The Central Bank’s Useless Harmonised Competitiveness Indicators

This was the original title of this recent paper of mine.   Some people thought it too truculant but even Patrick Honohan – when he wanted, as Governor, to talk about competitiveness – would get his RA’s to calculate the old indicators rather than use the new ones.  To keep it eye-catching I dropped the ‘Useless’ and added ‘Pernicious or Merely Otiose?’ but then some (though not the journal, I should point out) complained that they had to reach for the dictionary!  But I think the issue is a serious one.  I am hoping that Peter Clinch at the National Competitiveness Council will take up the challenge.

Brexit and Ireland – North and South

The US journal, World Politics Review, carried a one-page interview with me last week, focusing initially on why the border is such a sensitive issue, but broadening out to cover some less obvious angles.

As the interview is behind a firewall, here’s a pre-publication draft:

WPR: The Irish border issue, specifically the prospect of a hard customs and immigration border going up between Northern Ireland and the Republic of Ireland, looks increasingly like the biggest snag in Brexit talks so far. What solutions or proposals are the different sides—in Belfast, Dublin, London and Brussels—offering?

Frank Barry: The substantive issue here is rarely spelt out explicitly. It is, as political scientists in Belfast have informed me, that if uniformed customs or immigration officers are placed on the Northern side of the border, they will have to be protected by armed police, who will in turn require the protection of the British army. This is because the border areas are the stronghold of dissident republican factions that have consistently rejected the peace agreement of the 1990s that achieved a high degree of consensus across these islands. Stationing troops in the border areas will inevitably lead to clashes, which raises the specter of a return to conflict in Northern Ireland.

The economic problems associated with Brexit are also substantial. Agribusiness, which is of major significance to both the Northern and Southern Irish economies, is the sector likely to suffer most damage from Brexit. Supply chains are highly integrated across the border, so Brexit of any form will be hugely disruptive.  Businesses on both sides of the border have been restructuring vigorously in advance of Brexit, but restructuring is costly and there are some problems that cannot be surmounted by cross-border tariff-jumping investments.

The Irish government and the European Union have advocated what essentially amounts to moving the international frontier into the Irish Sea between Britain and the island of Ireland. This proposal is anathema to both Northern unionists and the British Conservative party as it affects the constitutional integrity of the United Kingdom. The matter is further complicated by the fact that the Conservative government in the United Kingdom is dependent on the parliamentary support of Northern unionist parliamentarians for retaining its majority—giving it strong reason not to upset this part of its coalition. The British side has suggested that the problem can be resolved by technology to monitor the cross-border flow of goods. At least some customs officers and random checks would continue to be required however, and it is difficult to see how Britain can regain control over immigration without a heavy presence of immigration officials. I can see no solution to the danger of a return to civil strife other than the one being advocated by the Irish government and the EU. The constitutional issue lay at the heart of the Northern conflict however, and unionists are prepared to risk a lot rather than see their constitutional position within the United Kingdom jeopardised.

WPR: How likely is a “hard Brexit” as a result of these negotiating hangups?

Barry: Either the British deny the unionist community in Northern Ireland a veto or the EU and the Irish government accept a land border on the island of Ireland. If this circle cannot be squared, the UK will exit the EU without a deal. This is the ‘hardest’ of the ‘hard Brexit’ possibilities. A hard Brexit typically entails defaulting to World Trade Organisation rules, involving a very significant deterioration in the  trade relationship between the UK and the EU. But the bad blood engendered if the UK would to leave the EU without a deal being struck would spill over into other areas. Nor is Northern Ireland the only stumbling block in the negotiations of course.

WPR: Does Brexit pose a bigger economic threat or political threat to Ireland and Northern Ireland, given the terms of the Good Friday peace agreement?

Barry: The political threat is the one that frightens the Irish side the most, because of the danger of a return to civil strife on the island. The economic threat is substantial, particularly for, though not confined to, agribusiness. In the past, one might have hoped for EU structural funding to offset some of the damage to businesses and the economy. The UK however is a major contributor to the EU budget, and competition between remaining EU countries over the reduced budget will be intensified. Irelandwhich is by now one of the richer EU member stateswill face an uphill battle in accessing adequate compensation to alleviate the damage.

