Some blog readers have bristled at invoking “reputational damage” as an argument against policies such as defaulting on bank liability guarantees. I have sympathy with this reaction given the elasticity of the concept, and because it is often thrown out as a sort of argument stopper. But there is still no getting away from the fact that Ireland’s reputation for institutional soundness matters for both domestic and international investment. It is hard not to worry that this reputation is being damaged by some recent crisis management policies.
The crisis has certainly exposed institutional deficiencies, not least in the area of policy making. Yet the “rotten institutions” view of the Ireland seems greatly exaggerated. Ireland scores well on various international comparisons of institutional quality. Perhaps the most comprehensive set of measures of institutional quality is the World Bank’s Worldwide Governance Indicators (overview paper here). On the Rule of Law measure – one of six aggregate measures of institutional quality in the WGI dataset – Ireland ranked 13th in the world in 2009 (94th percentile). Another influential World Bank comparative effort at measuring the quality of business environments is the Doing Business report series. The summary page for Ireland for the 2011 report is available here. It is noteworthy that Ireland ranks an impressive 5th in the world for protecting investors.
While it is difficult to get convincing measures for how much a reputation for institutional soundness matters for Ireland’s ability to attract FDI, available empirical evidence (and commonsense) does point that direction. A recent IMF study found that measures of “judiciary independence”, for example, are significantly related to flows of FDI for advanced economies, with the effect particularly strong for services-related FDI.
Until recently, the government seemed to be doing a good job in difficult circumstances protecting Ireland’s reputation for investor protection. Institutional strength is perhaps best demonstrated when protecting the unpopular—and bankers and developers certainly fit that bill. By themselves, each of the recent moves – the emergency bank resolution measures, changes to Section 23 reliefs, and the ultimatum relating to contracts for banker bonuses – might raise an eyebrow, but not change fundamentally the perception of the investment environment. Together, and the sense that all bets could be off in a crisis environment, they suggest a more troubling shift. To compound the threat, although some members of the opposition have voiced the need for caution, there is a sense the entire political debate is moving in a more populist direction.
Whatever the agenda of the letter writer, the danger is summed up well in a letter published in Friday’s Irish Times:
It is my firmly held view that some of the proposed changes to property-related tax reliefs are unconstitutional.
In Ireland, parliament is not supreme. The will of the people (the electorate) as expressed through the Constitution is supreme and the Oireachtas and government may not act outside the parameters of the Constitution. This is a manifestation of what is known as the rule of law.
The government wanted to encourage private funding of property development.
It promised taxpayers that they would receive relief from tax on rental income if they invested. Many taxpayers relied on that promise and invested.
However, the Government wants to retract that promise. To do so is clearly unfair – in legalese it is described as “an unjust attack upon the taxpayers’ property rights”. Recent case law suggests that such encroachments upon citizens’ property rights can be justified if they are necessary to address “an extreme financial crisis or fundamental disequilibrium in the public finances”. In other words, if the Government did not act, the State would go bankrupt.
The retraction of the promise of tax relief is simply unnecessary when raising future taxes will do. In truth, the retraction is a populist gesture. It is crucial that we do not trounce the constitutional rights of certain groups of people simply because it is currently popular to bash those groups. Otherwise, the rule of law – the notion that the Oireachtas must act within the Constitution – is meaningless. – Yours, etc,
PAUL BRADY AITI BL BCL,
Red Arches Drive,
Baldoyle, Dublin 13.