Debtors in Dublin

In fairness, it says “Compared with its neighbours in the UK” Is this not the case?

While “Compared to UK neighbours” does give them a bit of a cop-out, the FT’s editors would have appeared to miss an overall point about Ireland’s post-domestic boom economy – namely the exact opposite of its point, the central importance of domestic demand now that the vast bulk of our huge exports are undertaken by a surprisingly small part of our workforce.

Admittedly with little more than a calculator and the national income identity, I looked at the numbers in August (http://www.ronanlyons.com/2009/08/26/will-a-global-economic-recovery-be-irelands-panacea-dreams-and-nightmares-for-2010/) and estimated that even a global boom next year is likely to do little more than halt the fall in GDP here, because our exports on average require a huge amount of imports.

A domestic boom (were such a miracle to occur) would have a substantially more noticeable effect. (Perhaps one of the contributors on this site has a more formal analysis along the same lines.)

What Ronan L says is completely correct. However, Ireland is in no way unusual in this respect. In fact, its the norm for developed countries.

Only a small proportion of the workforce in developed countries are involved in primary wealth creation (mainly manufacturing) and exporting and that proportion has been in long-term decline for half a century. In Ireland about 10 per cent of the workforce are engaged in manufacturing. But, that’s almost exactly the same proportion as in the US, the UK, Canada and a host of others. What is more, thanks to mechanisation, robotisation and advanced technology, that proportion is likely to decline in every developed country for years ahead. The idea that unemployment can be reduced significantly as a result of jobs being created in the manufacturing and other primary wealth creation sectors is bonkers.

That doesn’t mean, however, that these sectors are unimportant. Clearly not. In developed countries, greater output in these sectors would normally lead to increased employment indirectly, rather than directly. The way it would normally occur would be through increased productivity
in these sectors resulting in higher real wages for those employed in these sectors. Those so employed would then spend their increased real wages in the domestic, largely service-oriented, economy.

There is clearly plenty of scope for that to happen in Ireland. CSO figures out yesterday showed manufacturing output UP 3.5 per cent in October compared with October 2008. Ireland is the only developed country to achieve such a y-o-y increase. However, that extra 3.5 per cent output was achieved with 10 per cent fewer persons employed in manufacturing. So, in Ireland in October manufacturing productivity was about 15 higher than in October 2008. So, clearly there would be plenty of scope for persons employed in manufacturing in Ireland to have got significant increases in wages between October 2008 and October 2009, while still improving competitiveness relative to other countries. In virtually every other developed country, manufacturing productivity actually fell between October 2008 and 2009.

However, as we all know, that didn’t happen. While precise figures aren’t available, the general consensus seems to be that manufacturing wages actually fell between October 2008 and October 2009, despite the 15 per cent increase in productivity.

If that trend continues into 2010, then what Ronan L forecasts may well come to pass. That is, an export boom, but, unlike up to 2007, that export boom having little effect on the domestic economy. If that does happen, let’s not wrap it up in mystery and have dozens of academic economists being paid to produce papers on why the export boom isn’t leading to increased demand in the domestic economy. If it happens, the explanation will be quite simple and exactly as I have outlined above.

@JohntheOptimist
Two refinements:
(1) Services exports are hugely important for the Irish economy, so you have to adjust up the numbers involved in trade-dependent output to include that – not easy though.
(2) Our export boom’s impact on growth really finished in 2001/2002, after that net exports acted as either little/no impetus or even a drag on growth. (That’s despite exports rising each year.)

@Colm
Agreed, the overall thrust is spot-on, the point was more of a side-point, namely that sometimes the limits of a generalist/global perspective are more apparent than other times!

@Ronan L

I agree entirely with what you say about services exports. The phrase I used was ‘primary wealth creation (mainly manufacturing) and exporting’. I think that covers both.

But, it is good that you raised it. If services exports are included, the proportion of the Irish workforce engaged in what I called ‘primary wealth creation’ is probably much higher than in most developed counties. Basically, the proportion involved in manufacturing in Ireland is about the same as in most developed countries (about 10%). I am unable to get the corresponding figures for services exports. But, the value of services exports per capita from Ireland is much higher than in most developed countries, so it is reasonable to assume that the proportion of the workforce involved in producing them is also much higher.

I agree with Ronnie’s point about exports.

My main point remains. Namely, even if there is an export boom next year, unless those employed in producing those exports (whether manufactured goods or services) get real income increases to match their productivity increases, this will not translate into a boom in the domestic economy. It will simply produce a ginormous trade surplus.

@B P Woods
“What would (will) people do with any surplus income they may be lucky enough to acquire. Save it? Possible. Pay down some debt? Probable.”
Both of these are desirable things. Our banks need to improve their loan:deposit ratios so they can stop sucking the interbank market teat (a teat that is very expensive at the moment!). Their customer base (those who would like to borrow) are too heavily indebted with mortgage and other debt. Unless they pay it down, it will not go away…

“Competitivness – what in the name of God is this – East Asian wages and ditto cost base”
I work in Asia. From Ireland. I compete with the rest of the world to provide services to my client.

Competitiveness is:
– being able to insure a building for the same or indeed a decreasing price each year. Why decreasing? Because you haven’t claimed, perhaps?
– it is being charged the same rates every year, not some arbitrary number because the council wants to build a shiny new eco-friendly [sic] concrete monstrosity for itself.
– it is not being gouged by every chancer that sees a chance to make a buck off your export sweat. And that most particularly includes the government.
– it is not being driven out of the country by the cost of basic public services, appalling broadband, outrageously inaccessible and expensive further education AND high personal taxes.

There are lots of other countries with shockingly bad public services… why waste my income here?

Also perhaps, Cormac Lucey’s point about debt deflation in Ireland, is worth highlighting.

“Brian Lenihan asserted that we had turned the corner. Maybe we are in sight of that point in terms of national output. But not in terms of national wealth. Our wealth is still overly invested in Irish residential property.

IMHO that is set to fall considerably considerably further in price while debt levels remain. That will put further pressure on private sector balance sheets (more negative equity) and downward pressure on retail activity etc. etc.”

Lucey’s point takes on the same focus as Graham Stull’s point linked earlier, but does something else in looking at the problem. Namely to contrast 2 no. elements – national output and national wealth.

The point about ‘wealth’ also arose in comments above. In the post by JohnTheOptimist.

http://www.irisheconomy.ie/index.php/2009/12/11/debtors-in-dublin/#comment-27932

@Pat Donnelly – “yoganmahew – You are quite correct that a major boost to attracting and retaining export service earners will be broadband”

I tend to agree with you.

If anyone is interested, the most technically advanced broadband implementation to date is probably South Korea (makes ours look like a trickle feed). There may be some interesting case studies to be had there in terms of what impact it may have had. Blogging over there certainly exploded!