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DE RUEHNP #0053/01 1131037
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R 231037Z APR 09
FM AMCONSUL NAPLES
TO RUEHC/SECSTATE WASHDC 6382
INFO RUCPDOC/USDOC WASHDC 0019
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHMIL/AMCONSUL MILAN 0156
RUEHFL/AMCONSUL FLORENCE 0130
RUEHNP/AMCONSUL NAPLES 1133

UNCLAS SECTION 01 OF 04 NAPLES 000053 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN KCRM KCOR IT
SUBJECT: CAN ITALY'S ETERNAL "SOUTHERN QUESTION" BE SOLVED? 
 
REF: A. A) 08 NAPLES 37,  B)  08 NAPLES 73,  C)  08 NAPLES 79,  D) 08 NAPLES 97, 
     ¶B. E) ROME 395 
 
NAPLES 00000053  001.2 OF 004 
 
 
Sensitive but unclassified -- handle accordingly. 
 
 
 
¶1.  (SBU) Summary:  The economy of southern Italy has been in a 
sad state for over a decade, with almost zero growth and chronic 
unemployment.  The worldwide economic crisis does not bode well 
for a region where 22.5 percent of the population lives below 
the poverty line.  Only one-half of one percent of all foreign 
direct investment in Italy is in the South, which hosts 37 
percent of the country's population.  The crisis resulted in a 
drop of almost 20 percent in exports from southern Italy in the 
last quarter of 2008, and observers have warned that Mafia loan 
sharking is on the rise as a response to the credit crunch. 
Enormous central and municipal government debt make it difficult 
for policy makers to address the gap between the South and the 
wealthier Center-North.  The outlook for narrowing the divide is 
not favorable in the short term, and only possible in the 
long-term if Italy finds the political will to tackle -- with 
the proper resources -- organized crime, corruption, 
wastefulness, inadequate infrastructure, and cultural attitudes 
that foster clannish disdain for government and rule of law. 
There has been a positive response to Mission programs, such as 
the Partnership for Growth, public outreach, the promotion of 
private equity and business angels, and the Department of 
Commerce's Partnership for Entrepreneurial Growth.  End summary. 
 
 
 
¶2.  (U) Even before Italy's unification, an economic divide 
existed between the country's more industrialized North and the 
more rural South.  Some experts (and many southerners) believe 
the disparity became more pronounced after unification, citing 
the Savoy royalty's pursuit of industrialization and 
modernization at the alleged expense of the former Kingdom of 
the Two Sicilies.  Whatever the historical reasons, the gap has 
not narrowed, even following the formation of the European 
Community/Union.  Italy's poorest regions are all in the South, 
where per capita income and net wealth average about fifty to 
sixty percent that of the North. 
 
 
 
¶3.  (U) Statistics tell much of the story: 
 
 
 
-- Southern Italy hosts 37 percent of the country's population 
but only produces 24 percent of its GDP.  The trend has not been 
positive:  between 2001 and 2007, the GDP of the southern 
regions grew by only 5.5 percent, while that of the center-north 
regions grew by 8.8 percent.  Based on 2005 statistics, southern 
Italy's GDP per capita was only 70 percent that of the European 
Union as a whole, while the Center-North's was 124 percent that 
of the EU average.  Southern levels of consumption, production 
and income are all about three-fifths of national averages. 
 
 
 
-- Over a quarter of the population lives below the poverty line 
in two regions of the South:  Sicily, with 27.6 percent, and 
Basilicata with 26.3 percent, have the highest poverty rates in 
the country.  The overall poverty rate, according to the latest 
GOI statistics is 22.5 percent in the South, as compared to 5.8 
percent in the Center-North. 
 
 
 
-- According to official GOI statistics, Sicily, Campania and 
Calabria led the country in unemployment in 2008, with 
respective rates of 14, 13 and 12.6 percent.  The overall 
unemployment rate in the Mezzogiorno was 12 percent.  The 
unemployment rate for young people (18-35) has been estimated at 
over 20 percent. 
 
