Year: 2010

After catch-up

The Economist’s bloggers have a piece on China today which is relevant to Ireland. They ask what happens to an economy’s growth rate, in the long run, once it has caught up to the technological frontier. Their answer, correctly, is that “Historically speaking, the answer is clear—growth slows to 2-3% per year.”

This is a point which Cormac Ó Gráda and I made in a textbook chapter on long run Irish growth a decade ago. Very high growth rates characterise economies catching up to the frontier — Western Europe or Japan in the 1950s and 1960s, the Asian Tigers in the 1960s and 1970s, ourselves in the 1990s. Once you have caught up, 2-3% per annum is about as good as it gets. Allowing a bubble to inflate can obscure this reality over the short to medium run, but in the long run you won’t manage to grow more rapidly than the United States has done over the past century or so: to do so is a sign of an economy that is still in some sense backward.

These are relevant considerations when thinking about what sort of growth rates Ireland can reasonably be expected to achieve over the next decade or two.

Compensating Accident Victims

The President of the High Court, Justice Nicholas Kearns, has established a working group to explore the alternatives to Ireland’s system of lump-sum compensation for accident victims. The group is headed by another judge of the High Court, Justice John Quirke, and has been asked to report by end-year.

The lump-sum system has been modified across the water, where the courts can award recurring payments, in practice index-linked annuities, with or without the agreement of the parties. I argue in the paper below that we should consider following suit in this country.

 http://www.ucd.ie/t4cms/wp10_23.pdf

Good news on the farm

Teagasc colleagues have produced their mid-year assessment of the likely outturn for output and incomes in Irish agriculture in 2010. The main message is that there is a solid recovery in gross margins in dairy and cereals from the awful year in 2009 and also a positive outlook for sheep (helped by the recent announcement of support under the new Grassland Sheep Scheme), but no change is expected on cattle farms where low or negative profitability will continue.  Overall, the Teagasc assessment is that both total agricultural output and incomes should increase by around €300 million this year, which will be an increase of 18% on the operating surplus in agriculture in 2009.

Continue reading “Good news on the farm”

Extending the Guarantees

In recent days the heads have AIB and Anglo have called for an extension of the bank guarantees.  (Colm Doherty’s conference call transcript here; Mike Aynsley’s interview with RTE here.) This has caused understandable dismay given the almost unimaginable costs the original blanket guarantee placed on Irish citizens.  But we should not allow the mistake of guaranteeing already locked–in funds for a period long enough to allow most of them to escape to colour the case against guarantees on new borrowing.   (It should be said that with the government’s effective “no–creditor–left-behind” policy, it is not obvious that losses would have been imposed on long-term creditors with or without the original guarantee.) 

In looking at the case for continuing with prospective guarantees it is important to consider how the credit system would evolve without them.  Without guarantees the cost of new funds would increase, leading to increased pressure to raise rates on new business and household lending.  Moreover, without guarantees there would be greater market pressure to increase capital ratios, which in the current environment is likely to be met by greater deleveraging.    The credit squeeze would worsen. 

I have thought since the outset of the crisis that balance-sheet constraints on credit supply have received disproportionate blame for the credit collapse relative to credit demand and borrower creditworthiness considerations.  But one factor I didn’t fully appreciate is how uncertainly about future credit supply can affect current demand.  Businesses will want to limit their debt exposure when there is a risk that their legs will be cut from under them when they try to refinance.   This may go some way to explaining Colm Doherty’s revelation that 40 percent of overdraft facilities are not being taken up.   (Simon Johnson makes a similar point in recent testimony before the U.S. Senate Budget Committee; this wide-ranging testimony is well worth a look more generally.)

The sustained deleveraging by banks, businesses and households risks a Japanese–style “lost decade” for the Irish economy.   The recent soft numbers, which have come in despite the stronger performance of broader European economy, could be an early warning.  Restoring confidence in the stability of credit supply is an important part of the policy challenge.   Unfortunately, guarantees on new bank liabilities will probably have to remain a while longer. 

Eurostat: Irish Deficit 36% of GDP in 2010:Q1

I know that the NTMA have already admitted as much but just in case there were any remaining doubts that Eurostat are counting the promissory notes towards this year’s budget deficit, the picture below is a screencap from Eurostat’s publicly available database. Yes, our deficit in the the first quarter of 2010 was 36.51% of GDP. I believe the figure for the year will be about 20%. (Yes it’s my first time using a picture! Perhaps now you can see why.)