Slí Eile: From a Financial Times editorial (The Luck of the Irish) of 10 August on the current state of the Irish economy:
‘The next few years will be harsh, and the burden of the adjustment will be borne by those least able to cope. Dealing with the fiscal crisis will mean it will be difficult to protect the country’s most vulnerable people. But, as the wreckage of the boom is washed away, older, safer sources of growth will be uncovered.’
Let’s parse this:
‘The next few years will be harsh’
You will search hard to find an industrialised country in the West that has seen a fall of around 15% in national output in the space of two years (2009-2010). Any recovery in global conditions will, most likely, lead to ‘jobless growth’, last seen in this country as we pulled out of the 1980s recession and before lift-off in employment levels in 1993.
‘.. and the burden of the adjustment will be borne by those least able to cope…’
Exactly. That is the whole point of the Dublin Consensus.
‘… Dealing with the fiscal crisis will mean it will be difficult to protect the country’s most vulnerable people.’
In other words, per the Dublin Consensus, There-Is-No-Alternative line, either because the political progressive wing is too weak in electoral terms (or too divided in terms of what to do), or because a rapidly shrinking cake means some adjustment in real income of social welfare recipients. This is the nub of the McCarthy et al argument – incomes have fallen all over the place – it is only inevitable (and fair?) that the incomes of those at the bottom of the income distribution should take a hit.
‘…. But, as the wreckage of the boom is washed away, older, safer sources of growth will be uncovered’
Interesting point which challenges us to think about how recovery can be generated. What will be these ‘older’ and ‘safer’ sources of growth – more foreign direct investment in pharmaceuticals, information technology? Back to horticulture and wind power? Or, green agriculture and food? New manufacturing technologies? New types of services? A reformed and re-equipped public service ready to deliver a better service?
We need to start thinking this through. For all its limitations and vagueness, the ‘Smart’ Report (remember?) of December 2008 contains some useful ideas particularly in regard to new sustainable technologies.
In previous contributions to this debate, Paul Sweeney, Jim Stewart and Sean O Riain have pointed to the importance of high value added, innovative enterprises as the mainstay of industrial policy. Key to this is an innovation-rich environment, with universities, research institutes and state agencies all providing support, skills and knowledge. We will still need foreign direct investment but we need to give much more attention to growing indigenous enterprises trading on home and world markets.
The State has a vital role to play in providing a more rigorous regulatory environment, as well as a complete overhaul of banking and finance. The Property-Financial-Political Complex has been dealt a blow and is on the floor. Let’s make sure that it doesn’t resume business ever again. Somehow, I fear that the lessons of history are often missed for lack of proper analysis and understanding.
In reference to the McCarthy Report, in the Irish Times on 10 August, Chris Horn of Iona Technologies (Our economic future lies with innovative exporters) said:
However, while the report tells us where we can cut back, it has not told us where we could focus our investment for recovery. In all the hubris and grappling for position after the publication of the McCarthy report, I have been surprised by the absence of public discussion on just how we now expect to drive growth in our economy.
The nub of his argument (in contrast to the strategy of relying on the safe, old and big investors) is that we should be focused on creating a culture and environment of a very large number of innovative, export-led companies at the heart of our new economy.
I agree. I would argue that we need to defend the income of those in relative, and especially consistent, poverty through a Basic Income for all citizens and residents, while at the same time, using fiscal policy to redistribute income and wealth, while at the same time using a reformed state infrastructure to enable private and public firms to compete on the basis of new ideas, technologies and markets.
That's the business of any future Government committed to economic development and social justice.
Showing posts with label indigenous industry. Show all posts
Showing posts with label indigenous industry. Show all posts
Thursday, 13 August 2009
Tuesday, 23 June 2009
Irish Industrial Policy: Strategic Obsessions
David Jacobson: Since the end of the 1950s industrial policy has evolved around two main objectives, the encouragement of foreign direct investment and the development of high tech industries. Both of these objectives have become obsessive, to the detriment of the long term stability and advancement of the Irish economy. This is not to say that policies and programmes aimed at supporting these twin aims are inappropriate; however, concentrating too intensely on them, without adequately realising that there are substantial opportunity costs, may have harmed the long term prospects of the economy and may be partly why Ireland is now in such deep economic crisis.
