Too little credit or too few entrepreneurs?
Lack of lending is hindering recovery but debate on attitudes to enterprise is needed
In Ireland, as in most European countries, the banking system is the most important conduit for channelling money from savers to investors. If the most important part of the financial system is impaired, under-investment follows, leading in turn to sub-par economic growth
The function of a financial system is to channel money from people who have it but want to save it to people who don’t have it but want to spend it. If some of the money saved in an economy is not spent on productive investments, the stock of capital depletes. As machines wear out and roads crumble, output withers.
In Ireland, as in most European countries, the banking system is the most important conduit for channelling money from savers to investors. If the most important part of the financial system is impaired, under-investment follows, leading in turn to sub-par economic growth. That is most certainly the case in the Irish economy today.
Investment spending in Ireland since the crash has collapsed, falling far more than any other component of GDP.
In 2007, more than €37 billion was spent on plant, planes, buildings and bridges. Last year, less than €17 billion was invested (the figures are adjusted for inflation). While the size of the decline overstates the economic damage (the biggest single reason for the €20 billion contraction is that most investment spending at peak was over-investment in unneeded buildings), it is beyond doubt that some companies have not invested because they cannot obtain loans and some would-be entrepreneurs have not started businesses for want of borrowings.
A paper published by the Economic and Social Research Institute on Tuesday* is the latest effort to measure the extent to which companies are not getting the funding they need because the banking system is broken (as with all other such studies, it did not take a stab at estimating the number of new businesses that never started up bec- ause they could not raise finance). Predictably, it found that credit constraints are a big and growing problem for companies.
The failings of the banking system have led to a ramping-up of the State provision of funding to businesses, with a large and growing number of schemes. Most are tiny, but some are large. Together these schemes are likely to be more important as a source of corporate financing than non-bank private sector sources, such as venture capital or corporate bonds.
While there may be concerns about the potential for politicised lending practices and the efficacy of such schemes (as is so often the case when it comes to how government spends taxpayers’ money, no rigorous value-for-money evaluation has even been conducted on the schemes), intervention is warranted given the importance of the credit provision function to economic growth.
It is all the more warranted since the evidence internationally has pointed increasingly to employment growth being driven by young firms, exactly the businesses that usually have most difficulty accessing finance, a point stressed by the ESRI.
If new companies are constrained from growing and the number of business start- ups stagnates or falls, the prospects of generating the sort of rates of employment growth needed to solve the jobs crisis will not materialise. Some historical perspective provides context. From the mid-1950s to the early-1990s, Ireland had the worst job-creation record in the developed world. Uniquely among industrialised economies, there was no growth in the numbers at work over that period.
There is no historical data on corporate demographics for the period, but if figures on company start-ups and early growth did exist, my strong hunch is that Ireland would have been on the wrong end of that international league table, too.
This raises the issue of whether there is an insufficient supply of good business ideas today, along with an insufficiency of appropriately priced credit.
While there is little doubt that attitudes to business have improved and the sort of Yeatsian snobbery of viewing commerce as a money-grubbing, greasy-till endeavour has waned, there is scant evidence to support the view that we are a highly enterprising nation, as is often claimed.
If there are now many fine Irish companies and inspiring entrepreneurs, there are not enough of either. If attitudes towards business and entrepreneurship have become more positive, it is by no means certain that they have changed as much as they need to.
At a recent event in Trinity College on the effects of the crisis on young people, salaried jobs at home or emigration were the career options that dominated discussion. Not a single participant or audience member raised the possibility of starting a business.
More change is needed.