Michael Burke: The latest ESRI Quarterly deals very briefly with the issue of economic stimulus.
‘We would be very cautious about a domestic stimulus in Ireland, however funded, as history and experience shows that such a stimulus would have little effect on the domestic economy, but would lead to a worsening of the balance of payments’ (ESRI Summer, QEC, p.41).
Of course, if it were really the case that an Irish stimulus would lead to a worsening of the balance of payments than it would be counter-productive by increasing the overseas indebtedness of the economy, to add to all its other debts.
It should be noted that the ESRI makes no distinction between types of stimulus. Promoting the purchase of goods not at all made in Ireland would be counter-productive, as that could only be met by increased imports. This is what happened with the cut in VRT. But promotion of investment in or purchase of goods wholly or mainly provided in Ireland would not have that effect.
The ESRI also engages in hyperbole when it argues that the experience of the 1950, 1970s and 1980s is that any stimulus measures means a large proportion of stimulus would go to imports. The series of National Development Plans have precisely been a domestic investment stimulus which lifted both the growth rate and the long-term productivity of the economy.
Where Would Stimulus Go?
The assertion that any stimulus would lead to a worsening of the balance of payments is not supported by an analysis of the Input-Output Tables for the Irish economy.
In effect there are distinct categories of sectors in the economy where that would not be the case. The first is comprised of those sectors where the import content of inputs is negligible. This means that any increase in the output of these sectors would require no increase in imports. The second category of sectors includes those where the export output is much higher than the import content. This means that firms based in Ireland are importing lower value goods or services and re-exporting them having added significant value to them. The third category is comprised of those sectors where, even though the import content of inputs are high, the domestic multiplier effect is so large as to produce a significant boost to the domestic economy.
The first category is where import content of inputs is low. As the CSO says (p.10), of 53 sector groups there are 7 which have an import multiplier of less than 0.15, that is for every €1 extra of domestically produced output in these sectors, less than 15 cents is required indirectly in imports. These include wholesale trade, real estate services and education, motor repair, retail trade and repair of household goods. Health services have in import multiplier of just 0.16. Investment in these areas would overwhelmingly boost the domestic economy.
The second category is comprised of those sectors where the export component of output is much greater than import inputs. They are naturally dominated by the sectors in which the overseas multinationals predominate, printed materials, chemical products, office machinery and financial intermediation. But that is not exclusively the case, as the manufacture of food and beverages and the wholesale sectors both export more than they import. Providing services or ancillary inputs to those MNC-dominated sectors, or investment in the two large indigenous exporting sectors would be a positive for the balance of payments, as well as boosting output and employment. Altogether there are 27, of 53, product categories where higher value added means they export more than they import.
In the third category are those sectors where the boost to the economy from increased investment (the ‘multiplier effects’) are so great as to override concerns regarding import content. There are also 7 out of 53 sector groups where the output multiplier is 1.66 or greater (pp. 38-40), implying that the State would have a direct positive return on investment in these areas. These include agriculture, food and beverage manufacturing, water collection and distribution, construction, hotels and restaurants and water transport. The state could either directly invest in these (eg, water distribution and collection, construction/refurbishment of schools) or facilitate investment (eg, through promotion of tourism to benefit hotels and restaurants) and provide a positive return to the Exchequer. Indeed, in the case of tourism promotion, it would make sense for the overwhelming bulk of the investment to be made overseas.
The truisms regarding Ireland’s status as a small, open economy should not obscure the potential for State-led investment in a wide range of product sectors which have little import content, or whose domestic impact is so great as to render the objection that there will e increased import demand meaningless.
In fact, we could go further and argue that the ESRI’s entire framework is wrong. If the aim of policy were to prevent imports then there are numerous examples internationally and in Ireland’s own history where everything from import-substitution to autarky where that has been tried and failed.
