convergence n output per worker and per capta ncome over the entre perod under study. However, they also show that ths fndng s n large part due to a catchng up process whch really nvolves only the perod from 1960 to the md 70s (Pac-Saba, 1998) 2, The decson to subdvde the analyss nto three perods was justfed by the fact that the data comes from dfferent sources. (Unoncamere ; ISTAT old tme seres ; ISTAT new tme seres ) (Mauro and Podrecca, 1994, pp ). The dversty of the perods analysed n dfferent works does not allow us to dentfy the exact year n whch the Italan regonal economes stopped convergng and began to dverge. Nevertheless, Pac-Saba (1998) make a strong case for 1975, because the pattern of both the growth ndcators used - per capta ncome and labour productvty - changes drecton n that year. These fndngs help to explan the concluson of Barro-Sala--Martn (1991) and Sala--Martn (1996), because the perods studed n both these works cover the years n whch Italy was undergong a marked process of global convergence. 2

3 These emprcal studes supply clear evdence of the absence of an overall process of absolute convergence between dfferent parts of the country. A lkely explanaton for ths outcome s that Italan regons converge towards dfferent steady state levels of output per worker, that s, there s condtonal convergence. The emprcal tests of ths hypothess have led to heterogeneous results, whch strongly depend on the way condtonal convergence s measured. In fact, when dfferences n regonal steady state equlbra are proxed by regonal dummes, the econometrc evdence suggests the presence of condtonal convergence (Mauro-Podrecca, 1994; Pac-Pglaru, 1995; Pac-Saba, 1998; D Lberto, 1994, Cosc- Matttesn, 1995), whle, when regonal dfferences are measured usng some specfc soco-economc varables, the outcomes are contrastng. However, the presence of condtonal convergence s demonstrated n a much greater number of works (D Lberto, 1994; Celln-Scorcu, 1997b; Cosc-Mattesn, 1995; 1997; Faban-Pellegrn, 1997; Ferr-Mattesn, 1997, Banch-Menegatt, 1997; D Lberto-Symons, 1998) than the ones whch exclude such a possblty (Mauro-Podrecca, 1994; Pac-Pglaru, 1995) or others whch fnd evdence of ts exstence only up to the end of 1980s (Celln-Scorcu, 1997a). Based on the emprcal nvestgatons suppled by the work on ths argument, t would seem, therefore, reasonable to mantan that there has ndeed been a process of condtonal convergence takng place n the Italan economy. Besdes the results on the exstence of condtonal convergence, these studes provde mportant nsghts to understandng whether and how the consdered structural varables nfluence growth n the Italan economy. In all the papers, the varables used as proxes of structural dfferences among regons or provnces nclude both those ndcators whch n cross-country analyses provde sound explanatons for dfferentals n growth and specfc varables representng the model of development n Italy. These are proxes of nfrastructure levels, effcency of the fnancal system, agglomeraton economes, nsttutons, government nterventon, mgraton and specalsatons n producton. The wde varety of results makes t mpossble to reach any unequvocal concluson. Ths s also due to the fact that the estmates obtaned have weak statstcal sgnfcance and, therefore, make nterpretaton both of the sgn and of the value of the estmated parameters dffcult. Nevertheless, for certan mportant aspects there s enough emprcal evdence to enable the authors to fnd some common ground. Investment, n partcular, s a varable wth a hghly sgnfcant explanatory power when dealng wth dfferences n growth rates between countres, whereas t s not sgnfcant when consderng models of growth n the Italan economy (Del Monte-Gannola, 1997; Pac-Pglaru, 1995; Mauro-Podrecca, 1994). On the contrary, the mpact of publc spendng on growth rates s both negatve and sgnfcant (Pac-Paglaru, 1995; D Lberto-Symons, 1998). A further element on whch there s wde consensus among authors, concerns a strong statstcal relatonshp between levels of nfrastructure and growth rates (Ferr-Mattesn, 1997; Pac-Pglaru, 1995), whereas the evdence for the effects of human captal (Pac-Pglaru, 1995, Banch-Menegatt 1997, Mauro-Podrecca, 1994; Cosc-Mattesn, 1995 and 1997) and for many fnancal, nsttutonal and envronmental ndcators (Faban-Pellegrn, 1997; Celln- Scorcu 1997b; Cosc-Mattesn, 1997; Usa-Vannn,1999) s ambguous and dffcult to nterpret. 3. Why focus on levels rather than on growth rates As noted above, several recent studes have dealt wth the queston of the developmental gaps across Italan regons. In the wake of cross-country studes, the approach has concentrated on the analyss of the determnants of growth rates and the problem of convergence or lack of t. Ths paper, on the other hand, focuses attenton on the analyss of the determnants of the levels of output per worker, nstead of growth rates. Ths approach has been followed for a number of reasons. Frst of all, such an analyss has never been appled to the Italan regons and t s worthwhle payng attenton to levels, because, as Hall-Jones (1999, p. 85) argue, levels capture the dfferences n long-run economc performance that are mostly drectly relevant to welfare as measured by the consumpton of goods and servces. 3 Many other studes brng to lght further emprcal evdence to support the hypothess accordng to whch there was a recovery n terms of growth whch affected the regons of the Mezzogorno compared to the rcher regons of Central and Northern Italy only n the 1960s and 1970s, whle no convergent pattern n Italan development reemerged n the 1980s (D Lberto, 1994; Pras, 1992; Celln-Scorcu, 1997a; Pac-Pglaru, 1995; Cosc-Mattesn, 1995, Faban-Pellegrn, 1997). 3

