Can Putin Survive?
The Lessons of the Soviet Collapse
IT IS difficult to gauge accurately the material losses which Italy suffered as a result of the ruthless German occupation, the vicissitudes of the fight put up by the partisan and patriot formations, the physical destruction caused by the yard-by-yard battle between Allied and German troops the length and breadth of the peninsula, and the systematic looting carried out by the Germans during their final retreat.
What figures we have are overwhelming. Two million and a half single-room units of housing were destroyed (half a million more than the total number built after 1931, or 7 percent of the total existing just prior to the war). Railroad transportation facilities were reduced by 38 percent, an especially serious matter for Italy with her long north-to-south lines of communication and the economic differences between the agricultural south and the industrial north. Nine-tenths of the merchant marine is gone; 30 percent of the livestock is gone; the damage to agriculture comes to 312 billion liras at the current valuation. Stocks of raw materials were exhausted when liberation came. The bank-note issue, which in 1938 was 22,496 billion liras, has risen to about 300 billions, plus nearly 100 billions in Allied military currency. Meanwhile, the national income, which amounted to 116 billion liras in 1938, dropped to less than 70 billion liras (figured at their 1938 value) in 1945.
Figures, however, do not give a sufficient idea of the complexity of the problems facing the Government and people of Italy. War brought to the surface tensions which for decades had lain deep in the national consciousness. The problem of the relationship between north and south, for instance, could not fail to become more acute during the long interval after the initial Allied landings when the two regions were cut off from one another. One economic consequence of this separation was the disintegration of the price system. Two quite different price structures came into being above and below the dividing line, accompanied by inflation in varying degrees. Prices were not integrated even within the zones, because the transportation crisis so isolated provinces, regions and towns that each tended to become a law unto itself. The price of foodstuffs varied enormously from one locality to another: flour cost 10 or 20 times as much in one town as in another 50 miles away.
This situation, of course, stimulated the growth of the black market. There was a general breakdown of government controls; and in the German-occupied zone breaking of the law was often a proof of patriotism. Of course many lawless acts inspired by selfishness were passed off as patriotic. In the general confusion the borderline between the legal and the illegal became increasingly vague and there was produced a general frame of mind inclined to insubordination and resentful of everything that smacked of rules and regulations. The work of reconstruction called for individual discipline and civic conscience, and this breakdown of morals greatly impeded it.
In terms of industrial assets, Italy came out of the war in fairly good shape, but her economy was disrupted and paralyzed and she urgently needed food and materials. The first tasks were to get transportation moving, to lay in raw materials and to avoid monetary chaos. The first objective of the Italian Government was to shore up the country until economic recovery could get underway; the second was to lay the groundwork of recovery. Major problems of the first category were food, unemployment and finances.
The food shortage was especially grave. In 1945 the production of grain in Italy was 50 percent less than normal, oil 25 percent less and sugar 90 percent less. A subsidiary difficulty in connection with the lessened production of foodstuffs was getting the farmers to bring their produce to the government pools instead of hoarding it. The government is still making a great effort to get the grain into these pools, but the black market cannot be wiped out until the general situation improves, until there are more consumers' goods on the market, and until monetary stabilization makes it possible to set and maintain fair purchase prices over a period of months. The serious shortage of food cannot be overcome without imports; indeed, had it not been for the aid of UNRRA and the credits conceded by the FEA, the position of the Italian people would truly have been tragic. Even with these two sources of help, there is no possibility of raising the calory content of the average Italian food ration above 1,700 (the Emergency Economic Committee for Europe has reported that 2,000 calories a day are the essential minimum for an adult), and the present 1,700 calories are not guaranteed for the future, since the UNRRA program is slated to end in a few months. One cannot foresee how starvation is to be prevented after that.
Unemployment is a problem inextricably bound up with the question of general reconstruction; nevertheless it absolutely had to be met with improvised and temporary solutions. When northern Italy was completely liberated, manufacturing equipment and machinery were found in unexpectedly good condition, but reserves of raw materials were almost completely exhausted. Even though little could be produced, it was quite impossible for the democratic government, immediately after the liberation, to allow a mass dismissal of workers who had been on the job in industrial plants up till then. An agreement with both employer and employee groups by which wages were paid in part by the government kept tens of thousands of workers at their jobs. Yet employers could not continue indefinitely to pay wages without receiving any return. In January of this year a new agreement was reached, allowing gradual dismissals, the effect of which has not yet been felt to any degree. On the other hand, a large-scale public works program set in motion by the government has to some extent absorbed the surplus labor. But, of course, there are obvious limits to what the government can accomplish by deficit financing. In spite of all that has been done, the number of unemployed is calculated at about 2,000,000. The problem of unemployment has, in other words, been ameliorated, although not resolved, with palliative measures which cannot be protracted indefinitely. Only a revival of industrial activity offers a solution.
In the field of finance, also, the government has sought to gain time while preparing well-laid plans for eventual recovery. Under such disturbed economic conditions, with administrative machinery badly mangled and a deficit of 300 billion liras, one of the treasury's immediate objectives was to stem the flow of paper currency. This objective was attained by means of a special loan, by borrowing from the banks and from sales of government bonds. Naturally these measures cannot be considered remedies for financial difficulties.