 
 
-- Large businesses are rare in the Mezzogiorno, where nearly 90 
percent of employees work at firms with fewer than nine 
employees, and fully 99 percent work at companies with fewer 
than 50 employees. 
 
 
 
-- Foreign direct investment (FDI) is also scarce.  In 2006, 
there were 7,094 foreign companies operating in Italy; only 318 
 
NAPLES 00000053  002.2 OF 004 
 
 
of those, or 4.5 percent of the total, were in southern Italy. 
In terms of monetary value, southern Italy accounts for only 
one-half of one percent of all FDI in the country.  This 
includes the country's second-most populous region, Campania, 
(which hosts a fairly large aerospace industry) with only 0.16 
percent of FDI in Italy; Sicily, the fourth-most populous region 
(and one with large natural gas deposits), with 0.02 percent; 
and Basilicata, which holds Europe's largest underground oil 
reserves, with 0.16 percent. 
 
 
 
-- Despite an abundance of universities and research centers, 
innovation is generally lacking; in this decade, southern Italy 
has produced on average 5.8 patents per million inhabitants, as 
compared to 60 patents per million inhabitants for Italy as a 
whole. 
 
 
 
-- Many of our interlocutors point to a brain drain as an 
important component of the vicious cycle of poverty.  As 
university graduates and professionals find it increasingly 
difficult to find employment, they leave the South for greener 
pastures in northern Italy or abroad, thus depriving their home 
regions of well-educated and highly skilled labor.  From 2003 to 
2007, Campania and Calabria led Italy in emigration, losing a 
yearly average of four persons per thousand inhabitants. 
 
 
 
¶4.  (U) Statistics cannot, of course, tell the whole story.  For 
instance, the true unemployment rate in the South is difficult 
to gauge because many people work in the underground economy or 
are obliged to take a series of temporary jobs as employers try 
to avoid paying employee benefits required by Italian labor 
laws.  It is clear that there are high levels of 
underemployment; countless people would like to work full-time 
but are able to find only part-time jobs.  Numerous 
interlocutors have also pointed to a widespread bias against 
women in the workplace that effectively locks the majority of 
them out of productive employment. 
 
 
 
¶5.  (U) Nor do official statistics reflect the immensity of 
illegal economic activity in the South.  The spokesman of the 
anti-Mafia NGO "AmmazzateciTutti" told us the illegal economy in 
Calabria is eight times larger than the legal one.  According to 
the research institute EURISPES, organized crime accounts for 
about nine percent of Italy's GDP; a business association report 
estimated that the various Mafias have some 20,000 employees. 
The 'Ndrangheta crime syndicate is undoubtedly the country's 
largest single enterprise, with an estimated 36 billion euros in 
revenue in 2007.  Another think tank estimates that organized 
crime represents a loss of 2.5 percent in the South's economic 
growth.  Prices for most goods and services in southern Italy 
are anywhere between two and five percent higher than what they 
would be in the absence of organized crime.  Unlike legal 
enterprises, organized crime does not generate sustainable 
growth or much trickle-down wealth, and does not, of course, pay 
taxes.  In a statement that could apply equally to Campania and 
Sicily, Nicola Gratteri, a prominent Calabria-based anti-Mafia 
prosecutor, recently wrote, "The 'Ndrangheta clans get richer 
and richer while Calabria remains stuck at the bottom of the 
income and employment indicators, demonstrating that the Mafias 
do not produce wealth, but condemn the territory where they 
operate to under-development and degradation." 
 
 
 
¶6.  (U) It is also wrong to view the South as homogeneous. 
Molise, the most prosperous region in our consular district, has 
a surprisingly diverse economy for a small region, and is hardly 
touched by organized crime; Apulia has the most industry in the 
Mezzogiorno; and Basilicata, as noted above, has substantial oil 
reserves.  However, income distribution in Apulia is not 
geographically equitable; the province of Taranto (an important 
port and home to a major iron foundry and oil refinery) is 
considerably wealthier than the rest of the region.  Basilicata 
has virtually no industry outside of the Val D'Agri oil fields 
and a FIAT factory. 
 