4 Secondly, a number of theoretcal and emprcal factors, suggested by many recent contrbutons, casts some doubts on the valdty of the approach on growth rates and solcts a focus on levels (Easterly-Kremer- Prtchett-Summers, 1993; Klenow-Rodrguez Clare, 1997b) Easterly et al. (1993) hghlght some econometrc ptfalls whch undermne studes on growth rates. They observe that the growth rates of most countres vary wdely over tme and show weak correlaton between one perod and another. On the other hand, the typcal explanatory varables accumulaton rate, weght of publc sector, levels of educaton, etc. used n the regressons of growth rates demonstrate a great persstence over tme. These features are also confrmed by data on Italan regons. For example, the correlaton coeffcent between regonal growth rates for the perod from 1960 to 1979, and growth rates for the perod from 1980 to 1993 s a tny 0,16 (see Fgure 1). On the other hand, the correlaton between nvestment levels (total nvestment for all sectors) for the correspondng perods s above 0,95, as are the results for both collectve consumpton and levels of educaton 4. Fgure 1. Italan regons. Correlaton between growth rates of ncome per capta ( vs ). 2,30% Per capta ncome growth rates ,10% 1,90% 1,70% 1,50% 1,30% 1,10% 0,90% 0,70% 0,50% 1,50% 2,00% 2,50% 3,00% 3,50% 4,00% 4,50% 5,00% 5,50% 6,00% Per capta ncome growth rates Source: own computatons. Data are from Crenos databank 4. Ths evdence serously challenges the results of regressons n condtonal convergence because t s dffcult to explan how a constant pattern of the explanatory varables could gve rse to such great fluctuatons n growth rates. Another pont closely related to the conclusons of Easterly et al. (1993) comes from Jones (1995) analyss of the tme seres used n the growth regressons. He found that the growth rates of most developed countres are statonary seres, trendless and wthout any untary roots. Nevertheless, the explanatory varables used n the new growth theores (AK models and models based on R&D) are often characterzed by a large trend component. Commentng on Jones work, Solow observes that there s no trend, nether determnstc nor a unt-root trend, n the growth rates. Therefore, any other tme seres that s to have a permanent effect on the growth rate ought to be trendless as well (Solow, 1994, p.112). Easterly et al. (1993) show that the low persstence of growth rates can be explaned by a model wth gradual dffuson of technologcal progress on a global level, whle countres are relatvely close to ther own steady state levels determned, n turn, by ther characterstcs and polces. Thus, characterstcs and polces determne levels of output but do not explan growth rates, whch are rather determned by a seres of shocks that ht the varous economes. Smlar models n whch all countres grow at the same rate, but are dfferent n levels of productvty and ncome, have recently been proposed by Parente-Prescott (1994), Barro-Sala-- Martn (1997) and Eaton-Kortum (1996). A further reason for nvestgatng dfferences n levels across regons s provded by the emprcal evdence on convergence whch, nstead of absolute convergence, shows some condtonal convergence at work across Italan regons, confrmng the exstence of dfferences n steady state levels. In fact, as shown n Secton 2, the studes regardng Italy demonstrate that absolute convergence ceased to occur at the mddle of 4 Data are from CRENOS databank ( 4

5 the 1970s. Ths s clearly confrmed by the tme pattern of the standard devaton of regonal per capta ncomes (σ-convergence) over the perod (Fgure 2). Fgure 2. Dsperson of ncome across Italan regons. 0,40 0,35 0,30 0,25 0,20 0,15 0,10 0,05 0,00 s-convergence s = Standard devaton of regonal per capta ncomes. Source: own computatons. Data are from Crenos databank. Dfferent results emerge when condtonal convergence s examned, snce a number of studes shows that there s qute a strong process of condtonal convergence. Ths mples that Italan regons tend towards dfferent steady state levels. On the bass of cross-country evdence, whch, as explaned, reflects the evdence found n Italy, Klenow-Rodrguez Clare (1997b, p. 610) conclude: Recent studes fndng that the rate of condtonal convergence s large suggest that countres are near ther steady state relatve ncome levels. Ths s also suggested by the fact that there s no absolute convergence. Thus, to explan dfferences n ncome levels, t s necessary to explan dfferences n steady state ncome levels. 