A further problem is that up to two-thirds of Irish exporters use Britain as a bridge to their continental European markets. For users of this route, Brexit will entail higher transport costs and significant time delays. Two new sets of customs frontiers will have to be crossed, as goods enter the U.K. and then re-enter the EU.

On the economic front, there are some offsetting benefits, though these pale in comparison to the costs. Britain will become less attractive to firms from the U.S. and other non-EU countries selling into the EU market, and Ireland will attract a share of the foreign investment diverted away from the U.K. British firms, too, are likely to establish in Ireland to retain free access to the EU market. Paradoxically, the harder the Brexit the stronger this effect will be. Loss of access to the Single European Market will be particularly significant for financial services firms. A large number of London-based firms are currently exploring the option of establishing operations in Dublin as a way to retain market access, though Frankfurt, Luxembourg and other locations are also competing vigorously for this business.

To the extent that Ireland is successful in attracting a share of financial services firms, however, another dilemma arises. The financial services sector in Ireland is almost entirely Dublin-based, while agribusiness is largely based outside Dublin. Regional disparities are thought to have played a role in the Brexit vote, and in the election of Donald Trump to the U.S. presidency. A widening of regional disparities could lead to a similar anti-globalization backlash in Ireland.

Brexit has not, so far, resulted in any significant weakening of Ireland’s commitment to full EU membership. But the U.K. has played a strong role in resisting the centralizing instincts of some powerful EU member states. An EU minus the UK is likely to be more strongly committed to some form of corporation tax harmonization. Yet Ireland is highly dependent on the foreign-owned multinationals, for which it serves as an export platform. These account for over 80 percent of Irish exports and have been a major factor in the rapidity of Ireland’s recovery from the financial and eurozone crises of the late 2000s. If Ireland’s attractiveness to multinational investment was to be severely diminished, its integration into the EU economy, and its ongoing commitment to the EU, could be substantially weakened.

 

The outward re-orientation of the 1950s and 1960s

T. K. Whitaker has been much eulogised over recent times, and rightly so. But, as he recognised himself in later life, he had not been infallible (is anyone, ever?) and others whom he opposed at the time deserved credit for their part in the outward re-orientation of the economy in the 1950s and 1960s.  In an article just published in the Dublin Review of Books, I offer an assessment of his significance over the period.

Implications for Ireland of the new Trump Regime

There’s a lot of wrong-headed analysis doing the rounds on the implications of the proposals of the new US Administration for Ireland.  Will US companies “be enticed home” by a dramatic cut in the US corporate tax rate? Companies don’t primarily come to Europe for tax reasons. They come for market access. Ireland captures a disproportionate share of these inflows, to a large extent because our rate is low RELATIVE TO OTHER European rates. In fact, given the US tax-credit system, US MNCs in Europe would not be able to recoup upon repatriating their profits the difference between high European rates and a potential new low US rate; this would work in Ireland’s favour (to the disadvantage of high-rate European economies).

Lower rates outside the US encourage US MNCs to keep their profits offshore (though a huge proportion of these can actually be, and are, held in US bonds and banks). If fewer profits are held offshore this WILL reduce overseas RE-investments, as these are currently financed out of offshore profits.

A dramatic reduction in the US rate would reduce the inventive for re-domiciling, though, as John FitzGerald and Mary Everett (of the Central Bank) have both shown, re-domiciling into Ireland probably does us more harm than good. In any case large, rich, central (as opposed to peripheral) economies tend to have higher corporate tax rates for revenue-maximising reasons.

US protectionism would trigger retaliation which would in turn trigger vastly more tariff-jumping FDI into Europe and elsewhere. Nor would a retreat of US corporations to the US mean that their external sales would be replaced by US exports; a substantial proportion would be captured by foreign competitor companies. And a huge proportion of current US exports go as inputs to their own subsidiaries abroad. The US State Department would also not be happy with a reduction in US FDI: think of the “soft power” this overseas investment grants the US. So the proposed very low US rate is unlikely to be in America’s interests. This might well impact on the chances of getting the proposals through Congress, even if President-elect Trump decides to run with them.