 
 
 
 
Why the Gap Is So Hard to Close 
 
NAPLES 00000053  003.2 OF 004 
 
 
 
----------------------------------------- 
 
 
 
¶7.  (U) The pervasiveness of organized crime in Campania, 
Calabria and Sicily is the most obvious reason for the 
historical and current backwardness of the economy (see ref A 
for a detailed treatment of organized crime's overall effect on 
the southern economy).  The crime syndicates force businesses to 
raise their prices in order to pay extortion; they engender 
corruption; they inhibit small enterprises from growing; and 
they create conditions that discourage investors.  Although 
organized crime is undoubtedly the main factor in the South's 
underdevelopment, other reasons such as bad government and 
cultural factors have played a role.  During the 1950s, the 
GOI's regional policy ("Cassa per il Mezzogiorno") was set up to 
help raise the living standards in the South.  The Cassa aimed 
to do this in two ways:  by land reforms creating 120,000 new 
small farms, and through the "Growth Pole Strategy" whereby 60 
percent of all government investment would go to the South, thus 
boosting the southern economy by attracting new capital, 
stimulating local firms, and providing employment.  As a result 
the South became increasingly subsidized and dependent, 
incapable of generating growth itself, and much of the funds 
wound up in the hands of organized crime and corrupt 
politicians.  The policy also led to disastrous ideas such as 
the construction of a major steel mill in the Naples beachfront 
neighborhood of Bagnoli; today, eighteen years after its 
closure, the site's hulking remains stand as an almost 
irremovable eyesore atop prime real estate.   Some scholars 
(notably American sociologist Edward C. Banfield, who wrote "The 
Moral Basis of a Backward Society, a Study of a Remote Southern 
Village") attribute the Mezzogiorno's economic misery in part to 
its population's amoral familism: like other southern European 
regions, it suffers from the inability to conceive the modern 
concept of common good beyond direct tribal-like family 
interests (see also ref B). 
 
 
 
Current Trends Not Positive 
 
---------------------------------- 
 
 
 
¶8.  (U) In a January 2009 report on the state of the economy in 
the South, the Italian Confederation of Industrialists 
(Confindustria) stated that the Mezzogiorno "remains on the 
margins of the oscillations of the business cycle, precisely 
because it is poorly integrated into the global economy." 
Indeed, conditions have barely changed in the South; even during 
Italy's boom years, growth in the South remained sluggish. 
However, it would be wrong to assume from this that southern 
Italy has not been affected by the global financial crisis. 
Exports are down significantly:  the GOI's Statistics Institute 
(ISTAT) reported a drop of almost 20 percent in exports in the 
South in the fourth quarter of 2008 as compared to the same 
period in 2007, in contrast to a seven percent reduction for 
Italy as a whole.  Campania's exports fell 14 percent, Sicily's 
by 24 percent, and Basilicata's by 43.5 percent.  Two large FIAT 
automotive plants with thousands of employees, one near Naples 
and one in Melfi, Basilicata, were temporarily shut down for 
several weeks in the autumn and winter of 2008 (the Melfi plant 
is now back in full operation, while the Naples facility remains 
closed indefinitely).  And some parts of the South that rely 
heavily on tourism for income, such as Naples and Sicily, have 
seen huge drops in the numbers of visitors (ref D).  In any 
case, the aforementioned Confindustria report asserted that, 
"The potential for tourism in the South remains broadly 
unrealized."  Only about fourteen percent of all foreign 
visitors to Italy venture into the South.  Judicial authorities 
and organized crime observers have noted that the credit crisis 
has allowed mob loan sharking to rise throughout the country. 
 