4. The decomposton of output per worker through levels accountng An analyss of regonal gaps n output levels requres, frst of all, a comparatve evaluaton of the quantty of nputs employed and ther contrbuton to the determnaton of output. Growth accountng - see for example Solow (1957) and Denson (1967) allows us to dentfy to what extent the output of a gven regon or ts growth rate s due to the accumulaton of nputs physcal captal, human captal and raw labour and to what extent t s due to Total Factor Productvty (TFP). In our analyss, the output s separated by dstngushng the contrbuton of nputs from that of productvty. Ths procedure follows some recent studes whch abandonng the approach based on growth rates and convergence adopt a methodology whch estmates the levels of per capta output or productvty (Hall-Jones, 1997 and 1999; Klenow-Rodrguez-Clare, 1997; McGrattan-Schmtz, 1998). The startng pont of the analyss s a neoclasscal aggregate producton functon augmented to nclude human captal as n Mankw-Romer-Wel (1992). It s assumed that the aggregate producton functon s a Cobb-Douglas wth constant returns to scale (wth the same form across regons): α ( ) ( ) Y = K A L h 1 α [1] The level of output n regon (Y ) s determned by the stock of physcal captal avalable n the regon (K ), by a measure of the technology level A (labour augmentng measure of productvty), 5 and by the number of workers employed (L ) multpled by the ndvdual amount of human captal (h ). The coeffcent 5 It s assumed that techncal progress s labour augmentng (or Harrod-neutral) as opposed to Hcks-neutral. 5

6 α s the output elastcty of captal, whch represents, n a neoclasscal framework, the captal s share of natonal ncome and, consequently, (1-α) s the fracton of total ncome accrung to labour. As regards the determnaton of human captal, the procedure followng Bls-Klenow (2000) s based on the earnngs functons proposed by Mncer (1974). 6 Mncer estmated the returns to nvestment n educaton through a regresson n whch the log of a worker s wage (w ) depends on her/hs years of schoolng (S ) and experence (T ) (the latter varable enters nto the equaton as quadratc). The followng s a typcal Mnceran equaton: ln ( w ) 2 1T ψ2t = γ S + ψ + [2] where γ represents the rate of return to each year of schoolng and ψ j denotes the returns to tranng. Thus, the stock of human captal per worker for regon, h, s assumed to be equal to: γ 2 S + ψ1t + ψ 2T h = e [3] where S and T refer n ths case to the regonal average values. 7,8 The producton functon [1] can be expressed n terms of output per worker, dvdng both members by L : Y L K = L α 1 ( A h ) α [4] By multplyng the rght-hand member by Y Y α and rearrangng one gets: Y L K = Y α 1 α A h [5] Thus, on the bass of equaton [5] we can obtan a measure of Total Factor Productvty A : A Y L = α K α 1 h Y [6] Equaton [6] s of crucal mportance for our analyss because t allows us to determne drectly the level of TFP across regons by usng data on output per worker and the captal-output rato, the coeffcent α In the lterature a seres of heterogeneous measures have been employed to estmate human captal (see Barro and Lee, 1993). Bls-Klenow (2000) argue that earnngs functons provde the best results. Because of the well known dffculty n fndng relable data on tranng, some authors adopt a smplfed verson S of equaton [3] n whch years of experence T are not consdered, that s, h = e γ. Klenow-Rodrguez-Clare (1997) and Bls-Klenow (2000) determne human captal on the bass of estmates of returns to nvestment n human captal (years of schoolng plus on-the-job experence). On the contrary, Mankw- Romer-Wel (1992) estmate human captal by explotng the property of steady state n Solow extended model: sh H =, where s h represents nvestment n human captal. n + g +δ 6

7 (the share of captal n total output), the years of schoolng and experence and estmates for the returns to nvestment n human captal. 5. Measurng physcal and human captal and TFP by regon The man data sources used for the 20 Italan regons are ISTAT (Italy s Natonal Statstcal Insttute) Regonal Economc Accounts, 1999 (Cont Economc Regonal, Ann ) for the perod (plus recent updatng for 1997) and SVIMEZ ("I cont economc delle regon talane dal 1970 al 1998") for the perod Varables are computed at current prce for the year 1997, the most recent year for whch all the necessary data are avalable. 9 All the economc sectors are consdered. The level of output per worker (Y /L ) by regon s obtaned as the rato between the regonal value added and the total unts of labour ( untà d lavoro total ) Physcal captal To determne regonal captal stocks the research was carred out n two stages. Frst, the perpetual nventory method was used to calculate a provsonal stock of captal ( Kˆ ) n order to compute each regonal share of captal: η = Kˆ 20 j= 1 Kˆ j. Then, the regonal absolute value for captal stock (n 1997) was obtaned by dvdng up among the regons accordng to the shares η the stock of captal at natonal level (as recently estmated by ISTAT 10 ), whch we consder a more relable measure of the stock of captal. The perpetual nventory method allows us to buld a measure of captal stock based on net nvestment over tme. 11 The estmate for captal n the frst year ( ˆK 0 ) s the startng pont for the analyss. In the neoclasscal growth model, the steady state level of captal per worker (k*=k/l) can be expressed as: k = sf ( k ) I L = ( n + g + δ) ( n + g + δ) where s represents the savng rate, f(.) s the per worker producton functon, n s the growth rate of the labour force; δ s the deprecaton rate, g s the rate of techncal progress, whch can be approxmated by the growth rate of labour productvty, and I represents total nvestments. Multplyng by L, the result (taken at I tme t 0 ) s: Kˆ 0 0 =. ( n + g + δ) Gven ˆK 0, the subsequent values of captal Kˆ t, are obtaned through the followng dynamc equaton: ( 1 ) Kˆ t I t K ˆ t+ 1 = δ + [8] The frst year (t 0 ) for whch data are avalable s The calculatons were carred out usng total nvestment at constant prces, by settng the deprecaton rate at δ=6%, n equal to the growth rate of labour force for every regon, g s calculated as the growth rate of labour productvty. In Table 1 we report the regonal shares of net captal stock, as determned by the perpetual nventory method. [7] These data have been made avalable very recently by Istat, Cont economc terrtoral secondo l Sec95 (October 2000). ISTAT, "Investment fss lord per branca propretara, stock d captale e ammortament", Ann , Statstche n breve del 11 luglo Such a method s wdely used n the lterature on growth accountng: see, among others, Barro-Sala--Martn (1995) and Beck-Levne-Loayza (2000). 7

