Economics - Innovation - Inclusive Growth - Public Purpose
Dear PRIME MINISTER, this is what the state can do

Dear PRIME MINISTER, this is what the state can do

My (unedited) letter to Italian Prime Minister, Matteo Renzi, after the Italian press reported he had bought a copy of my book, Lo Stato Innovatore. A shorter version appeared on front page of La Repubblica on August 9, 2014.


Dear Matteo,


I was very happy to see that my book Lo Stato Innovatore was amongst the books you bought this week (Italian translation of The Entrepreneurial State). Given the increasingly difficult situation of the Italian economy, I thought that it might be useful for you to receive a quick summary of the main points, and the lessons for Italy. This might even give you some extra time to read a proper novel rather than an economics text during your much needed vacation.


Italy’s low growth is again in the headlines today. A key thesis in the book is that to get out of this mess it is essential to dig deep and realize that the problem is not, as is often assumed, the way in which the ‘bureaucratic’ public sector is somehow impeding the growth of what is otherwise a dynamic and innovative private sector. But that without a dynamic innovative public sector, we simply cannot get growth in the private sector.


First, the context: Italy’s problems stem not from having a public sector that is too large and spends too much, but one that is not active enough and indeed does not spend as much as its lead competitors in all the key areas that determine productivity growth (hence long run growth in GDP):  human capital, education, research, and technology. Italy’s deficit  before the crisis was lower than the EU average. But if productivity (and hence the growth rate of GDP) is at a near standstill for 20 years due to the lack of these investments, even a with a relatively low deficit, the debt/gdp ratio can continue to grow exponentially (because the denominator is static).


The book is about what to do.  So what do I mean by Stato Innovatore? I mean a state that is able and willing to think big, to attract the top minds into its different departments, to lead the way in laying the foundation in key new high risk areas that only later attract the private sector—when profits are in sight. And also to build a healthy symbiotic, not parasitic, relationship between the public and private sectors, so that the growth that ensues is not only ‘smart’ but also more inclusive. This is key for a country like Italy that today not only lacks serious innovation but is also an increasingly unequal society.


In the book I use the example of the iPhone to debunk the usual story told about Silicon Valley.  Every technology that makes that phone so ‘smart’ was funded by the public sector in the USA: Internet, GPS, touchscreen display, and even the new voice activated SIRI. The same is true for the biotechnology, nantotechnology, and even fracking (shale gas), all industries fruits of decades of public investments that preceded business investment. While Steve Jobs was of course a genius, he like other US entrepreneurs, the latest being Elon Musk (who received a $500 million guaranteed loan from Obama for his Tesla S car), have surfed massive waves laid down by the state. What is missing in many European countries today is not so much the surfers but the wave. And this wave is needed not only in high-tech areas, but also in areas that are starving for renewal and transformation, like textiles, automobiles, and agriculture.  And even the arts, that will become a real national treasure only when central to a growth strategy that uses the powers of the IT revolution for its diffusion and international dissemination.


While there is much emphasis on venture capital as being essential to innovation, the truth is that what is needed is not any kind of finance but patient long term committed finance. Venture capital, with its focus on an early ‘exit’ (via an IPO or buyout) is fine for gadgets but not for the radical transformative innovations—in all sectors— that require much more patience and commitment. Indeed, it is typical in the US for venture capital to finance firms only after they have received this type of patient finance from the government. And in the emerging economies today, it is not venture capital that is leading the way, but active innovation focused state investment banks like the China Development Bank (funder of two of its leading companies, Huawei in telecommunications and Yingli in renewables), or the Brazilian Development Bank. And of course the success of countries like Germany is not so much that they ‘tightened their belts’ (dogma) but that they have the kind of strategic patient finance in their state bank, the KfW, as well as publicly funded institutions like the Fraunhofer that create the science-industry links that Italy lacks.


And the public sector cannot act alone of course. It needs an equally committed private sector. Italy has not only one of the lowest ratios of public spending on R&D (relative to GDP) but also one of the lowest private spending.  This is not due to ‘regulation’ but lack of a healthy tension between state and business. A good example? Fiat today does not invest in hybrid engines in Italy, while in the USA it does. Why? Because , Obama made it a condition for his bailout of the auto industry. And this is another big myth to debunk: in ‘market led’ USA, industrial policy is alive and well. Indeed, even the famous Bell Labs, one of the most innovative private sector research laboratories, at the heart of the IT revolution, came out of a tense negotiation between the state and AT&T a monopoly at the time, with the state insisting that the private profits were reinvested back into the ‘real’ economy in areas that created public goods. Indeed, isn’t.


Even though I do not focus on state owned companies in the book, but the relationship between the public and private sectors, there are also lessons for the kind of strategies that led to the development of ENI and IRI, which were indeed key to Italy’s golden age when they were mission driven and attracted the highest level managers. When public but independent, and expert driven, they were a success. Once they became a simple appendage of party politics, they no longer worked—becoming the problem not the solution. Indeed, the irony is that by constantly bashing the state and pretending that the key to everything is privatisation, it will be extremely hard to attract the kind of expertise that such public institutions required in the past and require today. The US Department of Energy was recently run by a Nobel Prize winning physicist, Steve Chu. He set up ARPA-E to do for renewable energy what DARPA did for the Internet.  He is succeeding. Persons of his level were key for the Silicon Valley miracle.


These stories should make it clear that the point is not public vs. private but what kind of public and what kind of private a nation needs to achieve innovation led growth. And the answer is that Italy needs a more courageous visionary investment driven public sector, and a more committed private sector, and a relationship between the two that is symbiotic and not parasitic. I encourage you to change the political-economic conversation in Italy away from the usual lazy one that pretends that the problem lays only in reforms of the bureaucracy, labor markets and tax to one that asks both the public and the private sectors to increase their commitments to investment and innovation led growth. And while the monthly 80 euro bonus is surely needed for many desperate families, long run increases in incomes which will make a real difference to consumer demand and life-style, require such an industrial-innovation strategy that increases not only jobs but also the quality of jobs.


© Mariana Mazzucato


Tags: Apple, Entrepreneurial State, Innovation Policy, Italy, State Investment Banks