Counter-factual analysis is fraught with dangers but it is reasonable to ask what the consequences would have been if even 20 percent of the total cost of encouraging foreign direct investment (FDI) had been spent, instead, on various ways of incentivising the development of indigenous firms. The usual answer to this kind of statement is that we tried – and failed – to encourage indigenous industrialisation during the 1930s, 1940s and 1950s. This answer is spurious for at least two reasons. First, there were some successes, and developments that laid the foundations for modern infrastructure. Second, the industrial policy of that period was extremely weak. There was no logic, for example, in supporting large numbers of car assemblers when the minimum efficient scale would have made it difficult for even one assembler to survive on the basis of domestic demand. Somehow, we’ve forgotten both the successes and the weaknesses of our 1930s-1950s version of Import Substituting Industrialisation and seem to believe that it is a waste of time, money and effort to encourage Irish firms. The star of Irish industrial policy has been the IDA; Enterprise Ireland does not have the same caché. Sectors dominated by indigenous firms are treated as second-class corporate citizens.
As the recently-appointed chair of the Print and Packaging Forum (http://printpackforum.wordpress.com/) I have been made sharply aware of the disadvantages under which this so-called low-tech, indigenous sector labours in the context of the current industrial policy regime.
The Forum (through its Director, Gerry Andrews) has been struggling to achieve parity for Irish firms with foreign suppliers in relation to VAT and procurement. In addition, excellent – cost neutral – ideas for training programmes to upgrade skills of sector workers on three-day weeks have been proposed. The printpackforum website provides evidence of the months and years of knocking on doors, of approaches to Ministers, of presentations to the Joint Oireachtas Committee on Enterprise, Trade and Employment that it takes before any changes in public policy are achieved. The changes requested are not irrational, protectionist retrogressing to the failed policies of the1930s; they are reasonable adjustments to reduce the discrimination against indigenous firms.
The demands of the Forum – representing some 17,000 workers – are met by delays, inflexibility, and inertia. What would happen if a multinational, considering establishing a subsidiary in Ireland to employ only 500 workers, made the same demands? It would be responded to by Government departments, the Revenue Commissioners, FÁS and the IDA, with alacrity, agility, flexibility and dynamism.
Given that the USA is going to make transfer pricing more difficult, given the ongoing pressures within the EU to harmonise corporate profit tax rates, and given increasing competition for mobile capital from Eastern Europe, Ireland’s attractiveness as a location for FDI is waning. We should level the playing field for indigenous firms now, before it’s too late.
Counter-factual analysis is fraught with dangers but it is reasonable to ask what the consequences would have been if even 20 percent of the total cost of encouraging foreign direct investment (FDI) had been spent, instead, on various ways of incentivising the development of indigenous firms. The usual answer to this kind of statement is that we tried – and failed – to encourage indigenous industrialisation during the 1930s, 1940s and 1950s. This answer is spurious for at least two reasons. First, there were some successes, and developments that laid the foundations for modern infrastructure. Second, the industrial policy of that period was extremely weak. There was no logic, for example, in supporting large numbers of car assemblers when the minimum efficient scale would have made it difficult for even one assembler to survive on the basis of domestic demand. Somehow, we’ve forgotten both the successes and the weaknesses of our 1930s-1950s version of Import Substituting Industrialisation and seem to believe that it is a waste of time, money and effort to encourage Irish firms. The star of Irish industrial policy has been the IDA; Enterprise Ireland does not have the same caché. Sectors dominated by indigenous firms are treated as second-class corporate citizens.
As the recently-appointed chair of the Print and Packaging Forum (http://printpackforum.wordpress.com/) I have been made sharply aware of the disadvantages under which this so-called low-tech, indigenous sector labours in the context of the current industrial policy regime.
The Forum (through its Director, Gerry Andrews) has been struggling to achieve parity for Irish firms with foreign suppliers in relation to VAT and procurement. In addition, excellent – cost neutral – ideas for training programmes to upgrade skills of sector workers on three-day weeks have been proposed. The printpackforum website provides evidence of the months and years of knocking on doors, of approaches to Ministers, of presentations to the Joint Oireachtas Committee on Enterprise, Trade and Employment that it takes before any changes in public policy are achieved. The changes requested are not irrational, protectionist retrogressing to the failed policies of the1930s; they are reasonable adjustments to reduce the discrimination against indigenous firms.
The demands of the Forum – representing some 17,000 workers – are met by delays, inflexibility, and inertia. What would happen if a multinational, considering establishing a subsidiary in Ireland to employ only 500 workers, made the same demands? It would be responded to by Government departments, the Revenue Commissioners, FÁS and the IDA, with alacrity, agility, flexibility and dynamism.
