The Economies Of Italy And Austria - Research Paper Example

?Running Head: THE ECONOMIES OF ITALY AND AUSTRIA Business, Research Paper of Introduction Italy is a peninsula-shaped country that is bordered to the west and east by the Tyrrhenian Sea and the Adriatic respectively. To the north, Italy is bordered by Switzerland, Austria, France, and Slovenia. Italy is a rather homogenous country both linguistically and religiously. However, it is quite diverse politically, culturally, and economically (McDonald, 1998). Italy’s population density ranks fifth-highest in Europe, with the largest minority group being the German-speaking people of the Bolzano Province and the Slovenes around Trieste. The country has a total land area of 301,230 square kilometers, of which land covers about 294,020 square kilometers. The climate of the country is predominantly Mediterranean, characterized by alpines in far north while it’s hot and dry in the south (Signorini, 2001). The terrain of the country is typically rugged and mountainous although there are some plains and coastal lowlands. Among the resources with which Italy is endowed are marble, sulfur, mercury, potash, fish, and coal. Although Italy has some crude oil reserves, the levels have been reported to be dwindling. Agriculturally, Italy uses about 32% of its land for arable farming, 10% for permanent crops, and 17% for meadows and pastures. Forest and woodland cover in the country accounts for about 22% of the land with the remaining portion being placed under other uses (Signorini, 2001). Italy also has several environmental issues including air pollution in the form of sulfur dioxide emission, water and land pollution by agricultural and industrial effluents, acid rain and poor waste treatment among other pollutants (McDonald, 1998). Economically, Italy is a rather diverse country, having a per capita yield almost equaling that of France or Great Britain. Austria, one of Italy’s neighbors, is one of the countries with which Italy’s economy may be compared. With its capital at Vienna, Austria covers an area of approximately 83,857 square kilometers and has a population of 1.71 million and an annual population growth rate of 0.4%, according to 2011 estimates. The other major and populous cities of Austria are Klagenfurt, Graz, Salzburg, Linz, and Innsbruck. Just like Italy. Austria’s terrain is composed majorly of alpines in the northern highlands and lowlands to the east. Interestingly, the most widely spoken language in Austria is German, used by about 90% of the population. This paper, thus, explores the economy of Italy and Austria and how the two countries are managing the economic crisis. Italy’s Economy The diversity in the Italian economy is first evidence in the difference between the economy of the south and that of the northern parts of the country. For instance, in the northern parts of Italy, the economy is quite capitalistic with the private companies representing the total productivity of the region (The Economist (US), 1999). On the contrary, in the south, the economy is less developed than in the north, which is more industrialized. The south’s economy is therefore more agriculturally oriented than in the north. In addition, the southern parts of Italy also experience unemployment rates as high as 20%. Nevertheless, the entire economy of Italy has recorded considerable growth in recent times as indicated by the improved imports of maximum raw materials and about 75% of its energy needs (Signorini, 2001). In this regard, Italy’s economic growth has supported employment, labor flexibility, and the restructuring of the hitherto costly pension systems. There are certain prominent features of the economy of Italy that are worth mentioning. First among these features is the Gross Domestic Product (GDP), which stood at $1.826 trillion in 2011, making Italy’s economy the sixth richest in the world. The prosperity and economic development of Italy could also be attributed to the fast industrial pace in Italy. In addition, the per capita income of the country is currently placed at 18th in the world. Italy also receives international aid for both its private and public sectors from development partners such as the United States, further helping build and stabilize its economy (Signorini, 2001). In other words, Italy’s strategies to work with its development and trade partners and merge with other western economic superpowers and markets have enabled it to gain considerable ground in surviving the economic crisis (Jurgen, 2012). As result of the international economic and market mergers, Italy has built a firm export market, which has greatly positively influenced its economy. Among the countries with which Italy has developed close trade ties are members of the European Union with whom Italy conducted about 56.1% of its total trade in 2009. Among its trade partners in the European Union are Germany (12.7%), France (11.6%), Spain (5.7%), and the United Kingdom (5.1%). There is also a strong domestic demand and market for Italy’s locally produced and imported goods, thus supporting economic growth, more so the small and medium enterprise sub-sector (Mignone, 2008). In fact, the increased economic activities in Italy in recent times have particularly worked in favor of the small and medium enterprises. Because Italy’s economy is currently developing rather fast, the country is almost self-sufficient in coping up with the global race for monetary and economic stability and development (Mignone, 2008). Drawbacks to Italy’s Economy Since World War II, Italy’s economy has gradually transformed itself from an agricultural one to an industrial economy, which is ranked among the highest performing economies in the world (Gianni, 1996). In fact, Italy belongs to the Group of Eight (G-8) industrialized nations