The Irish Economy

There have been a number of media stories about the government’s latest Smart Economy initative: a new innovation fund featuring public money matched by money from venture capitalists. The Taoiseach was quite bullish about this program on RTE’s The Week in Politics on Sunday night and he has announced it in a speech in New York (press release here.)  The details say that it is a €500 million fund. As I understand it, this is €250 million from the Irish government spread over five years (€50 million per year) matched by private venture capital funds.

The press release tells us that this is a “major boost for enterprise development and job creation.” Well, with GDP for this year projected at €161 billion, venture capital investments of €100 million per year corresponds to six tenths of one percent of GDP. Government initiatives to develop a venture capital industry in Ireland are probably a good idea (I say probably because these initatives are often poorly implemented, in which case they’re a waste of money.)  However, in the grand scheme of things, this cannot be considered a major boost to enterprise. It’s certainly not a major boost to job creation.

The OECD Innovation Strategy brings together the results of a three-year analysis of innovation and innovation policies.

The Executive Summary of the analytical study can be found here and the Key Findings here. A Compendium of Indicators to measure innovation and monitor the implementation of the strategy can be found here.

 An Expert Advisory Group including experts nominated by the governments of member states and other selected governments has provided advice and feedback on the project. As far as I can see in this Expert Advisory Group Ireland is not represented.

In today’s Business Post, Colm argues that “smart” should be defined broadly if it is to stimulate economic growth, rather than the narrow focus on gadgets that the government is currently following

Others and I have argued roughly the same, in different words, but without much traction

I guess that in ten years time, when an independent expert will evaluate the lack of return on investment in the smart economy, politicians will argue no one had warned them at the time

The government likes to see Ireland as a hotbed of all things green and techie. It must have been a bit of a disappointment then that the Economist’s briefing on Europe’s tech entrepreneurs (June 12) does not mention the Emerald Isle at all. The only Irish connection is the European Commissioner, Maire Geoghegan-Quinn.

The Intergovernmental Panel on Climate Change has just announced the authors of its Fifth Assessment Report. The list is, to a large degree, a list of the international, academic establishment on all things climate. Ireland is not represented.

The list of authors for Working Group 3 is impressive (scheduled for release at 8 am this morning). WG3 deals with greenhouse gas emission reduction and hence has a lot of economics in it. The list is a mix of world leaders and upcoming talent; expertise and topics match; and there are a few heavy weights with the authority to stand up to anyone who attempts censorship.

The list of authors for Working Group 2, on the impacts of climate change, is good too. There is less economics here, but what is there is well covered.

For completeness, here’s the list for Working Group 1 on the physics, chemistry and biology of climate change.

UPDATE: The (correct) WG3 list is now available.

The CPB has come a long way since it was founded, as the Central Planning Bureau, by Jan Tinbergen shortly after WW2. Besides giving solicited and unsolicited advice to the Netherlands Government — polite but frank — it is acquiring a similar role in Europe. Their latest publication is bafflingly in Dutch, but relevant to anyone in Europe. It is an assessment of the Lisbon Agenda.

At the beginning of the decade, European politicians promised all sorts of wonderful stuff for 2010. The CPB report wonders what came of that, comparing progress in the period 1990-2000 to the period 2000-2010.

Here’s a summary:

-Income per capita (Geary-Khamis): Economic growth in EU15 was slower after 2000 than before; ditto for Ireland; US and Australia show same pattern, but economic growth accelerated after 2000 in China, South Korea, Japan and New Zealand

-Labour participation (share population 15-65): Increase in EU15 was slower post 2000; ditto for Ireland

-R&D expenditures (share GDP): Increase in EU15 was slower post 2000; ditto for Ireland; US increase before 2000 but decline after 2000; China decline before 2000 but sharp increase after 2000; Japan and South Korea small increase before 2000 and sharp increase after 2000

+Education expenditure (share GDP): Fell in EU15 before 2000, rose after 2000; ditto for Ireland; US and China increase before and after 2000; Japan increase before 2000 but decrease after 2000

+Domestic waste (kg/cap): Rose in EU15 before 2000, fell after 2000; rose in Ireland before 2000, rose very rapidly after 2000

+Particulate matter (load): Rose in EU15 before 2000, fell after 2000; fell in Ireland before and after 2000

-Carbon dioxide (kg/cap): Fell in EU15 before 2000, stationary after 2000; rose in Ireland before 2000, fell after 2000; US, Canada, New Zealand increase before 2000 and decrease after 2000; China decrease before 2000, virtually no change since 2000; Japan increase before and after 2000