8 Table 1. Regonal shares of net captal stock (h ). Year=1997 Regons Regons Pemonte 8,4% Abruzzo 2,1% Valle d Aosta 0,4% Molse 0,6% Lombarda 18,6% Campana 7,3% Trentno Alto Adge 2,2% Pugla 4,9% Veneto 8,3% Baslcata 1,1% Frul Veneza Gula 2,5% Calabra 2,9% Lgura 3,6% Scla 6,7% Emla Romagna 7,4% Sardegna 3% Toscana 6% Umbra 1,5% Italy 100% Marche 2,5% Northern Central regons 71,4% Lazo 9,8% Mezzogorno 28,6% Source: own computatons. Data are from ISTAT (varous publcatons) and Svmez (Regonal Economc Seres) Fnally, the net captal stock for each regon used to determne TFP was obtaned by dvdng up the net stock of captal n 1997 for Italy as a whole ( K ITA = 6.124, 897 bllons of lra), accordng to regonal shares (η ): K = η K ITA Only recently has there been some paper evaluatng the stock of captal at a regonal level: see Bonagla-Pcc (2000), Pac-Pusceddu (1999) and Pcc (1995). All these studes, followng more rgorous and sophstcated methods, obtan results very smlar to ours. 12 The captal share α was calculated as the rato of gross profts to the value added ( Quota de proftt lord sul valore aggunto al costo de fattor ). The average value over the perod s α=28,24% (ISTAT, Rapporto annuale 1999: la stuazone del paese) Human captal In order to obtan an ndcator of regonal human captal, we use the earnngs functons of educaton proposed by Mncer (1974), based on the average years of educaton and experence of the labour force for every regon (S and T ) and on parameters γ, ψ 1 and ψ 2 n equaton [2]. The calculaton of years of educaton s obtaned by the number of years requred to reach a certan level of qualfcaton, weghted by the relatve regonal educatonal qualfcatons (see D Lberto-Symons, 1998). In symbols: Qj S = n j j [9] L where j represents educatonal level, n j the number of years requred to attan the j-th level of educaton, 13 Q j expresses the number of workers n regon for whom j represents ther educatonal qualfcaton. Data are from ISTAT ( Indagne ISTAT sulle forze d lavoro 1997 ) 14. Wth regard to the years of experence (on-the-job tranng), the usual specfcaton T = ( Age S 6) (see Bls-Klenow, 2000) s amended consderng the factor ( 1 u ) (where u s the average unemployment rate for regon over the perod 1980 to 1996) n order to take nto account the dfferent regonal labour markets stuatons. The dea s that n regons wth hgher levels of unemployment In fact, the correlaton coeffcents among our captal stock seres and Pac-Pusceddu's s 0,998, whereas wth respect to Bonagla-Pcc's s 0,974. The calculatons are as follows: 0 for no academc qualfcaton, 5 for completng prmary educaton, 8 for completng lower secondary, 13 for completng secondary educaton and 18 for a degree. A smlar calculaton has been carred out on the bass of data from ISTAT (Censmento della Popolazone 1991). The results do not substantally dffer from those used n ths analyss. 8

9 the representatve worker has receved less years of on-the-job tranng compared to workers of low unemployment regons. Therefore, we determne T as follows: T ( u ) = ( Age S 6) 1 [10] As for educatonal and experence rate of returns, we used, as reference, the mcro-econometrc analyss carred out by Coluss (1997), based on the survey conducted by the Bank of Italy on Italan households ( Survey of Household Income and Wealth ). The estmated coeffcents are the followng: γ =7,65%; ψ 1 =2,09%; ψ 2 = 0, (see Coluss, 1997, p. 261) Total Factor Productvty Table 2 dsplays, on the bass of equaton [6], the decomposton of output n the contrbuton dervng from factor accumulaton and TFP. To better evaluate captal accumulaton, data on the captal labour ratos, K/L was also ncluded. Regonal values are compared to the Italan ones. In order to consder how our results are senstve to the chosen parameters (see the remarks n Mankw, 1997), the varables were assessed usng alternatve coeffcents for α, γ, ψ 1, ψ 2. Wth respect to α, we used, as alternatve values, α=1/3 (the fgure used n the standard neoclasscal approach) and α=0,39 (used for Italy by Barro-Sala--Martn, 1991). 16 Wth respect to the parameters n the earnngs functon, the coeffcents estmated for Italy by Psacharopoulos (1994) were used: γ=0,028; ψ 1 =0,010; ψ 2 = 0, For each parameter, new estmates for the varables are bult. In all the cases, the correlaton coeffcents between seres n Table 2 and the new seres are always hgher than 0, These results ndcate that the chosen values do not affect sgnfcantly our varables of nterest. In Table 2 we fnd a few well known facts n the debate regardng the development of the Italan economy together wth some more surprsng evdence. The labour productvty dfferences n favor of the Northern and Central regons are consderable. Valle d Aosta (13% more than the natonal average), Lombarda (+12%), Lazo (+8%) and Pemonte (+6%) are the regons wth the hghest levels of output per worker, whle Calabra (-19%), Pugla (-17%) and Campana (-14%) record the lowest levels. Gven the general low level of employment n Southern regons, the dfferences n per capta ncome are much more marked. 