 
 
Addressing the Southern Question 
 
------------------------------------------ 
 
 
 
¶9.  (U) The global financial crisis, coupled with the GOI's 
onerous 1.708 trillion euro debt, make it virtually impossible 
for the government to address the southern problem now. 
Economists expect Italy's economy to shrink by 3.7 percent this 
 
NAPLES 00000053  004.2 OF 004 
 
 
year, a prediction that does not bode well for narrowing the 
North-South divide.  And the central government is not the only 
public entity with burdensome debt.  Southern municipalities are 
also running huge deficits; in 2006, Taranto was forced to 
declare bankruptcy; Naples has a debt of 800 million euros on 
its books; and Sicily's second city, Catania, is running a 
budget deficit of 360 million euros.  Smaller municipalities 
also have unsustainable debt burdens.  A decrease in tax 
revenues in 2009, due to the economic crisis, means even less 
money will be available for debt service and for public services. 
 
 
 
¶10.  (SBU) Nonetheless, throwing money at the problem has 
consistently failed to narrow the North-South gap.  For the 
period 2007-2013, the South has at its disposal 110 billion 
euros in EU structural funds for economic development projects. 
But the previous tranche of EU structural funds failed to 
produce any significant results.  Unless the money is 
administered in a well-planned, efficient, accountable and 
transparent manner, it will not be effective.  As noted in ref 
C, southern Italy is the only region on which the EU has 
showered development money but where economic growth continues 
to lag.  And based on conversations with numerous southern 
interlocutors, the EU does not seem to have vigorously enforced 
accountability for the funds.  Nonetheless, infrastructure and 
environmental clean-up projects would certainly make southern 
regions more attractive to investment. 
 
 
 
¶11.  (U) The U.S. Mission has worked to assist in some areas 
where the U.S. experience might be transferrable.  For instance, 
the Mission's Partnership for Growth initiative has successfully 
brought together researchers and financiers in an effort to spur 
innovation.  ConGen Naples has identified a number of 
entrepreneurs who are willing to form a business angels group 
for the South; we will accompany them to the United States in 
June so they can hear ideas from American business angel groups. 
 In April of this year, post organized a conference in Vibo 
Valentia, Calabria on promoting tourism in the South, that 
included suggestions for ways for the Mezzogiorno to brand 
itself and explanations of what American hotel chains' and 
tourists' expectectations when they decide where to go next. 
Post is also implementing, in collaboration with the Department 
of Commerce, the Partnership for Entrepreneurial Growth:  a core 
group of entrepreneurs and innovators is working with us to 
develop a transparent, efficient template to generate growth in 
the South.  Our public outreach has included numerous 
conferences on commercializing innovation, a conference on 
corporate responsibility and a series of speeches by the Consul 
General on shared values and rule of law.  We note that U.S. 
firms present in southern Italy are streamlining their 
manufacturing processes to reduce costs and become more 
competitive; it is hoped that this technique will set an example 
for the business associations to encourage their members to 
implement similar restructuring.  A Naples-based economist, 
Mario Sorrentino, tells us that the crisis will serve the 
Darwinian function of weeding out inefficient businesses that do 
not restructure, and that technology and alternative energy 
firms are likely to become more competitive. 
 
 
 
¶12.  (SBU) In the end, Italians must find their own way to 
resolve the southern question.  In our view, the political will 
to combat organized crime with the proper resources is still 
lacking, as is the equally important public will to embrace a 
civil society.  Vigorously attacking corruption and enforcing 
greater political accountability are also obvious components to 
an overall strategy, but so is instilling a greater sense of 
responsibility among businesses, civil servants and the public. 
Improving infrastructure and law enforcement is one thing; 
changing attitudes is a bigger and longer-term challenge.  Given 
the current economic crisis, any narrowing of the North-South 
gap is unlikely in the near future.  But unless Italy mounts a 
serious, principled, long-term strategy for the South, the 
divide will continue to split the country into two unequal 
portions, with the southern segment acting as a damper on growth 
for the country as a whole. 
TRUHN