-Trust in peope: Fell in EU15 before 2000, stationary after 2000; ditto for Ireland; US, Canada, South Korea fell before 2000, rose afterwards; Japan rose before 2000, fell after 2000

+Corruption: Increased in EU15 before 2000, stationary after 2000; increased in Ireland before and after 2000; increased in US before and after 2000; increased in China before 2000 but fell after 2000; decreased in Japan before 2000 but rose after 2000

-Poverty (share of population under poverty line, before transfers): Fell in EU15 before 2000, rose after 2000; ditto for Ireland

-Poverty (share of population under poverty line, after transfers): Fell in EU15 before 2000, rose after 2000; rose in Ireland before 2000, fell after 2000

-Children in jobless families (share of population 0-17): Fell in EU15 before 2000, fell slightly after 2000; fell in Ireland before 2000, rose after 2000

That’s 8 negatives and 4 positives for EU15, and 8 negatives and 4 positives for Ireland (albeit different positives and negatives).

The government will establish the European Energy Research Centre at the Tyndall National Institute, and provide initial support of 20 million euro. See here.

Tyndall has no prior experience with energy research, and I must admit that I was unaware of its existence until the 20 million euro rumour emerged a few months ago. Wikipedia has an interesting entry. Then again, sometimes it is good to start with a clean slate.

The World Economic Forum has released its latest Global Information Technology Report, highlighting the “Networked Readiness Index”. I do not know what that means, but it probably has something to do with the Smart Economy, the government plan that is mentioned in the introductory chapter of the report. Ireland ranks 24th, towards the bottom of the rich countries and at par with the best of the middle-income countries.

The index consists of 3 subindices, each consisting of three subsubindices, derived from a total of 68 indicators.

As everything depends on the arbitrary weighting of the indicators, it is more instructive to look at the bottom level indicators.

Ireland is 24th out of 133 assessed countries. What is dragging us down? I’ll list the indicators on which Ireland is 48th or lower:

• Burden of government regulation: 74th
• Intensity of local competition: 49th
• Time to enforce a contract: 60th
• Residential telephone connection charge: 92nd
• Residential telephone subscription: 118th
• Fixed telephone line tariffs: 52nd
• Business telephone connection charge: 76th
• Business telephone subscription: 92nd
• Availability of new telephone lines: 53rd
• Government prioritization of ICT: 63rd
• Government procurement of ICT: 59th
• Importance of ICT to government vision: 56th
• Government success in ICT promotion: 64th

There is no need to comment on the above.

Ireland scores well on a number of things (12th or higher):

• Judicial independence: 9th
• Number of procedures to enforce a contract: 1st
• Level of competition: 1st
• Quality of education: 8th
• ICT imports: 1st
• ICT exports: 10th

It is not surprising that economists raise a cynical eyebrow at corporate-speak-filled innovation reports.   Last week we had the IDA’s Horizon 2020; this week it was the turn of the Innovation Taskforce with its Innovation Ireland.   But it would be a mistake for Irish economists to disengage from the debate given the impressive body of literature on the economics of innovation we have to draw on.  (more…)

The Taoiseach has launched the report of the report of the Taskforce on Innovation (here’s a link to a page featuring the report, a summary and a video featuring lots of people telling us how cool innovation is).

I was critical of the composition of the taskforce when it was appointed but, rather than fire off knee-jerk criticisms, I’d like to take some time to read it before commenting further. However, as always, cogent opinions from our commenters are very welcome.

Last week, the IDA launched its new strategy document “Horizon 2020.”  Michael Hennigan has a critical article on the strategy in today’s Irish Times.

In light of recent discussions on this blog about Irish universities and their role in the wider economy, this article in the Sunday Business Post by Trinity’s Charles Larkin and Brian Lucey raises a lot of important issues.

Peter Sutherland may have been quoted out of context, or inaccurately, in today’s Irish Times, where it is reported that

Yesterday, Mr Sutherland was also critical of Government moves to reduce the pay of university presidents and other senior academics. Mr O’Keeffe has written to university presidents seeking a voluntary pay cut, while the Higher Education Authority has reviewed procedures which allow universities make special payments to its top academics.

Mr Sutherland called for a new flexible approach, “necessary to retain talented but highly mobile staff”.

But presumably the academics here can all agree that in the entire history of higher education, there has never been a recorded case of a talented student saying “I must get my PhD at Harvard, they have a really exciting President”, or “Oxford is the place for me, their Head of Human Resources rocks”, or “what about that VP for Research at Stanford, there’s no other option as far as I’m concerned.”