18 The estmates of the captal-output rato (second column) puzzlngly show that most of the Southern regons have a hgher captal-output rato than the Central and Northern regons. Apart from Valle d Aosta (+18%), we observe the most elevated captal-output ratos n Baslcata (+16%), Sardegna (+13%) and Calabra (+11%); on the other hand, Emla Romagna (-6%), Toscana (-4%) and Lombarda (-4%) have the lowest ratos. Ths fndng confrms what has been brought to lght n many studes (see, for example, Gall-Onado, 1990): n contrast wth the evdence at an nternatonal level, n the case of Italan regons there s some negatve correlaton between captal accumulaton and the level of development. When captal per worker (K/L) s consdered (excludng the outler Valle d Aosta), practcally no correlaton emerges between Y/L and K/L (ρ=0,02) and the rchest and poorest regons do not dffer sgnfcantly wth respect to K/L The average rate of return at nternatonal level s 6,8% (for OECD countres) (see Psacharopoulos, 1994; McGrattan-Schmtz, 1997). Gven the method followed to compute the regonal stock of captal, the deprecaton rate chosen has almost no effect. These results are avalable upon request. Standard devaton for ncome per capta s 0,25 and R s equal to 1,87 (see also Pac-Saba, 1998). 9

10 Table 2. Labour productvty, captal-output rato, human captal per worker and TFP by regon (Italy=1). Year: Regons α Y H K/L TFP L 1 α Y Pemonte 1,064 0,988 1,001 1,031 1,075 Valle d Aosta 1,127 1,183 0,990 1,727 0,963 Lombarda 1,118 0,962 1,026 1,014 1,132 Trentno Alto Adge 1,038 1,015 1,006 1,077 1,017 Veneto 0,994 0,963 0,999 0,902 1,033 Frul Veneza Gula 1,028 1,026 1,023 1,096 0,980 Lgura 1,061 1,074 1,026 1,272 0,963 Emla Romagna 1,028 0,937 1,014 0,873 1,081 Toscana 0,974 0,961 0,996 0,880 1,018 Umbra 0,957 1,028 1,026 1,026 0,907 Marche 0,928 0,985 1,001 0,893 0,941 Lazo 1,076 0,991 1,054 1,053 1,030 Abruzzo 0,900 1,049 1,005 1,018 0,854 Molse 0,952 1,101 0,983 1,217 0,879 Campana 0,865 1,053 0,965 0,986 0,851 Pugla 0,837 1,021 0,961 0,882 0,853 Baslcata 0,911 1,161 0,941 1,332 0,834 Calabra 0,810 1,114 0,960 1,065 0,758 Scla 0,919 1,058 0,964 1,060 0,902 Sardegna 0,884 1,135 0,935 1,220 0,833 Italy 1,000 1,000 1,000 1,000 1,000 Standard Devaton 0,090 0,068 0,031 0,196 0,098 Correlaton wth (Y/L) 1,000-0,268 0,713 0,308 0,849 R 1,292 0,952 1,065 1,139 1,274 R: Rato 4 rchest to 4 poorest regons Source: own computatons. Data are from ISTAT (varous publcatons) and Svmez (Regonal Economc Seres). Y/L s the rato between the value-added per worker and the total unts of labour; K/Y s the rato between the stock of physcal captal and the level of value-added; H s a measure of human captal; K/L s the rato between the stock of physcal captal and the total unts of labour; TFP s the Total Factor Productvty. Data refer to As regards human captal, there exsts a notable correlaton between h and Y/L, even f the dfferences across Italan regons are not partcularly marked. Lazo (+5%), Lombarda (+3%) and Lgura (+3%) have hgher human captal results, whereas Sardegna (-6%), Baslcata (-6%) and Calabra (-4%) fgure at the bottom. The most sgnfcant fndng s, wthout any doubt, the hgh correlaton between output per worker and the TFP ndcator: the correlaton s 0,85 (Fgure 3). Lombarda (+13%), Emla Romagna (+8%) and Pemonte (+7%) have the hghest ndex of TFP. Calabra (-24%), Sardegna (-17%) and Baslcata (-17%) record the worst performances. 10

11 Fgure 3. Italan regons: relaton between output per worker and TFP (1997). 1,20 1,10 TFP 1,00 0,90 0,80 0,70 0,70 0,80 0,90 Y/L 1,00 1,10 1,20 Source: own computatons. Data are from ISTAT (1999). Further evdence for the determnants of dspartes between Italan regons can be found by comparng the (geometrc) average for the four rchest regons (Valle d Aosta, Lombarda, Lazo, Pemonte) wth that of the four poorest regons (Calabra, Pugla, Campana, Sardegna), ndcated by the rato R n the bottom lne of Table 2. In fact, t s observed that: - labour productvty dfferences between rch and poor regons s about 29%; - captal-output rato s 5% lower n the most advanced regons; - human captal s 6% hgher n rch regons; - TFP dfferences n favor of rch regons are very smlar to the dfferental n labour productvty, beng equal to 27%. Dfferences between Italan regons n the lght of the data reported n Table 2 and Fgure 3 show clearly that most of the varaton n labour productvty s explaned by dfferences n TFP. Factor accumulaton does not account for regonal dfferences n productvty: the rch regons are so because of ther greater effcency n producton and not because they employ hgher levels of physcal captal and human captal. Therefore, the outcomes wth regards Italan regons are n lne wth the fndngs of many other economsts who, n analyss amed at explanng productvty dfferences across countres (see Easterly- Levne, 2000; Hall-Jones, 1999; Klenow-Rodrguez-Clare, 1997; McGrattan-Schmtz, 1998) fnd that most of the dspartes n output per worker are due to dfferent levels of TFP, rather than to dfferent levels of factor accumulaton, as argued by neoclasscal growth models (e.g. Mankw-Romer-Wel, 1992). In the next secton, an econometrc analyss s carred out n order to sngle out the causes of dfferences n productvty. 6. An attempt to dentfy the determnants of Italan regonal productvty The precedng analyss provded clear emprcal ndcatons on two fronts, the frst, confrmng the absence of a pattern of convergence of the Italan regons towards a sngle steady state and the second, of the role of TFP as a varable able to explan dfferences n output per worker across regons. Based on ths and on the fndngs of the recent lterature on growth t s useful, at ths pont, to focus attenton on the causes of regonal dfferences n TFP. In ths Secton, the am of the econometrc analyss s to fnd out to what extent, the dfferences n TFP across Italan regons depend on a seres of varables relatng to specfc regonal aspects. 11