Ataturk’s Ministers visit Sarajevo

The events of the last few days in Turkey brought back to mind this powerful snippet from Anglo-Irish writer Rebecca West’s account of her travels in Yugoslavia in the 1930s. Nothing to do with economics, and little related to present realities, but a passage that some might appreciate….


“There are thirty thousand Moslems in Sarajevo, and I think most of them were there. And they were rapt, hallucinated, intoxicated with an old loyalty, and doubtless ready to know the intoxication of an old hatred.

We came to the halt at the right moment, as the train slid in and stopped. There was a little cheering, and the flags were waved, but it is not much fun cheering somebody inside the tin box of a railway carriage. The crowd waited to make sure. The Moslem Mayor of Sarajevo and his party went forward and greeted the tall and jolly Mr. Spaho, the Minister of Transport, and the Yugoslavian Minister of War, General Marits, a giant who wore his strength packed round him in solid masses like a bull. He looked as Göring would like to look. There were faint polite cheers for them; but the great cheers the crowd had had in its hearts for days were never given. For Mr. Spaho and the General were followed, so far as the expectations of the crowd were concerned, by nobody. The two little men in bowlers and trim suits, very dapper and well-shaven, might have been Frenchmen darkened in the colonial service. It took some time for the crowd to realise that they were in fact Ismet Ineunue, the Turkish Prime Minister, and Kazim Ozalip, his War Minister.

Even after the recognition had been established the cheers were not given. No great degree of disguise concealed the disfavour with which these two men in bowler hats looked on the thousands they saw before them, all wearing the fez and veil which their leader the Ataturk made it a crime to wear in Turkey. Their faces were blank yet not unexpressive. So might Englishmen look if, in some corner of the Empire, they had to meet as brothers the inhabitants of a colony that had been miraculously preserved from the action of time and had therefore kept to their road.

The Moslem Mayor read them an address of welcome, of which, naturally, they did not understand one word. This was bound in any case to be a difficult love affair to conduct, for they knew no Serbian and the Sarajevans knew no Turkish. They had to wait until General Marits had translated it into French; while they were waiting I saw one of them fix his eye on a distant building, wince, and look in the opposite direction. Some past-loving soul had delved in the attics and found the green flag with the crescent, the flag of the old Ottoman Empire, which these men and their leader regarded as the badge of a plague that had been like to destroy their people. The General’s translation over, they responded in French better than his, only a little sweeter and more birdlike than the French of France, and stood still, their eyes on the nearest roof, high enough to save them the sight of this monstrous retrograde profusion of fezes and veils, of red pates and black muzzles, while the General put back into Serbian their all too reasonable remarks. They had told the Moslems of Sarajevo, it seemed, that they felt the utmost enthusiasm for the Yugoslavian idea, and had pointed out that if the South Slavs did not form a unified state the will of the great powers could sweep over the Balkan Peninsula as it chose. They said not one word of the ancient tie that linked the Bosnian Moslems to the Turks, nor had they made any reference to Islam.

There were civil obeisances, and the two men got into an automobile and drove towards the town. The people did not cheer them. Only those within sight of the railway platform were aware that they were the Turkish Ministers, and even among those were many who could not believe their eyes, who thought that there must have been some breakdown of the arrangements…

We had seen the end of a story that had taken five hundred years to tell. We had seen the final collapse of the old Ottoman Empire. Under our eyes it had heeled over and fallen to the ground like a lay figure slipping off a chair. But that tragedy was already accomplished. The Ottoman Empire had ceased to suffer long ago. There was a more poignant grief before us. Suppose that such an unconquerable woman as may be compared to the Slav in Bosnia was at last conquered this time, and sent for help to her old lover, and that there answered the call a man bearing her lover’s name, who was, however, not her lover but his son, and looked on her with cold eyes, seeing her only as the occasion of a shameful passage in his family history: none of us would be able to withhold our pity”.

Britain and the EU

Though Ireland and the UK joined at the same time, the UK always remained semi-detached from the EU. Brussels affairs received barely a mention in the Blair-era diaries of British government ministers and advisors. That this was not even noticed by British reviewers is telling. London regarded itself as more significant on the world stage than Brussels. And, strange as this might sound to Irish ears, until German reunification it had perhaps good reason to do so.