Academics — even, or perhaps especially, the opinionated ones — make universities what they are. The best students go to places like Harvard because of faculty rosters like this. VPs, Presidents and all the rest are not ’senior academics’. They are university bureaucrats, or administrators if you prefer. In the Irish context they sometimes come up through the ranks, while sometimes they are hired in from places like the HEA.  I doubt that they are particularly mobile internationally. Paying them enormous salaries strikes me as a waste of money.

If Ireland wants to become a ’smart economy’ it would be helpful if basic distinctions like this were kept in mind.

I’ve been patiently waiting for a response to, or even a report in Ireland of, the  publication of the 2009 Shanghai  Jiao Tong Academic Ranking of World Universities.  See http://www.arwu.org/indexs.jsp.  Could this possibly be a case of socioanalytic denial? 

This is by far the most widely used ranking in the world for three reasons.  It is almost impossible to ‘game’. It is used as an information tool by internationally mobile students.   It is designed to honestly assess the evolution of the relative position of Chinese Universities: we know it’s honest because they don’t score well.  

There have been enthusiastic references in the Irish media and in this blog to other university rankings.  This is because some Irish universities appear to be important in these.  But you should be suspicious: they also rank many British universities well above obviously superior US institutions.  The apparent success of some Irish Universities is a by-product of this ludicrous outcome.

Go on:  check it out.  Has the Portarlington Institute for Science and Society got the recognition it deserves?

Yesterday’s QNHS (Q3 2009) release provides a timely update on trends in the immigrant workforce.   In the period from the third quarter of 2008 the number of non-Irish nationals in employment fell by 61,600.   This is equals half the fall in the employment of Irish nationals (123,200), even though non-nationals represented only 13.6 percent of the workforce in Q3 2008.

It is also evident that many immigrants are returning home, with the total population of non-nationals (15 and over) falling by 41,000 over the year.   This might be welcomed in the short run if it limits the rise in unemployment.   But returnees also ease the downward pressure on wages.  Over the medium term, it is not a bad rule of thumb to view a country’s equilibrium unemployment rate as independent of the size of its labour force. 

Looking to the longer term, the return to net emigration is a worrying development.   As is often observed, Ireland’s high degree of factor mobility makes the economy operate more like a regional than a typical national economy.   An expanding skilled workforce gives the economy the scale, diversity and connections to support innovation-intensive growth.   Indeed, the empirical regional/city growth literature points to initial human capital as a strong predictor of subsequent growth (see here).   A truly smart “smart economy strategy” will recognise the value of getting–and keeping—talented people here. 

A recent international conference held in Brussels discussed strengthening research and research policies in Europe. The Conference Programme  addressed issues such as the long term perspectives for research and researchers; developing world-class research infrastructures in Europe; improving funding conditions for European research institutions; research and innovation during the current crisis; priorities for EU research policies post 2010; S&T specialisation; indicators to monitor progress towards the European Research Area and a knowledge-based economy. The papers and presentations can be found here. The conclusions of the conference sessions can be found here.

One of the points made often in relation to improving science, technology and innovation policy is the need for more effective multidisciplinary research. The ESRI is organising a Training Workshop focused on understanding multidisciplinary research collaboration and learning how to make it more effective. The Workshop will take place on 3 November 2009, 9:00-13:00. More details can be found here. Places are limited to 30 participants including researchers and policy analysts. Registration before 25 October 2009 here.

There is an ongoing discussion on this blog about attracting foreign investment in R&D in Ireland. In a recent research paper we analysed the location decisions of foreign affilates in the R&D sector incorported in the European Union over 1999-2006. Our research results suggest that, on average the location probability increases with market potential, agglomeration economies, R&D intensity and proximity to centres of  research excellence.  The determinants of the location choice of R&D foreign affiliates vary depending on the country of origin of the foreign investor. Thus, it appears that agglomeration externalities and business R&D intensity had a higher positive effect on the propensity to locate in an EU region in the case of multinationals from North America in comparison to European based multinationals. Proximity to centres of research excellence had a positive and significant effect on the location choice for North American R&D multinationals but no significant effect in the case of  European R&D multinationals.

Our research results suggest a number of policy implications. First, policy aiming at increasing the R&D intensity of regions are likely to foster the attractiveness of regions to R&D foreign investment. Second, positive externalities from clustering of R&D foreign affiliates outweigh competition effects. Third, given the heterogeneous behaviour of foreign investors, differentiated policy depending on target partner countries can increase the success of such policies.