12 The dentfcaton of varables whch nfluence regonal productvty s not an easy task to accomplsh and t s even more dffcult f one bears n mnd that the phenomenon under examnaton s the result of a complex web of relatons n whch each varable can be consdered both somethng that helps to provde an explanaton and somethng that needs to be explaned. Economsts cannot say wth precson what exactly determnes TFP, but they know roughly that t s composed of a seres of elements: «There are other possble nterpretatons of TFP: the educaton and sklls of the labour force, the strength of property rghts, the qualty of nfrastructure, cultural atttudes toward entrepreneurshp and work, and so on» (Romer, 1996, p. 25). Furthermore, Hall-Jones (1999) argue that the prncpal explanaton for gaps n development les n the economc envronment n whch actors produce, exchange, accumulate and nvent, that s to say, n the socal nfrastructure whch the authors defne as formal and nformal nsttutons, both prvate and publc, whch oversee economc actvty and supply ncentves for producton and accumulaton. Followng these arguments, t s consdered reasonable to assume that among the varables whch determne levels of TFP across regons there are ndcators of nfrastructures (INFRA), fnancal system development (FIN), socoenvronmental condtons and enforcement of property rghts (proxed by crme levels, CRIM), government nterventon (GOV), and agglomeraton economes (AGGL). Furthermore, t s recognzed that many of the explanatory varables used are lkely to be endogenous. For example, the level of development of fnancal system or the nfrastructure are plausbly related to the regonal economc development: there s a smultanety problem. Ths s qute a general problem plagung all the emprcal analyss of growth (see,.e., Mankw, 1995). The standard procedure adopted n lterature to solve, at least partally, ths problem s to use as regressors the lagged values of explanatory varables (or ther average value over a certan number of years) or to fnd nstruments for these varables employng the Instrumental Varables method (Temple, 1999). There s though a shortage of good nstruments - that s, varables that have to be exogenous to economc growth, but hghly correlated wth the explanatory varables and, consequently, the ntal value of the varable s often used as an nstrument. Our approach n facng the problem follows the lterature. Frstly, Ordnary Least Squares method (OLS) s appled, where the explanatory varables (n logs) are averaged over the three years perod , apart from the ndex of nfrastructures whch refers to The use of lagged varables n OLS estmates does not unambguously resolve the ssue of causalty, but t allows the understandng of whether the ntal value of each regressor s a good predctor of the regonal growth over the next 15 years. Besdes OLS, the check for endogenety s remade by usng the Instrumental Varables method (IV), where each lagged varable enters nto regressons as ts own nstrument. The tests carred out (see below) allow confdence n the adopted soluton. Before presentng econometrc results, here s a bref descrpton of data. As regards nfrastructure we use the ndcator proposed by Bracalente-D Palma (1982), who n the formulaton of ther ndex take nto account varous categores of nfrastructure - transport, communcatons, publc utltes (water, electrcty, gas etc.), educaton, health servces, toursm, entertanment facltes (e.g. sport) and soco-cultural servces 19. Table 3 shows that n 1977 there were large dfferences n nfrastructures between Italan regons: the hghest and the lowest values occur, respectvely n Lombarda and n Baslcata and, generally speakng, the Southern regons were less endowed than the Central and Northern areas. The ndex utlsed to gauge government nterventon s the rato between the average wage per worker n the publc sector and the average wage per worker n the prvate sector n every regon 20. In ths recent papers are followed (Alesna-Dannnger-Rostagno, 1999; Aquno 2001) whch document how publc employment n Italy has been largely subsdsed and unequally dstrbuted across regons and demonstrate that publc jobs negatvely nfluences ndvduals atttudes towards job search, educaton and rsk takng actvtes. Data n Table 3 underlne that the gap between publc and prvate wages s not relevant n Central and Northern Italan regons, whereas t s very marked n the regons of Mezzogorno. On an regonal bass, the lowest value of the rato publc wages/prvate wages occurs n Lombarda and Pemonte, where the gap of salary s about less 18% than the natonal value. At the opposte extreme, n Calabra and Scla the Bracalente-D Palma (1982) calculate the ndex of nfrastructure by dvdng fgures of basc nfrastructures (roads, length of electrc networks, museums, book-shops, number of seats n cnemas and theatres, beds n hosptals, etc.) to regonal surface area or to regonal populaton. Ths allows the authors to obtan homogenous data regon-by-regon. Then, standard fgures are normalsed and aggregated n order to determne the consdered ndex. Ths procedure s repeated n D Palma-Mazzotta-Rosa (1999). Data are from the Cont Economc Regonal publshed by Italy s natonal statstcal nsttute (ISTAT, 1999). Publc job salares are proxed by the fgures of the sector of non-market servces ( Servz non destnabl alla vendta ), whle wages n prvate jobs are those observed n regonal ndustral sectors. 12