The “supra-national” nature of the EU was designed by France to limit German post-war independence. As Ernest Bevin, Britain’s post-war Labour Foreign Secretary, commented: “when you open that Pandora’s box you’ll find it full of Trojan horses”. Britain felt neither the need nor the desire to have its independence limited in this way. For centuries it had stood secure in its island fortress, holding the balance of power between competing continental states. In the immediate post-war period it looked as much to the US and the Commonwealth as to Europe. The US was of much greater military importance. And as the world’s first industrial nation Britain had long pursued a ‘cheap food’ policy: the agricultural protectionism of the Common Market held little appeal.

Britain’s interest in Europe is as a free trade area. It viewed the creation of the single currency as a federalist step “far too far”, a position with which very many economists agreed.

Post-referendum Britain is not the only polity in existential crisis. The EU itself is clearly in the same position. The eurozone crisis side-lined the European Commission as member states looked to their own interests first. As a leading academic wrote recently, “supranational agents’ ability to take autonomous decisions can only be sustained in matters where the extent of disagreement among national governments over policy outcomes is relatively low”. The European elite thinks that the only way forward is through further integration: “more Europe”. But there is almost zero support across the European electorate for this.

The reaction to the referendum outcome has thrown a sharp light on clashing cultures. British political culture has always been suspicious of grandiose schemes and popular culture has always been irritated by layers upon layers of bureaucracy. (Ireland bears some responsibility for the latter, in that “a Commissioner from every member state” was given to us as a concession after one of our ‘no’ votes. Every commissioner views as their legacy the amount of legislation that they leave behind on the statute books.) The other side of the culture clash is reflected in the furious reaction of the European elite to the British vote, and the apparent desire to get the British out the door as quickly as possible. Twice the Irish voted no, and twice we were asked to vote again. Why did Europe react so differently to us, when there was so much less at stake?

The British vote is also clearly an inchoate reaction to globalisation, or perhaps more accurately to its “collateral damage”. In this it seems as one with the political support for the Trump campaign in the US.

Surely European leaders would be better advised to take a long hard look at how such widespread concerns might be addressed rather than rush to accept a British withdrawal? The latter may well lead to the break-up not just of the UK but to the withdrawal of other EU member states over time. It will entail years of negotiation on future relationships – at the bare minimum between the UK and Europe, and between the UK and Ireland. More worrying perhaps – given the class, age and geographic fault lines reflected in the referendum vote – is the legacy of bitterness and, quite possibly, civil strife that it will bequeath to Britain.

There is no need to rush Britain to withdraw, other than as a threat to other potential waverers. But this is hardly what the European project was supposed to be about. A year or two of uncertainty, particularly given the fragility of the global economy, is clearly undesirable. But the next general election in Britain is likely to offer the electorate an opportunity to visit the issue anew. Europe can use the hiatus to consider how the concerns of so many of its electorates can be addressed. A substantial electorate has spoken. Is Europe prepared to listen?

More on Greece

Colm McCarthy and I were up in front of the Oireachtas Finance Committee last week to talk about Greece.  I attach my speaking notes. (Colm’s were essentially as published in the Sunday Independent the other day). I think it’s fair to say that we both kicked to touch on Pat Rabbitte’s question as to what politically acceptable solution could have been pulled out of the hat. This is a question for the diplomats and politicians rather than economists.  The radicals and the establishment parties across Europe had manoeuvered each other so that they ended up painted not so much into a corner as up against an open 10th floor window.  Someone was going to be defenestrated.  And it was never going to be the strong.

Ireland in Recovery, Greece in Crisis

Adele Bergin of the ESRI and I made a presentation to a mini-symposium on Austerity: the Irish Experience at UCD last week.  Our analysis points out how wrongheaded it is to suggest, as some have done over the last few days, that if only the Greeks would take their medicine the way we did they might be able to expect an equivalent recovery.  This ignores the huge structural differences between the two economies.

Faced with evaporation of the tax base, jittery markets and a need for concessionary funding, our current government and the previous one did what was required on the fiscal side.  In the language of economics textbooks however, consolidation was necessary but not sufficient for the timing and pace of the recovery.

The first structural difference is the vastly greater openness of the Irish economy.  This cushions the domestic economy to an extent, since imports bear some of the brunt of consolidation.