The New York Times carries an interesting article on the role of spending on science projects as part of a stimulus package.

Quantitative analysis of science and technology is  a growing research area.  There are two university rankings based on bibilometric indicators which are worth watching:

Cybermetrics Lab has this university ranking for Top 100 universities in Europe, published in July 2009. TCD is the only Irish university in this list, ranked 49th in Europe and 169th in the world ranking. In the world ranking UC Cork is 393rd and UCD is 457th. The world rank of Irish universities can be found here.

The Centre for Science and Technology Studies of the Leiden University has constructed several university rankings based on scientific output. While based on the same data and methodological background, rankings differ depending on the focus of the impact - indicators. The Leiden ranking results 2008 can be found here.

As far as I know, there has not been a single blog relating to Northern Ireland since The Irish Economy blog began earlier this year. Northern Ireland is having a relatively good recession for various reasons on which I do not wish to dwell. However, it has serious long-term problems which have been addressed in a report commissioned by the devolved economy Minister. The report is available here. What will interest readers of this Blog was that 4 out of the 5 report authors are economists, of which I am one.

In essence, the Northern Ireland economy has operated under wartime conditions for nearly four decades. Public sector output amounts to around 60% of gross value added (the regional equivalent of GDP). More specifically, industrial policy has consisted of providing large scale grants to both inward investors and indigenous firms. This has been partly successful: employment growth has been high in the last decade and at the peak of the recent boom, the unemployment rate was hovering just above 4% as in the Republic of Ireland case. What was different was that productivity growth was low to non-existent. Consequently living standards have not converged on the UK and have diverged markedly from the Republic of Ireland and other successful countries.

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The new rankings are out. All Irish universities are up. TCD at 43, UCD at 89.

To pre-empt some critique: No ranking is perfect, but each imperfect ranking correlates with each other imperfect ranking. Two universities in the top 100 is not at all bad for a country that has far less than 2/100 people in the OECD, let alone the world.

One of the points which smart economy boosters often miss, but which is obvious to economists, is that technology is internationally mobile. It follows that productivity growth in a small open economy like Ireland depends much more on the domestic adoption of foreign inventions than on domestic inventions. This in turn has implications for the sorts of arguments that can be made in favour of government R&D expenditure in Ireland.

Cormac provides a nice historical example here.

In a paper just published in the ESR, Benoit and Marsh confirm that research excellence is measurable — even for political scientists, some of whom argue that reality is constructed. They show that research quality varies considerably. Should research budgets be cut, there is now a basis for cuts that minimise damage to quality.

Some of you will want to bitch that Benoit and Marsh feature as the numbers 1 and 3 on their own ranking. This is nonsense. The correlation between the various indices is high. The same people are top regardless of the quality measure used, and people-in-the-know already roughly knew who would do well. This exercise primarily serves the community — and the authors invested time that they could have used to publish in a more prestigious journal.

The Innovation Task Force was appointed to advise the government on how to turn Ireland into an international innovation hub and to support the development of a smart economy. It’s easy to be cynical but better to be constructive. The ITF has issued a call for submissions on its terms of references:

• to examine options to increase levels of innovation and the rates of commercialisation of research and development on a national basis with a view to accelerating the growth and scale-up of indigenous enterprise and to attract new knowledge-intensive direct investment;
• to bring forward proposals for enhancing the linkages between institutions, agencies and organisations in the public and private sectors to ensure a cohesive innovation and commercialisation ecosystem;
• to identify any specific policy measures which might be necessary to support the concept of Ireland as an International Innovation Development Hub including in the areas of legislation, educational policy, intellectual property arrangements, venture capital and immigration policy.

Here is my draft submission. All comments welcome. I’ll acknowledge your input by something like “A draft of this submission was posted at www.irisheconomy.ie and substantially improved as a result of the discussion there. Comments by Malle Appie were particularly helpful.”

High wages require high labour productivity. High productivity requires excellent skills and creativity. Ireland can only maintain its position at the forefront of economic development if it fosters innovation and commercialization. Innovation is a creative process, however, and therefore cannot be mandated by government policy. The government can only create the conditions under which innovation and commercialization are likely.