Given that the USA is going to make transfer pricing more difficult, given the ongoing pressures within the EU to harmonise corporate profit tax rates, and given increasing competition for mobile capital from Eastern Europe, Ireland’s attractiveness as a location for FDI is waning. We should level the playing field for indigenous firms now, before it’s too late.
Monday, 1 June 2009
An expanded comment: Paul Sweeney on Sean O Riain
Paul Sweeney: This is a thoughtful commentary on the banking crisis and what might transpire after it. At present as Sean O’Riain says, there is little serious debate on how we might, as a country, make the best out of this crisis, by radically addressing policy deficiencies especially around encouraging indigenous industry and services.
I was struck buy the third point made by Sean on state support for developing industry and services. Well, we can all say this till we are blue in the face and do things really change? For example, here is a similar comment in the final paragraph of the submission by TASC to the Industrial Policy Group, chaired by Mr O’Driscoll, way back in the heart of the boom – in October 2003:
The encouragement of FDI through low corporate profit tax rates has clearly been an important factor in Ireland’s recent economic success. However, it would be a mistake to continue to rely on this policy to the same extent in the future. Specific focus on high value added, innovative enterprises must be the mainstay of industrial policy. This includes both R&D and non-R&D innovation. How can we attract (from abroad) and encourage (from within) innovative firms? An innovation-rich environment, with universities, research institutes, state agencies all providing support, skills and knowledge, is essential. A sustained policy of investment in research is fundamental to this. In addition, quality of life issues, including housing, transport and culture, are essential to attract and keep the highly mobile qualified labour that will undertake the research and implement the innovations.
It is also worth quoting another paragraph from that same submission made a long 6 years ago! This focused on “Irish banks” DEFPA, which is now part of Hypo and collapsed gloriously.
“Among the downsides of the low tax policy is that, in order to conform to EU regulation, Ireland has had to apply this (low tax) policy across the board. This has made it impossible to adopt a strategically selective policy in relation to corporate tax rates. It has also reduced the revenue from indigenous firms’ tax payments. Moreover, the very success of the low tax policy in some instances, for example the IFSC, has engendered intense criticism from such significant European partners as Germany. This is not surprising, seeing as the single largest block of funds managed at the IFSC is from Germany. It cannot have escaped the attention of the German Finance ministry that the largest bank in Ireland (DEPFA bank) is in effect a German bank which, although its main operation is in Germany, has its ‘headquarters’ in the IFSC".
During TASC’s oral submission, made by Jim Stewart and myself, I pointed out the myriad of subsidies to property investors in tax breaks and warned of the likely (!) property bubble bursting. One of the members, who knew me, said that I had been saying that there was a property bubble for two years. I reiterated that there was a bubble and that it was state inflated with pro-cyclical tax cutting policies and subsidies.
On Sean’s fifth point on regulation reform, don’t hold your breath. The defenders of the status quo are already out in force against reform, in the Business pages of the Irish Times. My good colleague Pat McArdle wrote a stirring piece against rules based regulatory reform in the weekly Economics section, last Friday, arguing that all we need to do is implement existing regulation. He has a point, but would enforcement be adequate? He, like many in finance, are against enforceable “rules based” regulation favouring the supposed alternative of very light (so light it is often non-existent) principles based regulation. In a rules-based system, the state and regulators prescribe in some detail what companies must and must not do to meet their obligations to shareholders, clients and us suckers – the taxpayers, who bail ‘em out! In the principles-based systems, regulators worry less about details, and instead look at companies’ behavior according to broad principles. The U.K.’s Financial Services Authority has eleven such principles, which are often deliberately vague. For example “A firm must observe proper standards of market conduct.” We know where that got banking!
Pat is the economist with Ulster Bank and a member of the Financial Services Consultative Industry Panel. By pure coincidence, the Chairman of that august body, David Went, (formerly CEO of IL&P who built the former state Assurance company up with that takeover of Irish Permanent) was quoted in the business pages of the same Irish Times, the following day, as saying we must avoid “a one size fits all” approach of bank regulation. (I should say that I had a piece in the main pages of the Irish Times a few weeks earlier arguing for the radical reform of corporate governance and regulation). Mr Went again raised the issue of rules based or principles based regulation, while not apparently taking sides. But he was firmly against nationalisation of the banks as it would not be “good for the industry”!