Irish exports, though they took a hit in the early days of the international crisis, nevertheless propped up the economy in a way that the Greek export sector cannot do, because of the share of exports in the Irish economy, the sectoral pattern of our exports and our portfolio of export destinations.

The fact that Ireland was hugely specialised in goods and services for which international demand remained buoyant massively bolstered the economy.  Pharmaceuticals dominate Irish merchandise exports: pharma increased as a share of total US, UK and eurozone imports from 2000 to date (as shown by Stephen Byrne and Martin  O’Brien in the Central Bank of Ireland Quarterly Bulletin, 02, April 2015). Computer and information services dominate Irish services exports:  these increased as a share of  total US, UK and eurozone imports from 2000 to date.  Agriculture and food dominate indigenous exports:  these increased as a share of  total US, UK and eurozone imports from 2000 to date.

Services comprise an unusually high share of Irish exports.  Since transmission is almost costless, these are less geographically constrained and substantially less dependent on EU and North American markets than is the case for merchandise exports.  In the case of the latter, the MNCs can shift export destinations much more easily than indigenous enterprises can, as reflected in an increased US share as the US recovered earlier from the global crisis.  And Ireland of course benefitted much more than other eurozone economies from the weakening of the euro against the dollar and sterling over recent years.

Jobs in export production began to recover rapidly from 2009, driven by labour-intensive indigenous manufacturing exports and by the growth of both indigenous and foreign-affiliate services exports.  Ireland’s export-led recovery then fed into domestic demand.

It would be impossible for Greece to replicate this pattern.

And by way of footnote:  Even though it’s true that most Irish exports are produced by the foreign-owned multinational (MNC) sector, and that any €1 million of these exports creates less domestic value-added than €1 million of indigenous exports, a different perspective emerges when you look at backward linkages per job.  These are particularly impressive in the case of the rapidly growing MNC-services sector.

Arithmetic Manoeuvres in the Dark at the Irish Times

In a week when the Irish Times carried reports complaining about the dumbing down of Leaving Cert maths the paper itself provided us with some beauties.  An article yesterday by a former head of the School of Education at UCD informs us that  “nine per cent of academics at professor level were male and 2 per cent were female”.  What about the other 89 (or 77 or 61 or whatever it is)?

Last Saturday’s paper carried a report on ESRI work on overqualified workers.  The author revealed himself to hold a masters degree from UCD.  The piece (clearly not quoting directly from the ESRI) tells us that “adults whose highest educational attainment is the Leaving Cert earn 31 per cent less on average than those with a higher certificate or ordinary degree, and 100 per cent less than graduates with an honours degree”.  I’m sure we all sympathise with how tough it must be to make ends meet on the latter salary.

Even some of their commentators on economics seem to think that a 200 per cent increase means that the thing has doubled.  But it could be worse: imagine a 200 per cent decrease.

Austerity Talk at Battle of Ideas in London

The ‘Battle of Ideas’ festival held at the Barbican in London last weekend included a panel session entitled ‘Piigs can’t fly: Democracy/Technocracy/Austerity’. I was invited to make a 7-minute presentation of my views as expressed at various crisis conferences over the years:

Back in 1986, long before most people imagined that the single currency would really come into being, Paul Krugman wrote of the potential fiscal co-ordination problem: a bias towards excessive restriction because each country ignores the impact of its actions on the exports of others. “Achieving co-ordination of fiscal policies is probably even harder politically than co-ordination of monetary policies. There is not even temporarily a natural central player whose actions can solve the co-ordination problem. None the less, in surveying the problems of European integration, it is hard to avoid the conclusion that this is the systemic change most needed in the near future”.

Without this problem ever having been addressed, the potential for exchange-rate realignment was locked down. As many US economists warned, the euro was a federalist project lacking in federalist foundations, whether minimalist (banking union or federalist insurance schemes) or maximalist (a Washington-style federal budget).

In the face of this existing (anti-Keynesian?; pre-Keynesian?; antediluvian?) institutional structure, Ireland had no choice but to impose austerity (which would have been required even in the absence of the disastrous bank guarantee of 2008). The large primary budget deficits – which meant that government spending would still far exceed tax revenues even if interest payments ceased – precluded debt default.