of the world besides being a member of the European Union and the Organization for Economic Cooperation and Development (OECD) partly because of its economic strength. Italy’s economic performance has been attained regardless of the fact that it is a net importer of food, since not much of its land can support agriculture. Worse still, Italy lacks the huge deposits of iron, coal, or oil that other industrial powerhouses enjoy (Jurgen, 2012). Fortunately, the country has mineral resources in the name of natural gas reserves in the Po Valley and offshore in the Adriatic. As a consequence of the low and dwindling natural resources, Italy imports almost 80% of all the raw materials for its manufacturing industry and energy needs (Nolfo, 1992). Italy as an economic powerhouse, thus, obtains its strength from its processing and manufacturing sectors. These processing and manufacturing firms are mostly family-owned and range from small to medium enterprises majorly producing chemicals, pharmaceuticals, precision machinery, electric goods, motor vehicles, and fashion and clothing (Gianni, 1996). There are, however, certain drawbacks to the stability and growth of Italy’s economy. For instance, Italy had budget deficits and public debts of -4.6% and 119% of GDP respectively in 2010 (The IMF, 2010). These deficits are unfortunate since by joining the European Monetary Union (EMU) in 1998 and signing the Stability and Growth Pact, Italy had committed itself to keeping its budget deficit below the 3% ceiling. Economic difficulties have, however, implied that Italy cannot reduce its debt levels, with increasingly worsening economic situations derailing the achievement of this objective in 2009 and 2010 during which the deficit grew above the 3% ceiling, hitting 5.4% and 4.5% respectively (The IMF, 2010). Consequently, new targets to bring down the deficit were set at to 3.9% in 2011 and below 3% in 2012. Due to the impacts of the economic crisis, Italy had an economic growth of 0.8% in 2008. As world economy slowed, Italy’s GDP contracted and decreased by 1.3% in 2008 and 5.2% in 2009, more so due to the impacts of the economic crisis and its effects on exports and domestic demands (The IMF, 2010). Fortunately, 2010 saw Italy’s GDP recover part of the lost ground, growing by 1.3%. A major drawback to the economic development of Italy is its rather large underground economy, which represents some 27% of its GDP. This huge amount of production is never subjected to taxation, implying it is a source of lost revenue to both local and central governments (The IMF, 2010). The table below summarizes some of the estimate features of Italy’s economy in recent years (The CIA World Fact Book, 2012- http://www.theodora.com/wfbcurrent/italy/italy_economy.html). 2009 2010 2011 GDP (purchasing power parity) $1.751 trillion $1.774 trillion $1.826 trillion GDP - real growth rate -5.2% 1.3% 0.6% GDP - per capita (PPP) $30,100 $30,500 $30,100 Unemployment rate 7.8% 8.4% 8.2% Public debt 115.9% of GDP 119.1% of GDP 120.1% of GDP Inflation rate (consumer prices) 0.8% 1.6% 2.3% Market value of publicly traded shares $317.3 billion $318.1 billion $318.1 billion Commercial bank prime lending rate 4.757% 4.032% 4.5% Central bank discount rate 1.75% 1.75% 1.75% Italy’s balance of trade is the other aspect of its economy worth mentioning. For example, in December 2011 Italy had a trade surplus of 1447 Million EUR between its major exports, which are food, motor vehicles, clothing, chemicals, precision machinery, and electric goods and its imports of transport equipment, energy products, minerals, textiles, engineering products, chemicals and clothing; automobiles, electronics, food, beverages and tobacco. Austria’s Economy Austria could best be described as a well-developed market economy in which the living standard of the people is rather high. Austria’s close economic relations and ties to Germany and other EU members could be cited as a strong positive influence on its rather stable market economy. Central to the economy of Austria is its large service industry and an industrial sector, which although is comparably small, is supported by a rather developed agricultural sector (Rathkolb, 2010). Having experienced a period of considerable economic growth characterized by strong and growing demand for its exports and employment growth, Austria’s economy was somehow battered by the economic crisis of 2008, which led to a recession. Luckily, the recession was brief and did little damage to the economic stability and growth that Austria had achieved. For example, the recession caused Austria’s GDP to contract by 3.9% in 2009 but it soon recovered and recorded a positive growth of about 2% in 2010. The strength of the Austrian economy is the fact that its unemployment has not shot up as the government implements a policy of subsidizing reduced work hour schemes. This strategy has enabled companies to retain their employees even during hard economic times. The Strengths of Austria’s Economy Economic stabilization policies, income tax reforms, and stimulus spending are thus among the strategies that pushed Austria’s budget deficit to 3.5% of GDP in 2009 and 4.7% in 2010 compared to the 1.3% in 2008. Coupled with these strategies was the international financial crisis, which affected the operations of Austria’s banks, which are spread all over central, eastern, and southeastern Europe, resulting in huge losses. Although the Austrian government has since provided supports such as nationalization to prevent these banks from liquidation, additional capital is still required for these banks’ medium- and long-term survival (Rathkolb, 2010). Austria’s economy is also boosted by the natural resources found within its borders including natural gas, timber, tungsten, iron ore, crude oil, magnetite, lignite, and