Author: Frank Barry

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).

Scottish Independence and Foreign Direct Investment

Thanks to readers for the valuable comments on my last post on Scottish independence. I have just received the transcript (here) of some brief remarks I made on the above topic at a recent conference in the UK.

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.