But, in a 2005 submission to the Dept of Finance, the Panel said “The Industry Panel believes that enabling, principles-based primary legislation, combined with an appropriate process/structure operating under the aegis of the Department of Finance at the “newly constituted” secondary level, would be a more effective option”. This body is an advisor to the failed Financial Services Regulator, perhaps the costliest public sector failure ever in modern Irish history. It appears to be dominated by the same guys who captured the Regulator! In fact, the panel was described as "industry insiders" by Labour Finance spokesperson Joan Burton TD, who called for the panel to be scrapped as part of an overhaul of the system.
I was struck buy the third point made by Sean on state support for developing industry and services. Well, we can all say this till we are blue in the face and do things really change? For example, here is a similar comment in the final paragraph of the submission by TASC to the Industrial Policy Group, chaired by Mr O’Driscoll, way back in the heart of the boom – in October 2003:
The encouragement of FDI through low corporate profit tax rates has clearly been an important factor in Ireland’s recent economic success. However, it would be a mistake to continue to rely on this policy to the same extent in the future. Specific focus on high value added, innovative enterprises must be the mainstay of industrial policy. This includes both R&D and non-R&D innovation. How can we attract (from abroad) and encourage (from within) innovative firms? An innovation-rich environment, with universities, research institutes, state agencies all providing support, skills and knowledge, is essential. A sustained policy of investment in research is fundamental to this. In addition, quality of life issues, including housing, transport and culture, are essential to attract and keep the highly mobile qualified labour that will undertake the research and implement the innovations.
It is also worth quoting another paragraph from that same submission made a long 6 years ago! This focused on “Irish banks” DEFPA, which is now part of Hypo and collapsed gloriously.
“Among the downsides of the low tax policy is that, in order to conform to EU regulation, Ireland has had to apply this (low tax) policy across the board. This has made it impossible to adopt a strategically selective policy in relation to corporate tax rates. It has also reduced the revenue from indigenous firms’ tax payments. Moreover, the very success of the low tax policy in some instances, for example the IFSC, has engendered intense criticism from such significant European partners as Germany. This is not surprising, seeing as the single largest block of funds managed at the IFSC is from Germany. It cannot have escaped the attention of the German Finance ministry that the largest bank in Ireland (DEPFA bank) is in effect a German bank which, although its main operation is in Germany, has its ‘headquarters’ in the IFSC".
During TASC’s oral submission, made by Jim Stewart and myself, I pointed out the myriad of subsidies to property investors in tax breaks and warned of the likely (!) property bubble bursting. One of the members, who knew me, said that I had been saying that there was a property bubble for two years. I reiterated that there was a bubble and that it was state inflated with pro-cyclical tax cutting policies and subsidies.
On Sean’s fifth point on regulation reform, don’t hold your breath. The defenders of the status quo are already out in force against reform, in the Business pages of the Irish Times. My good colleague Pat McArdle wrote a stirring piece against rules based regulatory reform in the weekly Economics section, last Friday, arguing that all we need to do is implement existing regulation. He has a point, but would enforcement be adequate? He, like many in finance, are against enforceable “rules based” regulation favouring the supposed alternative of very light (so light it is often non-existent) principles based regulation. In a rules-based system, the state and regulators prescribe in some detail what companies must and must not do to meet their obligations to shareholders, clients and us suckers – the taxpayers, who bail ‘em out! In the principles-based systems, regulators worry less about details, and instead look at companies’ behavior according to broad principles. The U.K.’s Financial Services Authority has eleven such principles, which are often deliberately vague. For example “A firm must observe proper standards of market conduct.” We know where that got banking!
Pat is the economist with Ulster Bank and a member of the Financial Services Consultative Industry Panel. By pure coincidence, the Chairman of that august body, David Went, (formerly CEO of IL&P who built the former state Assurance company up with that takeover of Irish Permanent) was quoted in the business pages of the same Irish Times, the following day, as saying we must avoid “a one size fits all” approach of bank regulation. (I should say that I had a piece in the main pages of the Irish Times a few weeks earlier arguing for the radical reform of corporate governance and regulation). Mr Went again raised the issue of rules based or principles based regulation, while not apparently taking sides. But he was firmly against nationalisation of the banks as it would not be “good for the industry”!
But, in a 2005 submission to the Dept of Finance, the Panel said “The Industry Panel believes that enabling, principles-based primary legislation, combined with an appropriate process/structure operating under the aegis of the Department of Finance at the “newly constituted” secondary level, would be a more effective option”. This body is an advisor to the failed Financial Services Regulator, perhaps the costliest public sector failure ever in modern Irish history. It appears to be dominated by the same guys who captured the Regulator! In fact, the panel was described as "industry insiders" by Labour Finance spokesperson Joan Burton TD, who called for the panel to be scrapped as part of an overhaul of the system.
