Italy's economy is 62.5 percent free, according to our 2008 assessment, which makes it the world's 64th freest economy. Its overall score is 0.2 percentage point lower than last year. Italy is ranked 29th out of 41 countries in the European region, and its overall score is not improving as quickly as it might because of deeper reforms implemented in neighboring countries.

Italy scores highly in business freedom, trade freedom, investment freedom, and labor freedom when compared to the world average. Starting a business takes about 13 days, which is far below the world average. The tariff rate is low, although an inefficient bureaucracy implements some non-tariff barriers that also deter foreign investment. As a member of the EU, Italy has a standardized monetary policy that yields relatively low inflation despite government distortion in the agricultural sector.

Property rights and freedom from corruption are relatively weak compared to other European states. Italy scores below the world average and is exceptionally weak in fiscal freedom and government size because of having to support an extensive welfare state. Tax revenues equal 40 percent of GDP, and government expenditures equal nearly half of GDP.

Background:
Italy has been a central force in European integration ever since the end of World War II. It also is a member of NATO and the G-8. Despite having one of the world's largest economies, Italy faces serious economic challenges, including a high tax burden, large pension liabilities, and labor market rigidities. However, the center-left government of Romano Prodi continues to face tough opposition to structural reform from labor unions. Despite strong international competition from emerging Asian economies, small and medium-sized enterprises continue to thrive in manufacturing and high design, particularly in the country's northern regions. Tourism and services are among the most important sectors.

Business Freedom - 76.8%

The overall freedom to start, operate, and close a business is relatively well protected by Italy's regulatory environment. The government has streamlined bureaucratic procedures. Starting a business takes an average of 13 days, compared to the world average of 43 days. Obtaining a business license requires less than the world average of 19 procedures and slightly more than the world average of 234 days. Closing a business is relatively easy.

Trade Freedom - 81%

Italy's trade policy is the same as those of other members of the European Union. The common EU weighted average tariff rate was 2 percent in 2005. Non-tariff barriers reflected in EU policy include multiple restrictions. Pharmaceutical and biotechnology regulations are restrictive, government procurement is non-transparent and prone to corruption, service market access barriers can exceed the EU norm, and enforcement of intellectual property is weak. An additional 15 percentage points is deducted from Italy's trade freedom score to account for non-tariff barriers.

Fiscal Freedom - 54.3%

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 40.4 percent.

Freedom from Government - 29.4%

Total government expenditures, including consumption and transfer payments, are very high. In the most recent year, government spending equaled 48.5 percent of GDP. Reducing the budget deficit and public debt (still equivalent to over 100 percent of GDP) is a priority, but progress has been sluggish.

Monetary Freedom - 80.6%

Italy is a member of the euro zone. Inflation is relatively low, averaging 2.2 percent between 2004 and 2006. Relatively stable prices explain most of the monetary freedom score. As a participant in the EU's Common Agricultural Policy, the government subsidizes agricultural production, distorting agricultural prices. It also can introduce price controls. Items subject to rate setting at the national level include drinking water, electricity, gas, highway tolls, prescription drugs reimbursed by the national health service, telecommunications, and domestic travel. An additional 10 percentage points is deducted from Italy's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom - 70%

Italy welcomes foreign investment, but the government can veto acquisitions involving foreign investors. Since the election of Romano Prodi in 2006, certain investments in large Italian companies have been blocked. Foreign investment is closely regulated in defense, aircraft manufacturing, petroleum exploration and development, domestic airlines, and shipping. The Sviluppo Italia agency is trying to attract investment with incentive packages. Bureaucracy, inadequate infrastructure, legislative complexity, and a rigid labor market are major disincentives. Foreigners may not buy land along the border. There are no barriers to repatriation of profits, transfers, payments, or current transfers.

Financial Freedom - 60%

Credit is allocated on market terms, and foreign participation is welcome. Only three major financial institutions (Cassa Depositi e Prestiti, Bancoposta, and the sports bank Instiuto per il Credito Sportivo) remain state-controlled. There were 784 banks at the end of 2005, down from over 1,150 in the early 1990s. The six largest banks account for over 54.6 percent of assets, though the market is less concentrated than elsewhere in Europe. Regulations and prohibitions can be burdensome, and approval is needed to gain control of a financial institution. Legislation to improve the regulatory environment was passed in late 2005. Italy has the EU's fourth-largest insurance market. The government is taking steps to reform underdeveloped capital markets.

Property Rights - 50%

Property rights and contracts are secure, but judicial procedures are is extremely slow, and many companies choose to settle out of court. Many judges are politically oriented. Enforcement of intellectual property rights falls below the standards of other developed Western European countries.

Freedom from Corruption - 49%

Corruption is perceived as present. Italy ranks 45th out of 163 countries in Transparency International's Corruption Perceptions Index for 2006. Corruption is more common than in other European countries. Italians regard investment-related sectors as corrupt.

Labor Freedom - 73.5%

Relatively flexible employment regulations could be further improved to enhance employment opportunities and productivity growth. The non-salary cost of employing a worker is very high, but dismissing a redundant employee can be costless. Rules on the number of work hours are relatively rigid.

 

Italy

  • Rank: 64
  • Regional Rank: 29 of 41
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Chart 1: Italy


Chart 2: Italy


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Quick Facts
  • Population:
        
    58.6 million
  • GDP (PPP):
        
    $1.7 trillion
    0.1% growth in 2005
    0.4% 5-yr. comp. ann. growth
    $28,529 per capita
  • Unemployment:
        
    7.9%
  • Inflation (CPI):
        
    2.2%
  • FDI (net inflow):
        
    –$19.7 billion
  • Official Development Assistance:
        
    None
  • External Debt:
        
    $2.0 trillion
  • Exports:
        
    $462.7 billion
    Primarily engineering products, textiles and clothing, production machinery, motor vehicles, transport equipment
  • Imports:
        
    $463.3 billion
    Primarily engineering products, chemicals, transport equipment, energy products, minerals and nonferrous metals, textiles and clothing, food, beverages, tobacco