The actions of the ECB in 2010 in forcing us to pay off remaining unsecured bank bonds (by threatening to cut off liquidity) appear to have been beyond its mandate and it is difficult to think of any reason not to support economist Colm McCarthy’s call for this to be brought to the ECJ. But, as he notes, the need for  retrenchment would have remained.

The Irish experience under austerity has been distinguished by remarkable industrial peace. Paddy Teahon, the chief civil servant behind social partnership, argued that the process had promoted a shared understanding among unions, employers and the government of the key mechanisms and relationships that drive the economy. I wrote back in 2009 that “the Teahon view will be seen to be of validity if some agreement can be reached to reduce public-sector pay until the current crisis is overcome”.

As to whether austerity has worked, it has achieved what it was supposed to achieve, which was to close the deficit and slow the accelerating debt ratio. It was never supposed on its own to get the economy back to work, but rather to position the economy well for when markets rebounded. The flexibility of the labour market makes it easier for Ireland to bounce back from austerity than is the case for Greece for example. So does the openness of the economy, as long as export markets recover.

[All of the other panellists having been hostile to ‘the displacement of democracy by technocracy’, I suggested that:] Many or most economists of my acquaintance in Ireland were content enough with the policies espoused by, and implemented at the behest of, the troika. Technocracy can be viewed as an advantageous buffer between government and – on the other hand – purveyors of snake oil and the representatives of powerful entrenched interests (though technocrats too are not immune, of course, from regulatory capture).

Irish Performance since Independence and the Scottish Debate

This paper of mine just came out in a special issue of Oxford Review of Economic Policy on the question of Scottish independence.  I had been asked to reflect on Irish economic performance since independence, on the exercise of fiscal and monetary sovereignty, and on migration policy, without saying anything about Scotland.

From an earlier draft I attach a comparison of population growth in Ireland and Scotland and their respective peripheries.

Outward-oriented economic development and the Irish education system

 

Irish Educational Studies recently published a special issue to commemorate the landmark report Investment in Education (which was commissioned in 1962 and released in 1965).  The report’s finding that half of all children were leaving school by the age of 13 generated newspaper headlines and created the environment for Donogh O’Malley’s ‘free education’ initiative of 1966.  An appendix to the report provided information on the educational attainment of the population in 14 European countries (including seven in Eastern Europe) as well as in the US, Japan and Israel.  No equivalent statistics could be produced for Ireland.  Questions relating to educational attainment were included in the Irish Population Census from the following year.   This issue of Irish Educational Studies includes two witness accounts by key players, Áine Hyland, an RA to the report team, and Seán O’Connor, first head of the Development Branch of the Department of Education.  The issue, entitled Investment in Education and the Intractability of Inequality, also contains four academic papers.  Mine is available here.  The abstract reads as follows:

Most studies of the relationship between education and economic development focus on the line of causation running from the former to the latter.  The present paper studies how the pattern of Irish development has influenced the structure of the Irish education system.  The first section sets out the economic context of late industrialisation within which Investment in Education was commissioned and which determined the reception that the report received.  The report’s release would be followed shortly thereafter by a series of policy measures that would expand secondary-school enrolment and graduation rates and massively increase the demand for third-level places.  Later sections analyse the subsequent evolution of Ireland’s binary system of tertiary education and the recent attention devoted to science, technology and innovation policy and the ‘fourth level’ (postgraduate) sector.  Concluding comments focus on the continuing relevance of the perspective embodied in Investment in Education for the surprisingly high numbers who continue to leave the Irish education system without a Leaving Certificate qualification.

 

Lessons from the 1950s?

The institutional innovations over the deep crisis of the 1950s gave birth to the modern Irish economy. I analysed the process in this article  in the Irish Independent last week.  Brendan Keenan re edited it slightly to highlight his interpretation of what I was saying. One of the fascinating things about writing anything is how it takes on a life of its own in readers’ minds.   (“And the word was made flesh and dwelt among us”).  Edna Longley once destroyed the meaning of something I had written by aggressive editing; fortunately no such problems arise with Brendan.  I wrote a similar piece for historyhub.ie, a new site developed by a group of young historians.  Though I disagree with much of what Bryce Evans has to say on Lemass, I found his interpretation of what I had written illuminating: “it makes the case very convincingly for expertise offered as a basis for policy-making being more robustly based on both independence and breadth of opinion.”

