2009 Index of Economic Freedom

Quick Facts

Population:

• 58.9 million

GDP (PPP):

• $1.7 trillion
• 1.8% growth
• 0.9% 5-year compound annual growth
• $29053 per capita

Unemployment:

• 6.0%

Inflation (CPI):

• 2.0%

FDI Inflow:

• $39.2 billion

Italy's economic freedom score is 61.4, making its economy the 76th freest in the 2009 Index. Its overall score is 1.2 points lower than last year because slight increases in four areas were offset by lower scores in government size and labor freedom. Italy is ranked 32nd out of 43 countries in the Europe region, and its score is slightly above the world average.

Italy enjoys a high degree of business freedom, trade freedom, and investment freedom. Bureaucratic procedures have been streamlined. The tariff rate is low, although bureaucratic red tape deters foreign investment. As a member of the European Union, Italy has a standardized monetary policy that yields relatively low inflation despite government distortions in the agricultural sector.

Property rights and freedom from corruption are relatively weak. Fiscal freedom and government size remain weak because of an extensive welfare state. Government expenditures equal roughly half of GDP. Reduction of the chronic budget deficit and public debt has been sluggish, and Italy's national debt still hovers around 105 percent of GDP. There is considerable informal economic activity.

Background Back to the top

Despite more than 60 changes of government since 1946, the Christian Democratic Party has generally dominated politics. The advent of multi-party coalition government has led to more stability. Prime Minister Silvio Berlusconi was elected for a third time in 2008. Italy has been a central force in European integration and was a founding member of the European Union. It also is a member of NATO and the G-8. Despite having one of the world’s largest economies, disparities between the prosperous entrepreneurial North and the poorer and more government-dependent South persist. Small and medium-size enterprises continue to thrive in manufacturing and high design, but the informal sector accounts for an estimated 27 percent of economic activity—about double the OECD average. Tourism and services are among the most important sec-tors.

Business Freedom 78.7 Back to the top

The overall freedom to conduct a business is relatively well protected under Italy's regulatory environment. Starting a business takes an average of 10 days, compared to the world average of 38 days. Obtaining a business license requires less than the world average of 18 procedures and slightly more than the world average of 225 days. Closing a business is relatively easy.

Trade Freedom 80.8 Back to the top

Italy's trade policy is the same as that of other members of the European Union. The common EU weighted average tariff rate was 2.1 percent in 2005. Non-tariff barriers reflected in EU policy include restrictive pharmaceutical and biotechnology regulations, government procurement that is non-transparent and prone to corruption, and services market access barriers that can exceed the EU norm. Enforcement of intellectual property is weak. Fifteen points were deducted from Italy's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 55.8 Back to the top

Italy has a high income tax and a moderate corporate tax. The top income tax rate is 43 percent. The top corporate tax rate has been reduced to 27.5 percent from 33 percent as laid out in the amended 2008 Finance Bill. Corporations are also subject to a regional tax, reduced to 3.9 percent from 4.25 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 42.6 percent.

Government Size 24.7 Back to the top

Total government expenditures, including consumption and transfer payments, are very high. In the most recent year, government spending equaled 50.1 percent of GDP. The state still controls some strategic enterprises, mainly in transportation and energy. Attempts to privatize the national airline, Alitalia, have failed.

Monetary Freedom80.8 Back to the top

Italy is a member of the euro zone. Inflation is relatively low, averaging 2.1 percent between 2005 and 2007. As a participant in the EU's Common Agricultural Policy, the government subsidizes agricultural production, distorting agricultural prices. Items subject to price controls at the national level include drinking water, electricity, gas, highway tolls, prescription drugs reimbursed by the national health service, telecommunications, and domestic travel. Ten points were deducted from Italy's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom70.0 Back to the top

Italy welcomes foreign investment, but the government can veto acquisitions involving foreign investors. National treatment is provided to foreign investors established in Italy or in another EU member state, except in a few instances that include defense, aircraft manufacturing, petroleum exploration and development, domestic airlines, and shipping. Italy's inefficient judicial system is frequently cited as a deterrent to foreign investors. Bureaucracy, inadequate infrastructure, regulatory non-transparency, the possibility of government intervention, and hostile labor unions can inhibit investment. There are no barriers to repatriation of profits, transfers, payments, or current transfers. Foreigners may not buy land along the border.

Financial Freedom60.0 Back to the top

The Italian financial sector is relatively well developed, providing a wide range of financial services. Credit is allocated on market terms, and foreign participation is welcome. The state no longer holds any considerable shares in the banking sector, and only three major financial institutions remain state-controlled. The six largest banks account for over 50 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. The government has taken steps to reform underdeveloped capital markets.

Property Rights50.0 Back to the top

Property rights and contracts are secure, but judicial procedures are 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 Corruption52.0 Back to the top

Corruption is perceived as present. Italy ranks 41st out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Corruption is more common than in other European countries. Italians regard investment-related sectors as corrupt.

Labor Freedom61.3 Back to the top

Italy's relatively rigid labor regulations impede employment 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 inflexible.