Wednesday, 1 April 2009
The road to recovery: different responses
There has been, recently, a plethora of reports on the economy in Ireland ranging from the Government publication 'Building Ireland's Smart Economy' (December 2008), to various analyses by research, social partnership and advocacy bodies, to policy responses by various political parties (e.g. Fine Gael and Sinn Féin). It is hoped, over coming the weeks, to review and compare these recent contributions from the standpoint of four pillars
Fairness and equity (do the proposals effectively address inequality and advance a redistribution of income and opportunities towards the less well-off)?
Public, social and community infrastructure (do the proposals provide an adequate basis for delivering vital social services)?
Sustainable economic growth and competitiveness (do the proposals represent a sensible strategy to position Ireland for the inevitable upswing - eventually)?
Public finances (do the proposals address the need to re-structure taxation and improve the effectiveness of public spending in meeting key economic and social goals)?
Beginning with 'Getting Ireland back to work - Time for Action' published by Sinn Féin in March 2009, I will be looking at other documents in the course of the coming weeks, attempting to identify:
Points of commonality among various 'progressive' platforms
Points of difference among them
Questions and issues that appear to be inadequately addressed across all such contributions
Options for taking particular issues or proposals further
'Getting Ireland back to work - Time for action' is one of the latest contributions arguing - among other things - for a domestic stimulus with a particular focus on public capital spending in key areas of social need, incentives for small, medium sized indigenous industry and an all-island perspective in addressing economic and social challenges. The plan places considerable emphasis on the role of education and training in upskilling those at risk of losing jobs or currently unemployed as well as investment in research and development. Interestingly, the document has relatively little to say about the crisis in banking and finance. It does, however, call for the establishment of a State Bank that would ensure access by small businesses to credit. In this regard it cites the example of the Industrial Credit Corporation (before it was privatised) which proactively sought to avoid company closures and job losses through seeking out firms at risk.
Sinn Féin has very much gone with a Keynesian-style stimulus package. This is all the rage now on the left and in such recent converts such as the new US Administration. The European response, by and large, is sceptical and the Irish Government is listening to too many economists who say 'no point - we are a small open economy - it would dissipate in additional imports with minimal impact on jobs and income here - the problem of public finances is too critical anyway to allow any such largesse'. Sinn Féin disagree on this. They call for sustained and possibly higher levels of capital funding in areas such as schools, housing, ICT (including broadband).
The document also critiques the lack of evaluation of effectiveness in public spending in support of enterprises (page 8). A distinguishing feature of the document is the way in which it places indigenous industry at the centre of any national economic revival. While it accepts the benefits of Foreign Direct Investment (the records do not show that Sinn Féin urged any raising of the nominal 12.5% Corporate Tax rate during their 2007 election campaign), it invokes the Telesis Report of 1982 in arguing for the establishment of strong indigenous (and presumably multi-national) industries.
As further posts will show most of the ideas advanced by Sinn Féin are held by other progressive voices. Some specific policies appear to be unique such as the creation of a State Bank with a specific focus on aiding small and medium-sized businesses. In all the document, provides a valuable set of ideas and proposals which, if acted on, could position Ireland well to avoid the worse excesses of slash-and-burn economics during these trying times and at the same time anticipate how the island could compete on the basis of knowledge, innovation and skills in the next phase of our economic development. If Whitaker and Lemass got it right on the need to open the country to trade as well as foreign direct investment in the 1960s, then a new paradigm is called for as we head into the next decade. Citing Finbarr Bradley and James Kennelly 'Capitalising on culture, competing on difference' the document calls for a 'radical rethink of higher education' and a move away from an 'industrial mindset' to a situation where graduates are flexible, self-starting and multi-skilled.
One suspects that a key to recovery is not just 'more education' but a very different kind of education. Interestingly, Sinn Féin also make the case for investment in early childhood education (we have not heard too much about that in recent times) to 'train workers now for a pre-school education system' and to 'start constructing the buildings required' (page 16). Perhaps the €2 billion earmarked for the building of public offices under 'de-centralisation' could be used for that? It pays dividends, as economist James Heckman points out.
In a telling sentence on page 5, the document says: "Initiatives like the 'Ideas Campaign' website are to be lauded, and show the tenacity, creativity and resourcefulness of the Irish people when put to the test - but we need government leadership, as well as people-led ideas"
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