Origins and Evolution of the IDA

In this paper – part of a series on the institutional innovations of the 1950s, and related to my paper of last year on the 1956 introduction of export profits tax relief – historian Mícheál Ó Fathartaigh and I describe the circumstances surrounding the establishment of the Industrial Development Authority in 1949 and chart its evolution and expansion of influence over the following decade.

Turnover and Exports in Irish Pharma – guest post from Chris Van Egeraat

Last week The Irish Times published their annual TOP 1000 Companies list. The list includes figures on, amongst others, turnover. A quick inspection of the list and CSO export data would suggest that exports of Irish pharmaceutical companies account for 248% of turnover!

The turnover figure I took from the TOP 100 list. I added Pfizer, which was missing from the hard copy but included in the on-line version. I excluded companies in Northern Ireland. I also excluded pharmacy groups and national distribution/sales companies on the basis that most of these will export little. I also excluded a small number of companies that were erroneously listed as pharmaceuticals. The turnover of the resulting list of firms adds up to €20.9bn.

CSO export figures suggest that in 2011, Ireland’s pharmaceutical exports stood at €51.8bn [pharmaceutical sector is here defined as to include organic chemicals (= mainly active ingredients), pharmaceutical preparations and essential oils].

I can’t figure out the problem. The issue cannot be explained by adding the turnover of the sub-1000 companies. The smallest Top 1000 company has a turnover of €6m. You would need a lot of small pharmaceutical companies to cover the difference.

I thought the difference could be explained by the fact that some pharmaceutical companies (e.g. Pfizer) operate separate export companies. But, the (separate) table with top financial enterprises includes no pharmaceutical companies. Still, could it be that exports of these export units are included in the Irish pharmaceutical export figures but not in the turnover of the Irish operations?

I appreciate that the Irish Times TOP 1000 list may not be perfect (Dell Ireland is reported to employ 796 Irish employees while the Dublin unit alone employs 1000 plus!) Still, the difference between the two figures seems too big to be explained away by recording errors. Any suggestions welcome

Below I include a selection of the methodological notes included on page 27:
• Where companies filed consolidated accounts, the group turnover was taken.
• The Irish subsidiaries of multinational or overseas companies are included if they are significant employers. If no financial information is available for the Irish operations, then turnover is estimated by The Irish Times on the basis of revenue per employee as per publicly available figures
• If a multinational has several subsidiaries in Ireland we have where possible treated them as one entity grouped under the main Irish company. In some circumstances this was not possible and they appear separately

Depfa Bank collapse and the Irish taxpayer

There seems to be almost unanimous agreement within the Irish media that had the IFSC-based Depfa Bank not been bought by another German bank just before its collapse at the beginning of the financial crisis, the bill would have landed on the Irish taxpayer. Dan O’Brien repeats this view in an article in the Irish Times on Saturday.

I am not sure that the issue is as clearcut as is supposed. Willem Buiter (pages 9-11) suggests that we are in uncharted territory in these matters.

Treaty and future of eurozone

I wrote the following background piece in response to a request last week.  It’s similar to John’s Compact Logic.  My respondent wrote back:  “So a Yes will facilitate EU growth policies, the exact opposite of the No position?”. I was also asked about the consequences of a Greek exit:

Adopting the euro as our currency was supposed to give us much greater stability than the fixed exchange rate regimes that preceded it.  But if Greece leaves the euro, financial markets will no longer accept at face value a statement by a struggling country such as Ireland that it intends to remain within the single currency.  We are likely to see a repeat of the Irish currency crisis of the early 1990s when markets lost their faith in the fixed exchange rate arrangement of the time and Irish short-term interest rates quadrupled over the space of a few months.

Ironically, the currency turmoil of that time was triggered by the outcome of a European treaty referendum but, for once, not one of ours.  Everything had been proceeding smoothly towards the eventual introduction of the euro.  Financial markets believed that Central Banks would intervene to any extent necessary to defend existing exchange rates and a speculative attack on a currency could not possibly be successful.  All changed when Denmark voted no to the euro in June 1992.  It was possible that France would do likewise in September. Suddenly the single currency was no longer inevitable.  Sterling succumbed to  speculative attack and devalued, and attention shifted to Ireland.  Over a billion pounds flowed out of Irish financial markets over the course of a few days and short term interest rates soared to almost 60 percent.