13 dfference n wages s n favor of publc employees, respectvely, 30% and 22% hgher than the natonal benchmark (Table 3). The development of fnancal systems s gauged by Prvate Credt, defned as the amount of credt to the prvate sector dvded by GDP. Ths choce s based on the hypothess that fnancal systems, whch channel a major share of credt to the prvate sector, provde properly the standard fnancal functons (researchng frms, exertng corporate control, provdng rsk management servces, moblsng savngs and facltatng transactons) and, as a consequence, postvely nfluence economc growth (see,.e., Levne 1997; Levne-Loayza-Beck 2000; Rajan-Zngales 1998). 21 Prvate Credt s calculated by usng data from Statstcal Bulletn publshed by the Bank of Italy and refers to the credt allocated to local prvate ndustral frms and to producng famles by banks operatng n each regon. In , the rato Prvate Credt/GDP n all the southern regons s less than the natonal average and s far below that acheved n the regons (.e. Lombarda, Emla Romagna, Pemonte), where banks manly work wth the prvate sector (Table 3). Populaton densty was used as an ndcator of economes of agglomeraton (DENS), whle the proxy for soco-envronmental condtons s represented by the rato between the total number of crmes commtted aganst the economy and the resdent populaton (DEL). 22 For these varables too there s a strong contrast between Southern and Central-Northern regons: except n Campana, the populaton densty of Southern area s below the natonal average, whle the rato Crmes/Populaton ndcates that property rghts are better enforced n the Centre-North. Table 4 reports econometrc outcomes. An ntal fndng s that, from a statstcal pont of vew, the model provdes good results, the share of varablty of TFP explaned by the regressons beng hgh: n OLS estmates, the adjusted R 2 s equal to 0,95, that s, a very satsfactory value for sectonal analyses. The values of dagnostc tests (.e., t-statstcs and F-statstcs) are smlarly hgh. Moreover, n OLS estmates, the Bartlett test suggests that resduals are homoschedastc and, therefore, the results can be consdered consstent and effcent. Fnally, LM tests ndcate that the ortogonalty condtons cannot be rejected at the 5% level and ths permts the consderng of the nstruments used as approprate. In terms of economc nterpretaton, IV estmatons provde some evdence that the observed relatonshps between TFP and the chosen explanatory varables do not appear to be drven by endogenous bases. Table 4 also presents results derved by consderng as a dependent varable the output per worker (Y/L) or the captal-output rato (K/Y), as shown n Table 23. Ths extenson s consdered very useful because t dscloses a more general pcture of the phenomenon under examnaton,.e. dfferences n Italan regonal growth. In fact, after verfyng the mpact of each regressor on TFP, attenton s pad to compare these results wth the analogous ones whch emerged n the other two regressons. Ths allows, on the one hand, the dscernng of the channels (TFP or K/Y) va whch the consdered explanatory varables affect economc growth and, on the other, the addng of evdence on the relatonshp between Y/L, or K/Y, and the varables whch are consdered strongly relevant n explanng TFP. As regards the nterpretaton of the role of the sngle varables n explanng regonal growth, the frst thng to observe n regressons on TFP and Y/L s that the parameter assocated wth the varable INFRA s postve 24. Ths means that the regons wth the best nfrastructures record a hgher level of output per worker. As for the mpact of INFRA on the components of aggregate producton functon, t emerges that regons wth a hgher level of nfrastructure have hgher productvty and lower captal ntenstes (even f t Evaluatng the mpact of the fnancal system on regonal growth makes sense only f markets are segmented. Ths assumpton seems to be emprcally founded, snce Italy stll represents an nterestng case of poor ntegraton of fnancal markets on a regonal level, that s, captal moblty across the Italan regons s far from perfect. Ths pecularty of the Italan bankng system has been largely debated and for a recent analyss t s worthy referrng, among others, to Usa-Vannn (1999). The followng crmes are taken nto consderaton: embezzlement, counterfetng, robbery, burglary, swndlng, handlng stolen property. Data are from ISTAT (Statstche gudzare, 1983, Rome). Results obtaned n the regressons on human captal, the other component of the producton functon (see Equaton 5 and Table 2), are not reported because of ther low statstcal sgnfcance: our model explans less than 5% of the varablty of human captal and the sngle coeffcents are never sgnfcant at 5%-10% level. As the dependent varables are expressed as logs of components of equaton 5, the lack of results on human captal (see note 23) mples that the sum of coeffcents across rows n TFP and K/Y regressons s not equal to the one obtaned n Y/L estmaton. 13

