The long-term challenge of the NRP is through reforms

Introduction

What are the mechanisms for transmitting the reforms included in the NRP to the real economy? What indicators could potentially be useful to monitor its effects? What are the implications for Italy?

After describing the key features of the reforms included in the Italian National Recovery and Resilience Plan (NRP), the document discusses the mechanisms of transmission of reform-induced improvements, in the institutional environment and regulatory framework, to the real economy. A number of synthetic indicators are also presented that could potentially be useful in monitoring the contribution of the reforms to institutional quality. The main implications for the Italian economy should the objectives envisaged by the PNRR be achieved are also covered.

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Structural reforms affect the economy through different transmission mechanisms, especially in the long term. A more favourable economic climate, fostered by more efficient economic policies, institutions and infrastructure, increases overall total factor productivity. Potential GDP, the maximum level of GDP that the economy can achieve, then grows.
In particular, improvements in the institutional quality generated by the reforms leads to a reduction in the bureaucratic burden and production costs borne by businesses, thus freeing up new resources for investment.
More ambitious investment plans encourage a higher level of investment, stimulating an increase in aggregate demand. This then leads to an increase in actual as well as potential GDP.
Finally, reforms also help to limit the inflation rate. In competitive markets, reducing production costs leads to a reduction in price, and therefore to a lower inflation rate, the greater the difference between potential and actual GDP (output gap).
If the mechanisms work and the objectives envisaged by the reforms in the PNRR are achieved in relation to the various indicators of the competitiveness of the economic system, Italy would improve its position compared to the other main European countries.
The results of this brief show that reforms could make it possible to reverse the trend of decline in institutional quality observed over the last twenty years, bringing Italy back to the levels of the early 2000s.
The effects of the reforms would lead to an increase in the long term growth path, consistently and sustainably reinforcing the effect of public investment linked to the NRP.
Italy's GDP could return to 2007 levels, prior to the global financial crisis, as early as 2025, reaching a consistently higher level over the years than in a scenario without reforms.

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