cement. Agriculturally, Austria is endowed with forest products, livestock, sugar beets, potatoes, grains, and wine products. Its major industries are therefore dealing in steel, iron, chemicals, capital equipment, and consumer goods (Rathkolb, 2010). Austria thus exports industrial goods such as timber, paper, chemical products, foodstuffs, electro-technical machinery, iron, and steel products, which brought about $145.5 billion in 2010 (Rathkolb, 2010). Austria’s imports, which stood at $151.8 billion in 2010, include fuels, raw materials, foodstuffs, iron and steel, metal goods, machinery, vehicles, chemicals. The main partners with which Austria engage in export and import trade are European Union members, the United States, China, and Switzerland. Despite the positive global economic outlook for Austria, a lot still need to be done in relation to the establishment of knowledge-based and IT-based economy, economic restructuring, labor flexibility, and labor participation. The latter two aspects of economy would be quite useful in tackling the growing unemployment and the effects of the aging population. The table below shows a summary of Austria’s economy’s statistics for 2009, 2010, and 2011(The CIA World Fact Book, 2012- http://www.theodora.com/wfbcurrent/austria/austria_economy.html). 2009 2010 2011 GDP (purchasing power parity) $325.6 billion $332 billion $351.4 billion GDP - real growth rate -3.9% 2% 3.3% GDP - per capita (PPP) $39,700 $40,400 $41,700 Unemployment rate 7.2% 6.9% 5.4% Public debt 69.8% of GDP 72.3% of GDP 72.1% of GDP Inflation rate 0.4% 1.7% 3.3% Commercial bank prime lending rate 3.101% 2.564% 3% Market value of publicly traded shares $107.2 billion $118 billion $118 billion Imports $138.6 billion $151.8 billion $183.1 billion The Nature of Austria’s Economy The economy of Austria also varies from one of its regions to another. For instance, cattle rearing, forestry, and dairy farming are concentrated at the Alpine provinces. This small scale agricultural economy, which is concentrated at the Alpines, is almost self-sufficient as far as the country’s food production is concerned and employs about 3% of the population (Rathkolb, 2010). Tillage agriculture is also found predominantly in both Upper and Lower Austria and in Burgenland. Among the crops majorly produced in these regions are potatoes, barley, rye sugar beets, fruit, and oats. A rather diverse sector of the Austrian economy, manufacturing accounts for about 30% of the gross national product. Most of Austria’s manufacturing firms are found in the major towns of Graz, Leoben, Innsbruck, Linz, Steyr, and Salzburg, generally referred to as the Vienna Basin. Of greatest importance in the manufacturing sector of Austria are food and mineral processing firms, which are necessary in the processing of the agricultural produce and minerals such as copper, zinc, magnesium, graphite, and iron found in Austria (Rathkolb, 2010). Another sector of Austrian economy that has recorded some level of growth in recent times is the service sector, which encompasses tourism, insurance, and banking. In fact, these services have become more embedded to the needs of the bulk of Austria’s work force. Strengths of Austria’s Economy The economic freedom of Austria, which currently stands at a score of 70.3, has also been a source of its strength. As a matter of fact, Austria is current at position 28 among the freest economies of the world. However, its 1.6 score in the 2012 Index is a poorer performance compared to last year’s in which it was ranked 14th amongst 43 countries in the Europe region (The World Bank, 2008). Arguably, bad scores for government spending and business freedom could be the reasons for the drop in economic freedom score. Not to be derailed by the recent economic crisis, Austria has strived to remain economically dynamic and stable, a feat achieved due to the protection of the principles of economic freedom and the emphasis laid on institutional strength and rule of law. The state of affairs has, however, not been well due to expansionary public spending policies and lack of government commitment, and the resultant budgetary pressures. However, the transparent and corruption-free business environment has played quite a pivotal role in countering the influence of excessive spending by the government (The World Bank, 2008). The characteristic transparency, efficiency, and competitiveness of Austria’s economy thus created an environment that supports the thriving entrepreneurial private sector. Conclusion Italy and Austria are two European countries with quite stable and strong economies. These two neighbors have economies that are diverse in the sense that they are built on processing, agriculture, manufacturing, trade, and service industries, which support and complement one another. Despite the economic crisis and its impacts on world economies, Austria’s economy continues to do well mainly because of the freedom, transparency, efficiency, and non-tolerance to corruption, practices that have countered the negative influences of the government’s expansionary spending. Italy’s economic stability, on the other hand, could be attributed to its fast industrial pace and improved import/export trade. References Gianni, N. C. (1996). Economic growth in Europe since 1945. Cambridge University Press. Jurgen, B. G. (2012). Handbook of the history of economic thought: insights on the founders of modern economics, volume 11. The European Heritage in Economics and the Social Sciences. McDonald, J.S. (1998). Some Socio-Economic Emigration Differentials in Rural Italy, 1902-1913. 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Knowledge economy forum 2008: innovative small and medium enterprises are key to Europe and central Asian growth. The World Bank. Read More