14 s not hghly sgnfcant from a statstcal perspectve) 25. Consstent wth expectatons, the analyss ponts out the postve and sgnfcant relatonshp between nfrastructure and TFP ndcatng the role of nfrastructure n attractng producton, reducng costs and fosterng effcency (Hrschman 1958; Munnel 1990; Hulten- Schwab 1991). Ths mportant role of nfrastructures s confrmed by the fact that publc captal alone explans roughly 80% (65%) of the varatons n regonal TFP (Y/L). 26 Wth reference to the mpact of State nterventon, our ndcator, the rato between publc and prvate wages, s negatvely and sgnfcantly lnked wth the output per worker and wth TFP, whle no nterpretable effect emerges on the rato K/Y. The results on TFP and Y/L are n lne wth the nterpretatons offered by Alesna-Dannnger-Rostagno (1999) and Aquno (2000), who emphasse, as publc employment n Italy has been used to pursue dfferent goals from provdng effcent servces and publc goods and ths has presumably stmulated rent seekng actvtes and generated dsncentves to allocatng resources n prvate entrepreneurshp 27. Ths vcous crcle ends up by lowerng regonal TFP and, as a consequence, depressng the rato Y/L. 28 As for the fnancal varables, other thngs beng equal, one would expect growth to be postvely lnked to the structure and extent of the fnancal system 29. On the bass of the emprcal evdence on the postve and sgnfcant coeffcent assocated wth the rato Prvate credt/gdp n the regressons on TFP and on Y/L, t emerges that the more credt prvate actvtes receve the hgher s the regonal level of total factor productvty and output per worker. Ths means that fnance does not smply follow growth, but that t s a good predctor and a determnant of the level of growth. The mpact on the rato K/Y s negatve (but not hghly sgnfcant). Ths s an nterestng result, because t leaves open the queston about how local economes fnance captal accumulaton. There s much evdence to beleve that the workng of the fnancal system has not affected K/Y because frms decsons to nvest n physcal captal have been encouraged massvely by polces amed at the development of the Mezzogorno. In fact, the subsdsed fnancal resources seems to have exerted a strong mpact on captal accumulaton, 30 but no effects on our ndcators of productvty, probably because the selecton of nvestment projects s not effcent when loans are guaranteed by publc nsttutons (Levne 1997). Ths s an nterestng vew, even f not orgnal (see,..e., Sracusano- Tresold, 1990), wth strong polcy mplcatons f one thnks that the major benefcary regons account nowadays for the hghest levels of captal ntensty, but the lowest levels of economc growth (see Table 2). Turnng to the regressons, the relaton between growth and agglomeraton economes s of nterest. The dea s that there exsts scale effect and ncentves to locate busnesses n large regons wth agglomeraton economes, whch, n ths study, are approxmated by populaton densty n a gven area. In ths case, the reducton n transport costs and the advantages dervng from concentraton of producton n one area should determne a postve effect on development (Krugman, 1991; Faban-Pellegrn, 1997). Estmatons ndcate, n some ways, that the output-per-worker and the TFP are postvely determned by agglomeraton economes (the parameter concerned results as postve both n OLS and IV estmates). Instead, the coeffcent n the regresson of K/Y s not valuable because of ts low sgnfcance. The fnal aspect to consder s the effect of the condtons of securty of property rghts on regonal growth: one would expect that the greater the safety and relablty of regonal economc relatonshps, the more proftable would be nvestments and producton and hence, ceters parbus, the hgher the TFP and the output per worker (Putnam, 1993; Marsell-Vannn, 1996). From the regresson on Y/L and TFP, t emerges 25 Ths fndng seems to ndcate, n some ways, a sort of substtuton between captalsaton and the local exstence of nfrastructure,.e., n the sense that Southern regonal economes mght have ncreased ther level of captal ntensty n order to compensate for the lack of publc servces. 26 These result are avalable upon request. 27 Smlar vews are n Del Monte-Gannola (1997) and D Lberto-Symons (1998) and n the whole lterature that analyses the effcacy of Italan government nterventon from the end of 70s, that s when t has not been motvated to support nvestment but to ncrease the sze of local authortes. 28 These results are not n contrast wth the general vew (Barro, 1990) accordng to whch state nterventon takes resources away from the workng of free-market forces, creates dstortons and upsets long term equlbrum. 29 See,.e., smlar arguments n Levne 1997; Levne-Loayza-Beck 2000; Beck-Levne-Loayza, 1999; Rajan- Zngales 1998; Pagano, 1993; Usa-Vannn, 1999; Fan-Gall-Gannn, In fact, f n OLS and IV regressons on K/Y the relatve amount of subsdsed credt s nserted, as expected, postve and sgnfcant values of the relatve coeffcent are obtaned. The fndngs are not presented here because the man nterest s n payng more attenton on the determnants of TFP and, n addton, t was decded to consder regressons wth an unform set of explanatory varables. Anyway, these results are avalable upon request. 14