There was no use even thinking of monetary stabilization as long as general economic conditions were so chaotic and the government budget was so abnormal. Nothing could be done save halt the printing of paper money and wait until the arrival of goods from abroad and a general improvement in public finances should bring a more normal scale of prices and thus furnish a basis for stabilization.
At the time of the Allied landings, exchange was set at the rate of 100 liras to the dollar and 400 to the pound sterling. This rate was arbitrary, and it would be hard to prove that even at this time it reflected purchasing power parities among the currencies involved. In any case it marked the beginning of the general rise in prices in Italy. The usual vicious spiral followed. Prices skyrocketed and were soon so high in proportion to prices elsewhere that Italian exports could not possibly compete in foreign markets. Hence in January of this year the Government substantially modified the rate of exchange, setting the lira at 225 to the dollar and 900 to the pound sterling, though even this devaluation was not sufficient to bring Italian prices in line with those prevailing internationally. Recent Italian regulations therefore permit exporters to sell on the free market -- and hence, at rates higher than the official ones -- 50 percent of the foreign currency proceeds of their exports, while the other half must be sold to the central bank at the official rate. Ultimate buyers of foreign currency however must use it within 90 days for the purchase of essential imports specified in an official list. It must be added that Italian currency quotations on the free market have in recent months exhibited a considerable degree of strength and resiliency.
The Government wisely directed its first reconstruction efforts to the restoration of hydroelectric plants and transportation facilities, particularly railroads, two branches of industry which are essential to a revival of economic activity. In the hydroelectric industry, fortunately, it was possible to prevent too great a loss of production. The joint production of a number of power plants, accounting for 89 percent of the total national production, was 3.244 billion in the first three months of 1946. This compares fairly well with the production for 12-month periods in previous years, which was 13.143 billion kilowatt-hours in 1938, 17.734 billion in 1941, 11.795 billion in 1944, 11.289 billion in 1945. We must note that the lack of coal has naturally created a demand for electric power where solid and liquid combustibles were formerly in use.
The reconstruction of the railroads has made notable progress. By the end of January of this year single and double-track lines, whose mileage had fallen from 16,582 kilometers in March 1943 to 11,659 kilometers in July 1945, had risen to 14,210 kilometers. There has also been an increase in the number of available locomotives, which had fallen from 4,971 in March 1943 to 2,825 in July 1945. In January of this year 3,081 locomotives were in service. But the most striking figures are those relating to train-mileage, which had fallen from 14,030,443 kilometers in February 1943 to 3,585,305 in June 1945; by December the total had risen to 5,266,710.
Some progress has been made even in the reconditioning of the merchant marine, which the war had almost annihilated. From May 1945 to February 1946, 124,797 tons of shipping were made available by new launchings and repairs.
The progress made in the field of transportation has considerably changed the general aspect of conditions in Italy. Increased facilities for travel, freight handling and circulation of information have integrated business activities. As a result, there has been a general leveling up of prices (exclusive of shipping costs) and a renewal of production based on available raw materials. From a psychological point of view nothing has done more to improve morale and to mitigate the feeling of abnormality that followed the war than this restoration of communications.
In the field of production, as in that of transportation, the period since the liberation is characterized by the rehabilitation of plants which required only minor repairs in order to function efficiently. Because of the sudden ending of the conflict in the north, and the immediate reconstruction which was undertaken in this important industrial region, productive capacity is almost up to par -- perhaps 90 percent of what it was before the war. But actual production is still at a very low level: in 1945 the production of artificial textile fibers, for example, which was 145,500 tons in 1939, fell to 3,612 tons in 1945. In general, however, thanks to raw materials and coal supplied by UNRRA, production is beginning to revive fairly rapidly. But in this field, as in foodstuffs, things will take an abrupt turn for the worse when UNRRA aid comes to an end. Unless other financial support is found, we must expect that at the end of 1946 production will fall to 30 percent of what it was before the war.
Agricultural production is correspondingly low. The wheat output in 1945 (when drought added to the ravages of war) fell 38 percent below the average for 1940-1943 and 34.1 percent below what it was in 1944. The production of beans fell 68 percent and 51.1 percent in comparison to the same two periods; and that of potatoes 49.8 percent and 35.4 percent. The 1946 harvest promises to yield 60,000,000 quintals (6,600,000 tons) of wheat as compared to the average for 1936-39 of 70,000,000 quintals.