The Irish government tried to hold off the speculators.  Currency control were reintroduced.  The Central Bank raised its lending to the money markets more than twenty-fold to prevent mortgage and commercial interest rates rising by more than 4 to 5 percent.  But this could not be sustained over the longer term as all the country’s foreign exchange reserves would be lost.  Ireland succumbed to devaluation in January 1993.

The same turmoil, with a run on the banks and a massive risk premium on foreign lending to Ireland, would undoubtedly follow a Greek departure from the euro.  The difference in the present case is that where then we had only our own Central Bank, we now have the European Central Bank with its vastly greater firepower.

The fact that numerous other countries would be calling on the firepower of the ECB at the same time, and possibly indefinitely into the future, is why the eurozone powers seem lately to have drawn back from the precipice of countenancing a Greek exit.

The ECB has recently shown itself ready to provide enough liquidity to stave off catastrophe.   At the behest of the Americans, the IMF and now the French, the German government now seems to agree that austerity alone on the fiscal side will fail, just as it did in the Great Depression of the 1930s. But can the Germans be expected to run deficits to stimulate the European economy, or countenance eurobonds – which would put their own credit rating at risk –  before the rest of the eurozone has promised to limit its borrowing?  As a German politician said this week, “you don’t lend your credit card to someone who doesn’t know how to control their spending”.

In the event of a NO vote

Michael Moore of QUB raised an interesting point with me last week.  A NO vote would not affect our membership of the IMF.  Presumably, Michael asked, we could still turn to it if/when we need a second bail-out?  And recall that the troika – the coalition of the willing – was just put together because it was considered demeaning for the EU that a member state should seek a bail-out from entirely external sources.  Given all the indications of how much the IMF has changed in the wake of the Stiglitz critique, they might even have a better deal to offer than our EU partners.

Michael, of course, likes to lace his stews with chili.  But still… 

Then, though, it would be up to our American partners.  A senior IMF official confirmed to me over the summer the veracity of Morgan’s account of the Geithner veto.  Soundings to be taken over St Patrick’s Day at the White House?

External Trade Statistics

The (merchandise) trade statistics released by the CSO today showed that exports fell in December (here).  “From a November high of €8,252m, seasonally adjusted exports decreased by 9% to €7,503m in December… A substantial part of the decline in the value of exports was due to a high value product in the Chemicals and related products sector coming off patent in December”. 

This is the beginning of the “bad news (for Ireland) from big pharma” that I posted on back in December.   

Authorities refused to publish house price warnings in 2004

Anthony Murphy, now at the Dallas Fed, is a renowned Irish econometrician with a strong research interest in housing markets. Back in 2004 he was commissioned by the National Competitiveness Council to study the competitiveness implications of the housing boom.

The first paragraph of his report read: “Ireland’s booming housing market has attracted and continues to attract a considerable amount of attention, both domestically and internationally. Irish house prices are extremely high by historic and international standards, both in absolute terms and relative to incomes. The strength and duration of the house price boom is unique. Many other countries and regions have experienced large house prices booms. However, at least in the 1980’s and early 1990’s, most of these booms have ended in a house price bust.”

The report, which is here, was obviously written in very judicious language but was highly critical of the fiscal contribution to the boom. (His demolition in Section 3.5 of many of the research papers written on the boom is also well worth reading). The NCC declined to publish it. Though I have a good deal of respect for Forfás and the NCC in general, I am forced to ask: how much attention might it have received, and might it have made any difference, if it had been published?

Economic Geography Conference, January 30

As part of its fortieth anniversary celebrations, the Department of Geography at NUI Maynooth is organising a one-day conference on Networks and Flows in Economic Space. National and international academics will present papers on export flows, spin-off networks, innovation networks, finance networks, multinational global production networks and regional development. The keynote speaker is Henry Wai-Chung Yeung, Professor of Economic Geography at the National University of Singapore.

Free Registration at: geography.department@nuim.ie
Conference details and list of speakers here.
For further information, contact: chris.vanegeraat@nuim.ie