Abstract: Getting Unsustainable: Debts, Investments and Losses of Italian State-Owned Enterprises from the Golden Age to Privatizations, 1951-1991

Fabio Lavista and Giandomenico Piluso

Abstract

Italian SOEs performed quite well during the golden age, enhancing the growth potential of manufacturing sectors, fostering the increase of firms' size and heightening productivity levels. In the 1950s and 1960s investments were financed largely through long-term debts, while capitalization plunged periodically, following investment cycles in capital-intensive industries. Nevertheless, constant and robust improvements in productivity allowed sustainable high levels of indebtedness. During the 1970s stagflation altered the overall framework profoundly: macroeconomic shocks hit the cost structure of big businesses, improper political pressures forced SOEs to bail out private poorly performing firms and to increase employment levels, as interest rates increased. Stagflation acted as a powerful stimulus to revise monetary policy models, and the central banking paradigm changed dramatically in the second half of the decade, increasing the cost of money: huge debts became a "financial trap" for low-performing firms. Considering the history of Italian SOEs in a large framework, the paper shows that, under specific circumstances, debts could be assumed as a funding channel when self-financing declined. Focusing on the specific institutional arrangements and macroeconomic policies adopted during the 1970s, it also explains how an adjustment process may fail and makes clear why a successful model turned into a failure.