The economic decline of Italy since the mid 1990s is a critical case in contemporary
political economy because its model of capitalism was deeply reformed at the time
when its decline commenced. This paper argues that economic stagnation cannot be
attributed to special interest politics, nor to the lack of market-friendly reforms in a
globalized economic context, as previous literature argues. Instead, Italian economic
decline is a consequence of institutional change which on the one hand has destroyed
previous institutional complementarities, and on the other hand has led to an
incoherent, or “hybrid,” setting. In the institutional spheres of corporate governance
and labor, economic reforms established new institutions alternatively apt to support
both strategic coordination and market coordination, resulting in institutional
incoherence.
In addition, building on the case of Italy and based on patent data relative to 19 OECD
countries, this paper unpacks the link between institutional coherence and economic
performance. It articulates a novel hypothesis according to which higher specialization
in innovation patterns, derived from institutional coherence, also leads to higher overall
innovation volumes. Hence, reforms that undermine a prevalent mode of coordination
across the economy also undermine innovation capacity, leading to economic decline