Mafia Welfare

Commentary, Equalization, Peter Holle

The transfer system Canadians call “equalization” – now indelibly etched into our constitution as a permanent provincial welfare trap – is not unique in the world. Australia, Sweden, Belgium, even Great Britain all have forms of it, programs that claim to serve the public interest by taking money from wealthy parts of the country and sending it to poorer regions. Perhaps nowhere else in the world, however, are the problems inherent in such schemes more clearly demonstrated than in Italy.

French economist Frédéric Bastiat once offered a coy definition of government: “The state is the great fiction by which everybody seeks to live at the expense of everybody else.” The same could be said of equalization programs, the Italian version of which has its own colourful detail. Many of the transfers, for instance, are captured in southern Italy by criminal organizations, a problem not readily apparent in other countries. But the program shares one important characteristic with its counterparts elsewhere: in terms of helping “have not” regions get back on their feet, it is an abject failure.

A new Frontier Centre backgrounder, a joint project with the Italian think tank Istituto Bruno Leoni in Turin titled North and South: The Tragedy of Equalization in Italy, contains a detailed discussion of that country’s grand attempt at equity. The country started on the equalization track about the same time as Canada did, in the 1950s, when it created the “Fund for the South” (or Cassa del Mezzogiorno). The subsidies were intended to promote industrialization, which had lagged in southern Italy in part because of previous interventions with tariffs that protected northern industrialists.

Although the Fund itself wound up in 1985 after years of constant expansion, its activities persist under other names. In almost all segments of the public sector, including research and infrastructure, Italian laws mandate special treatment for Southern regions. Despite political resistance from the people who pay the boodle – the Northern League, a strong political party owes its existence to such protests – the people who receive it are just as intransigent about continuing the program, so much so that substantive change is considered impossible.

Equalization in Italy is executed through four main programs, each with its own sad record of dysfunction:

  • Income and taxes – Only four states in Italy pay in more to the central government than they receive in benefits, and they are all in the north. Taxpayers there also face higher total rates of taxation, 50% in Lombardy, for instance, versus 40% in Puglia. Despite that, Puglia remains as poor as ever.
  • Infrastructure – A tilted playing field in public investments for goods like roads are the chief means by which money is siphoned off into criminal organizations. Areas receiving favouritism also experience high levels of rent-seeking, with energies focused on qualifying for part of the bounty rather than production, a diffusion of parasitic attitudes and a weakening of honest players who can’t compete with their subsidized counterparts.
  • Public jobs programs – Employment in the three major components of social policy – education, health and social security – is heavily biased in favour of the South. Loose definitions of what constitutes a handicap are used to pension off the ble-bodied, and in Calabria, thousands of forest guards patrol a relatively small region purportedly to prevent forest fires, but really to reduce unemployment. The net effect? Fewer people seek productive employment in the wealth-creating private sector.
  • Equalized wage rates – Introduced in 1968, this program enforces equal wage rates in all areas of the country, an intervention with bizarre effects. Because differences in marginal productivity cannot be reflected in real wage rates, market signals that might cause more investment to move to poor regions are erased. So they stay poor.
  • Despite the wide disparity between how much the Italian central government collects and spends in rich and poor regions, economic development in the latter is stalled. Nor has the equalization of public infrastructure succeeded in jump-starting economic activity in the South. Instead, it’s created a spoils system that enhances the power of the political class, distorts markets by dampening the entrepreneurial spirit and spreads parasitic and criminal behaviour.
  • Attempts to equalize employment have encouraged Southern Italians to seek public sinecures or dependency and strengthened the North’s hegemony over private-sector growth. Wage interventionism prevents poorer regions from exploiting their comparative cost advantages and instead discourages the very private investment that might enhance economic growth.

    As with other countries, the chronic Italian problem of wide disparities in economic performance between regions will never be solved by equalization programs, the backgrounder concludes: “A better solution is available through a rededication to a decentralized government characterized by neutrality and open, unimpeded markets for investment and employment.”

    In Canadian places like Manitoba and the Maritimes, equalization has resulted in provincial regimes with more public employees, that tax and spend more on public programs than their benefactors in wealthier jurisdictions. The outcomes may not be as entertaining as in Italy, but they’re just as disappointing. Instead of spreading the wealth, equalization ends up spreading stagnation.

    Peter Holle is president of the Frontier Centre for Public Policy in Winnipeg. Carlo Lottieri and Carlo Stagnaro are Policy Directors at the Istituto Bruno Leoni, an independent think tank based in Turin, Italy.