The Northern Ireland economy

As far as I know, there has not been a single blog relating to Northern Ireland since The Irish Economy blog began earlier this year. Northern Ireland is having a relatively good recession for various reasons on which I do not wish to dwell. However, it has serious long-term problems which have been addressed in a report commissioned by the devolved economy Minister. The report is available here. What will interest readers of this Blog was that 4 out of the 5 report authors are economists, of which I am one.

In essence, the Northern Ireland economy has operated under wartime conditions for nearly four decades. Public sector output amounts to around 60% of gross value added (the regional equivalent of GDP). More specifically, industrial policy has consisted of providing large scale grants to both inward investors and indigenous firms. This has been partly successful: employment growth has been high in the last decade and at the peak of the recent boom, the unemployment rate was hovering just above 4% as in the Republic of Ireland case. What was different was that productivity growth was low to non-existent. Consequently living standards have not converged on the UK and have diverged markedly from the Republic of Ireland and other successful countries.

It is not hard to see why. Good quality inward investors are attracted by incentives (such as the Republicsof Ireland’s low corporate tax regime) which reward future profits. Northern Ireland’s emphasis on front loaded grants incentivises those that cannot obtain commercial funding: as poor a signal as one could wish for. Northern Ireland’s unique selling point was its low cost base: in essence it is competing with Bangalore, not high wage high productivity economies and regions. In addition, we estimate that the deadweight loss from Invest NI (the industrial development agency) handouts was in excess of 50% overall and close to 100% for some types of grants. The interesting exception was Innovation and R&D grants where deadweight loss is particularly low.

Business expenditure on R&D (BERD) in Northern Ireland is extraordinarily low: of the order of one-half of one per cent of gross value added. In fact university R&D expenditure exceeds BERD: I know of few regions with this eccentric characteristic. Previous contributors to this blog have reminded us of the global stylised fact that there is a weak connection between academic research and business innovation.

Economists had almost no input into the NI peace process so that the opportunity to replace Northern Ireland’s grant dependency with tax incentives was lost. How ever much this is bitterly regretted, the panel’s task was, inter alia to devise an industrial policy for a (relatively) high tax economy. Inevitably, we turned our attention to Scandinavia. We were particularly impressed by the experience of Oulu in Northern Finland. As god-forsaken a region it would be hard to find: yet it has developed into having the second highest living standard in Finland (after Helsinki).

Our recommendations are as follows:

(1) Phasing out of almost all Invest NI grants to businesses by 2013. One of the important exceptions is grants for R&D and innovation. Grants for investment by companies new to NI would be also retained. This is a much narrower concept than FDI which includes expansions and retentions by existing international companies.

(2) Other than the above, Invest NI  may only participate in enterprises through equity and subordinated loans

(3) Establishment of a state owned commercial contract research company along the lines of VTT in Finland. The latter employs about 3,000 people and that is the scale that we are proposing. . This will both be a magnet for inward investment as well as enabling existing companies to increase BERD.

(4) Overall, our proposals are, at worst, fiscally neutral and may well involve net public expenditure cuts

9 replies on “The Northern Ireland economy”

While all these proposals have merit and are undoubtedly well-intentioned, might I respectfully suggest a better one: abolish partition and integrate the whole island – economically at first, but eventually politically as well.

In case this sounds a little too much like Sinn Fein, I should say that I have always been totally opposed to Sinn Fein, both their absurd economic policies (although these might be in the process of changing), their anti-Europeanism (now discredited after the Lisbon 2 referendum result) and their campaign of violence (although the loyalists were worse and the military were no angels).

However, as a Northern Protestant, it pains me to see how far and how fast the north is falling behind the rest of the island. The fact that, temporarily, shopping centres in Newry are doing well can’t disguise that. A century ago, the north of Ireland was renowned for its industrial flair, its enterpreneurship, its infrastructure and its educational establishments. Today, the north is falling behind the rest of the island right across the board: standard of living, productivity, infrastructure (compare the roads now north and south and contrast with what it was 20 years ago), high-quality employment, life expectancy, education, even rugby (believe it or not, until 20 years ago, Ulster would regularly thrash Munster and Leinster). For example, just today Richard Tol has opened a thread on university rankings. TCD and UCD are in the 100 universites in the world – Queens University Belfast is nowhere. When I studied at Queens in the late 1960s, the idea that we might be outranked by UCD or TCD would have been considered a joke.

I’m afraid to say that, as long as partition lasts, the north is going to fall further and further behind the rest of the island. These proposals are just papering over the cracks.


Thanks for this interesting post. Can I highlight that the link to the report is not included above. I would like to rread it.

John, I think that phased integration already on the way so dont worry.

Seems that NI suffers the moral hazard involved in state support. Let’s face it even the ‘Peace Process’ is just the nationalisation of hundreds of small protection / criminal rackets into a single state contract. All ‘communities’ are hooked on state welfare. Talk that one often hears about ‘returns to violence’ (though of oourse not here) is just a veiled threat. Solution are to lower taxes….reduce government…..enforce rule of law…

Too many businesses depend on government grants and thats their (InvestNI) inward investment strategy is similar, grants for this and that. I was at a meeting once and one guy asked if there was a grant for recycling paper, strangely enough the speaker said there was, never bothered to follow it up. The civil service is so massive it yields way too much power.The island is too small to be split into two different economies, it doubles the cost of setting up an all island business. Plain daft but a political nightmare.

The old story about giving a man a fish feeds him for a day, teaching him to fish… A dependence culture is never healthy especially if it allows true innovation & entrepreneurship to atrophy. Elsewhere on this blog the term “R&D” has been debated. In the case of an economic region finding its footing again it would be better to encourage innovation close to commercialization with clear market focus. As a former QUB student I’d love to see it as a top 100 university as well as there being some truly excellent examples of local innovative industry.

Two points:

1. John’s remark about NI’s rich entrepeneurial heritage is well made. The problem today is that potential entrepeneurs are going to GB/ROI to study and ending up staying there. If NI’s politicians want to make a long-term impact, they should focus first on reversing this brain drain. If NI’s best and brightest continue to leave, it is hard to see how a bright future for NI can be constructed.

2. I was up in Belfast this week and spoke to someone working at a senior level at Stormont. He made the point that, from a governmental efficiency perspective, the NI governmental institutions are structured to make difficult decisions almost impossible.

The complex interlocking structures of OFMDFM, executive, assembly oversight committees overlaid with a system where all major parties are in government leads to decision-making gridlock. NI enjoys a privileged political position as long as the parties which promoted the Peace Process remain in government in Dublin and (more importantly as they are writing the cheques) London. But once those governments change and people outside NI regard the Peace Process as “done”, the NI executive will face very difficult political decisions.

It’s hard enough down here for the government of a sovereign people, used to the ups (1987-2007) and downs (1979-1987, 2007- ) of economic independence and operating in a system where those who take on the responsibilities of government get to enjoy the spoils of office, to face up to politically difficult but economically necessary decisions.

I have my doubts about how well any NI executive, unused to any measure of economic independence and operating a system of government where responsibility is deliberately diffused, will operate when the hard decisions start to rain down.

Comments are closed.