Common good should be driver of economic policy
If we learn from our many mistakes, we can create an Ireland of vision that excels on new global markets
After the excitement of a property boom, the crisis in banking and the departure of the troika, what next? The general population may now be faced with the prospect of relative boredom as pundits and analysts return to the mundane world of business, debt, living standards and jobs.
While there is much to be positive about in recent economic news, there is also much to be concerned about. High public debt levels are likely to stay for the rest of this decade, along with unresolved personal debt issues, enduring high unemployment and underemployment as well as a growth in precarious employment and low-wage sectors.
With most households experiencing a fall in living standards over the last six years, prospects for recovery before 2016 look remote. Real wages are stagnant, while taxes and charges are higher and more are in the pipeline until 2015 at least
Now is the time to ask fundamental questions about what type of society we envisage not just in 2016 or 2021 but in 2050 when many of us will still be alive to see, hopefully, a different type of Europe and Ireland. Economic policy should be driven by a vision of what is good for society: not the other way round. However, without a successful economic policy aimed at full employment, greater social equality and sustainable development, it is not possible to provide the level of social services and protection people need.
After the debacle of the 1980s economic crisis, a combination of continuing inward investment, fortuitous international conditions and a credit-fuelled, regulation-light boom in land and property prices drove the Celtic Tiger, especially in its latter phase from 2001 onwards. There was something for most people as it was imagined that we could have Berlin public services for Boston level taxes. As late as 2007, there was near-universal consensus across the political spectrum on the desirability of further cuts in income tax: this after almost half the workforce had been removed from the income tax net and high-income taxpayers were able to pay low tax through tax reliefs and write-offs.
There was something clearly rotten in the state of Denmark, as Marcellus might have said to Horatio in Hamlet. Except, it was not Denmark that was the problem. It was the totality of economic, political and social relationships here in Ireland that allowed what happened to happen. Commercial property construction and associated tax reliefs and lending lies were behind the bankruptcy of Anglo Irish Bank. Might we yet see a return to a commercial property boom, again, in major centres with the risk of overheating in some sectors of construction while there is a shortage of affordable homes?
A popular theme in post-bailout Ireland is that lessons have been learned and the future is to be secured by means of strict devotion to fiscal rules, tighter controls on banking and reform of public institutions. It is as if the crisis was the product of the wrong people in the wrong positions with the wrong incentives and bad institutional rules.
There was indeed a failure of corporate governance in the private banking sector and other areas of high finance. There was also failure at political and public regulatory level, while distortions in economic behaviour were encouraged and rewarded by a regime of low interest rates and speculative-friendly reductions in capital gains and other forms of tax.
However, the real flaw of the Celtic Tiger model lay in its failure to generate a sufficiently dynamic and large-scale native enterprise platform capable of competing on global markets with new products and services. For example, too much investment went into hotels and homes in the wrong places, while a national-level social crisis in affordable accommodation was in train, the fruits of which are now evident in the collapse of social housing and the beginnings of a spiral in private accommodation rents in the capital.
This is not to deny there was much productive investment in the years leading up to the recession, especially in areas of transport, roads and energy where public enterprises invested heavily. However, much of productive Irish business remained underdeveloped.
The problem was not just lost competitiveness, misdirected investment and rising costs. It was a deeply embedded culture which marked out Ireland from other northern European small, open economies. It signalled an underdeveloped system of native innovation and enterprise identified over recent decades (for example in the 1992 National Economic and Social Council-commissioned report by Prof Lars Mjoset).
As a long-term strategy, a policy of excessive reliance on foreign direct investment allied to a low corporate tax regime is risky, given the shifting sands of policy on corporate tax and newly emerging markets for skills and products. A more diversified strategy is needed and one which gradually shifts the relative balance towards stronger domestic enterprises with the capacity, skill-base and access to networks and finance to compete in new global markets. Irish agribusiness, healthcare, educational services, ICT and construction services are examples of export growth areas.
Beyond shareholder value
A successful enterprise policy needs to be complemented with effective social policies to raise skill levels and equip firms with supports, and changes to corporate governance and employee engagement so they reflect the common good and not just shareholder value. Other economies with higher taxation and “social wages” (subsidised or “free” early childhood care, national health services and social housing) also have stronger indigenous sectors. Part of the reason is that higher taxes and “social wages” are reinvested into the economic and social infrastructure and this benefits employees and businesses.
Banking remains central to economic activity. Rather than selling all the nationalised commercial banks, there should be a strategy to reform existing institutions and develop a new State investment bank which invests in and advises enterprises.
Now is the time for an honest debate on choices and options for Ireland. There are no single silver bullets, whether in foreign direct investment, native enterprise, State services or local community initiative. Instead, there is the prospect of learning, trial and error. The Japanese have a saying “fall seven times and stand up eight”.
Tom Healy is director of the Nevin Economic Research Institute (nerinstitute.net)