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From yesterday’s Sunday Business Post

One of the recommendations of An Bord Snip Nua is to transfer all research money from the departments and agencies to a single research body.  Besides the cost savings, I see three advantages:

1. Competition for research allocation between fields (as opposed to the current earmarking of research money for someone’s pet projects)

2. Academic quality control (captive agencies occassionally grant funding to researchers of low repute but the right political colour)

3. Streamlining of applications and administration (at present, research bodies need to keep track of the rules of a range of bureaucracies)

I see two disadvantages, however:

1. Disruption: Transfer of tasks between public policy inevitably leads to chaos, and no research funding will flow for a certain period. This may lead to the destruction of human capital — that is, the good researchers may leave the country, leaving the dross behind. Continuity is therefore a high priority.

2. Applied research has a lower status, and funding will be under additional pressure from blue-skies research. The agencies and department that lose their research grants should have a substantial say in the type of research to be funded (but not, of course, select the researchers).

Former IDA chief executive Seán Dorgan has an interesting article on the Smart Economy in today’s Irish Times, partly rebutting some of the points made in Declan Jordan’s recent piece.  One of the arguments made by Dorgan that I found interesting was the following:

The Technology Foresight reviews were undertaken a decade ago with the realisation that a production model based on low costs and labour surpluses had run its course.

Instead, Ireland had to move to higher value activities and create a new dynamic for growth. The competitive power of knowledge and innovation was identified, for indigenous development and winning international investments.

One of the points I made when last discussing this issue was that the Smart Economy strategy seemed more appropriate for the later days of the Celtic Tiger, when the economy was at full employment after years of attracting FDI.  Dorgan’s article further enforces that impression: With unemployment already at almost 12% and going higher, should we really be talking about moving beyond industrial policy strategies based on the availability of labour surpluses?

Over the past couple of months, I’ve been surprised at how little real debate there has been about the government’s Smart Economy strategy.  Monday’s Irish Times Innovation supplement had a useful article discussing the economist-free Innovation Task Force that I mentioned last week.

As one might expect, the article contains some enthusiastic comments from some members of the Task Force—industrial policy experts will recognise the idea of the strategy succeeding by “picking winners.” In addition, however, the article also quotes some less enthusiastic economists—me and UCC’s Declan Jordan.  The Times also carried another article from Declan, which together with his earlier article from April, represent important contributions to the debate on these crucial issues.

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The Irish Times reports that

TAOISEACH BRIAN Cowen has announced the appointment of an innovation taskforce to advise the Government on its strategy for positioning Ireland as an international innovation hub and to assist in making the “smart economy” a reality.

The taskforce to assist in making the Smart Economy a reality doesn’t contain an economist of any sort, smart or otherwise.  This seems to me to be a pity.  Economists tend to think about the effect of policies on the economy in a somewhat different ways to scientists, civil servants and CEOs and could have had a useful influence on such a taskforce.  (Hey, if we’re not for ourselves, who else is going to be?)

In particular, economists tend to think about government interventions in a more systematic way (What’s the market failure that these policies are addressing? Externalities? Natural monopoly?) and to better see the linkages between new initiatives and past industrial policies.  Since there won’t be any economists advising the government on this taskforce, I would encourage participants in this blog to come forward a bit more to discuss these issues here.

One aspect of the current Smart Economy strategy for which, in my opinion, the likely economic impact is being exaggerated is the link from university innovation to start-up firms and jobs.  Policies to encourage university R&D and its commercialisation may change the type of jobs in Ireland but they are unlikely to have much effect on the number of jobs.  Similarly, the statistics on start-ups show that failure rates are very high, so as much it’s nice to talk about starting up a Nokia here in Ireland, the truth is that this process is highly random.

More generally, given the heavy emphasis in recent policy statements on university innovation and spinoffs, it is important be realistic about the role of such activity in other advanced economies.   Engineer Richard K. Lester from MIT is an international expert in the interactions between science and the economy.  Here is an interesting presentation titled “A Framework for Understanding How Higher Education Affects Regional Growth” in which he discusses some common “myths” with regard to university innovation.

Finally, here’s a link to an edition of the journal Capitalism and Society, which has a paper on the Oxford model of commercialisation as well as interesting comments from Lester. 

The papers are behind a pay firewall which many of you won’t have access to, so here’s a brief excerpt from Lester’s comments:

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The news today that the proportion of Leaving Cert students taking honours maths and physics has declined confirms what third level teachers already know: mathematical literacy is poor in Ireland. There are obvious implications for the credibility of the government’s knowledge economy ’strategy’, but since the government has little credibility anyway that is not of any great importance. The problem of low mathematical standards is, however, an important one for the economy. It is a problem for which there are no quick fixes, but which could be solved given time, willingness to change, and attention to detail. Which makes it a nice metaphor for the Irish economy more generally.