The basic problems facing Italy -- financial rehabilitation and production -- remain, then, unsolved. There are two salient features to the financial problem: the budget and stabilization of the lira. Public expenditure is presently met by means of short-term borrowing. This is vastly better than the printing of paper money, but there are dangers in such a course which must sooner or later be eliminated by the funding of this vast floating debt. The debt comes to about 630 billion liras out of a total public debt of 970 billion. These figures are enormous, but they must be considered in relation to the lowered value of the lira. It would be rash to prophesy when and how the general government deficit can be eliminated. Effective action in this direction depends on the tax-paying ability of the country as a whole, and this in turn depends on the general revival of economic life. If recovery is fast, government finances can be put in order without too much delay. The technical monetary situation is fraught with uncertainty. It is not only difficult to say how the budget will be balanced and at what level prices will be stabilized, but under current conditions in the Italian market it is hardly proper to speak of price levels at all. The shortage of commodities is so great a factor that it upset all calculations. In some cases mere notice of a limited UNRRA shipment has sent prices crashing. Any estimate of the levels of price stabilization can only be guesswork.
After the recent monetary distress, the price structure itself is most disorganized. In spite of the tacit agreement among all political parties, an increase in salaries and wages has been unavoidable. Although the raises have not been sufficient to compensate their beneficiaries for increased living costs, they have been more than enough to upset a delicate financial balance. The cost of living is perhaps 20 times what it used to be, while salaries and wages are only five and ten times greater. Yet, even so, these raises have too greatly increased production costs, particularly since management was obliged to pay a greater number of workers than it actually needed, in the manner noted above. Obviously, the problems of food, unemployment and finance cannot be solved until production is really under way. And the peculiar nature of Italian economy, plus the special handicaps under which it is presently laboring, make the problem of production primarily a task of fitting Italy into the framework of international trade again.
In order to understand this, it is necessary to remember that Italy's whole economic existence depends on foreign trade. Except for sulphur and mercury, Italy has no raw materials -- no coal, iron, tin, nickel, oil, and (using the term "raw material" in the widest sense) no grain. Of the total imports of the year 1938, raw materials accounted for 47.5 percent. This means that essential imports simply cannot be limited. A large portion of products which Italy exports are made from raw materials which Italy does not possess; and these materials are equally necessary for the manufacture of goods for domestic use. Even the present impairment of agricultural production is due less to war damage than to the lack of imported fertilizers. The breakdown of foreign trade was in itself sufficient to paralyze Italy's economic life.
Any revival of production, then, depends on imports, above all the import of coal, which is the oxygen in the lungs of Italian economy. And imports, in turn, depend on the extension of foreign credit. Indeed, foreign credit -- in particular, dollar credits -- are necessary not only to get production going but to make possible real reconstruction which will, among other things, allow Italy to resume the payment of interest on loans. Without foreign credits Italy cannot make the adjustments entailed by the loss of former markets and the necessity of finding new ones. (Germany alone, during the last ten years, took from 30 to 60 percent of Italian exports.) Whether the problem of Italian economic revival is examined from the point of view of immediate or long-term needs, it is plain that dollar credits and other credit facilities are the primary necessity.
Clearly, Italy is not moved by an aggressive design on foreign markets, but by the need to increase the imports indispensable to her national economy. Even during the ill-starred Fascist policy of autarchy, Italy's exports fell considerably short of her imports and the balance of payments was settled out of the proceeds of emigrant remittances, the tourist industry and the merchant marine. Present conditions the world over will continue to keep the revenue from these three sources very low during the next few years. Moreover, reconstruction needs will call for an increase in imports, to probably 1.2 billion dollars per year, as compared to $800,000,000 in 1938. It is easy, therefore, to see that exports are a life-and-death matter for Italy.
Three factors are in Italy's favor in this economic task: available manpower, technical ability and a spirit of enterprise. But these will be of no avail without a fourth element, which does not depend on Italians alone -- a reasonable system of world trade. Much can be done in Italy to develop handicrafts and manufacturing of a kind that cannot attain the proportions of mass production but that calls for taste and ability. But an increase in the volume of exports of this type depends in large measure on the degree of postwar prosperity in various European and non-European countries. There is much to be done, too, to step up the export of traditional Italian foods and wines. In order to export enough to balance imports, however, Italy must increase the export of basic industrial products, especially those involving comparatively large labor costs. Under normal conditions, when a fair share of raw materials is obtainable, Italian industry can accomplish much along this line, especially if the raw materials can be purchased where they cost least. If the agency that regulates international trade can give Italian manufacturers a reasonable assurance that tariff barriers will not block their way, Italian industry will be able to organize sufficiently large-scale production to meet competitive selling prices and Italy can become an important center of manufacturing and finishing. Italy has it within her power to make a notable contribution of this kind to the community of nations.
This, then, is the course that economic reconstruction in Italy should follow, aided by some form of international coöperation. Such an industrial revival, bringing with it an equilibrium in balance of payments and giving employment to a large amount of manpower (Italy's 5,000,000 industrial workers form 29 percent of her total labor population), would be the best and perhaps the only guarantee against the return of a drive for economic self-sufficiency. Needless to say, no such solution is possible unless the major exporting Powers, chief among them the United States (which has taken the lead in problems of world trade and inescapably bears the heaviest responsibilities), are willing to accept an adequate amount of imports. The surprising vitality and capacity for work which the Italian people have demonstrated after their recent catastrophe are not in themselves enough to ensure success in the task of rebuilding the Italian economy. Italy's problem is bound up with the international economic problem.