Italy: Selected Issues

This Selected Issues paper focuses on economic challenges and options for overcoming the demographic drag in Italy. Italy has large catch-up potential to help overcome the demographic drag on output, but fundamental changes are needed to shift from the current suboptimal equilibrium. On numerous metrics, Italy is among the worst EU performers in areas that directly bear on output, including female labor force participation, NEET youth, educational attainment, and digitalization. Increasing employment is essential, but not sufficient. While boosting female labor force participation and the effective retirement age would raise economic output, it would not achieve growth in the end unless accompanied by higher capital and total factor productivity. Going forward, Italy needs a sustained, pro-growth strategy to significantly boost productivity in order to counteract the effect of demographic decline. While there is scope to quickly narrow labor participation gaps, reforms are needed to address critical shortcomings in education, competition, public administration, and the judicial system. However, such transformational change likely entails long gestation periods. It is therefore imperative that these reforms be implemented promptly and decisively.