27 of the 53 product sectors in the Irish economy export more than they import. Investing in those sectors, either directly or indirectly would boost imports, but exports would grow by a greater amount. Even those sectors which currently export nothing according to the CSO, like education, could become significant exporters by attracting overseas students. There is a vast and growing demand for high value-added education primarily in English and, as coverage of Euro2012 shows, everyone likes the Irish. But that too would require state-led investment and the input of high-value imports, both material and human.
7 comments:
You're tlting at windmills, Michael. This is not the ESRI speaking. This is what it says in the press release:
"The ESRI is an independent research institute. The Institute does not take policy positions and the views expressed in ESRI publications are those of the authors. All ESRI reports are peer-reviewed prior to publication."
It is even more specific at the beginning of the QEC:
"The Commentary, Research Notes, Special Articles and Research Bulletins contained within have been accepted for publication by the Institute, which is not
responsible for either the content or the views expressed."
These are just the view of a few individuals. And it just so happens that they coincide with the Government's views. The peer-review thingy means that a few more people agree with these views. The ESRI itself is just a publishing house.
I think you've got it the wrong way around. The ESRI produces what the Government wants to hear. It's not that the ESRI produces something, the Government ponders it and, accepting its provenance and wisdom, implements it. That's the impression all parties involved seek to convey, but nothing could be further from the reality.
You should have a chat with Mr. Gilmore and his special economic adviser. It's always more effective to seek out the organ-grinder.
Ireland's extremely high trade as a proportion of GDP suggests that many imports are being re-exported. If it were the case that gov spending will necessarily lead to high leakage, then, logically, it must be the case that reductions in public spending will not be so damaging as we will only stop buying German cars, and so on. Without suggesting the effect is equal and opposite, or that the effects are linear or indeed easy to isolate, it might be interesting to compare whether reductions in state spending are less damaging in Ireland compared to less open countries.
As I said in the blog below, domestic demand has fallen by a staggering 26% and is still falling.Domestic demand is falling because people are not spending and investment has been cut dramatically. Exports, which had performed well, are insufficient to lift the economy. Thus some kind of stimulus is required. The source of funding has been analysed and suggested by a number of bodies. Thus it appears that the ESRI, or the authors, are not yet impressed by the facts. This stubborness to recognise reality can be called many things!
@Paul Sweeney,
You refer to the case about the financing of new investment you advanced in the blog post 'below'. In comments on that post I invited you to examine the existing sources of investment financing and the allocation of that investment by activity and location (including the commitments to future investments) in the dominant semi-state. (A similar high-level and very simple assessment could be performed on BGE and on other semi-states. Indeed, a similar assessment could be performed on the proposed Irish Water semi-state, if only the Government were prepared to release the financial analysis conducted by its consultants and paid for from the public purse).
It is vital that there is a clear understanding of how investment is currently financed and allocated before any sensible recommendations may be made about how it might be financed and allocated in the future.
However, I can understand the reluctance to examine data and evidence that would undermine comfortable rhetoric, idsology and prejudice.
Mr Hunt: I assume you do not approve of idsology?
Apologies for the typos.
I'm pretty sure though that this is unlikely to be the reason that there has been no response to the points I've raised. It's simply the fact that nobody here has the courage to reveal the current status of the financing of semi-state investment and the allocation of this investment. It would be too frightening to reveal how it is done. Much better and safer to ignore this and spout mountains of rhetoric about how it should be done.
But that's what seems to characterise this blog; rhetoric and ideology largely unmoored from evidence and analysis.
Go on. prove me wrong. Have a look at how semi-state investment is actually financed and allocated and then you can tell us all how it should be done.
Given the, perhaps, understandable reluctance to respond to the points I've raised in this and the previous thread, would it be too much to ask blog posters here who advance the case for an investment stimulus to begin with an assessment of (1) the current financing of public and semi-state investment, (2) how and where this investment is allocated and (3) the currently available medium term projection of these investment levels, their financing and allocations?
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