Exports will be vital part of economic recovery

A recent talk by the Government’s economic adviser Alan Ahearne gave an insight into his thinking – which is surprisingly optimistic

LAST TUESDAY over 100 TDs and Senators crowded into Fianna Fáil’s assembly room on the fifth floor of Leinster House for their weekly meeting. It was a warm evening and the room was clammy even with the air-conditioning thrumming at full blast. Despite the discomfort levels, many stayed the course for three hours because of the subject matter.

The centrepiece was a presentation on the economic crisis and the remedies required to fix it. The leadership’s objective was to get uniformity of knowledge so there would be consistency of communications from its TDs. To borrow the Blairism, they all needed to be “on message”.

“People think there is no plan and it’s all random and that we are putting out fires,” said one senior figure. “There is a coherent plan and it is the only plan and we wanted to show that this was the only way to do it.”

The political aspects of these were dealt with by Minister for Finance Brian Lenihan, who also fielded questions during a long, spirited but increasingly attenuated debate.

However, it was a presentation on the economic aspects of the crisis that commanded most attention.

This came by way of a presentation by Dr Alan Ahearne, the NUI Galway academic now seconded as adviser to Lenihan. An expert on the economic impact of property crashes in other jurisdictions, he is unquestionably the country’s most influential economist at present.

What surprised some of the TDs and Senators was the upbeat nature of the presentation.

Sure, the overall picture was grim and Ahearne does as good a line in sanguine pessimism as any other macro-economist. Nobody was left in doubt about the gravity of the crisis, not least the meltdown in the property sector.

But there was far more buoyancy and hope than many TDs had expected from Ahearne. He told the meeting that when you peered beyond the crash-site of the property sector there were vital signs of life to be detected. Exports were proving to be very resilient. The Irish workforce was proving itself to be extraordinarily adaptable in a European context. The essential journey to restore competitiveness to the Irish economy had already begun.

What he said on Nama and on the severe cutbacks required in public spending has already been well ventilated. But there was more grim stuff to come. New house completions will dip depressingly to well below 10,000 next year, with only a slight improvement in 2011: that is an astonishing 90 per cent drop compared to 2006 when there were 90,000 completions.

The huge over-dependence on property, he told the meeting, saw its share of GDP increase from 4 per cent in the 1990s to 13 per cent in 2006. At the same time, with inflation, rising prices, costs and wages, exports continued to fall. The property boom masked this emerging fault line.

The figures in retrospect are incontrovertible and indefensible. By 2008 Ireland had lost 25 per cent of competitiveness compared to 1998. That situation was exacerbated by the sharp depreciation in sterling in 2008.

Ahearne pinpointed 2003 as the moment when Irish banks began to lose the plot. In 1992 money borrowed by domestic banks from foreign banks amounted to 7 per cent of GDP. In 2003, it shot up and reached a vertiginous 55 per cent of GDP by 2007. His view? In retrospect, it was a high-risk position that left them very vulnerable, very exposed because of the huge dependency on property.

Ahearne also argued against any stimulus plan or injection of cash into the economy – a Labour Party position. The money borrowed for stimulus would “leak out of a small open economy through higher imports”, he argued. That was unlike big economies like the US or Japan where stimulus money is mostly spent on home-produced goods and services.

The only stimulus possible in a small country like Ireland is to reduce costs, both in Government and in the private sector.

One positive development he said has been the 4 per cent fall in unit labour costs in the past year, partly attributed to pay cuts, voluntary and imposed. Ireland is the only State in the EU which has shown a decline (there has been a 6 per cent increase in the Netherlands). That swing of about 7 per cent has helped eat into the 25 per cent loss of competitiveness experienced over the previous decade.

Ahearne said it demonstrated an impressive “agility” in the Irish work force. Wage cuts were tried but failed in Hong Kong in the 1980s and in Sweden and Japan in the 1990s. Here they have occurred, with some moaning, but ultimately without resistance. The effect is akin to a stimulus. The loss of earnings is somewhat cushioned by a 4.5 per cent fall in the Consumer Price Index.

Competitiveness of goods for export has also improved.

Another dramatic upswing in Ireland was witnessed in personal income which rose from 60 per cent of the EU average in 1992 to 130 per cent in 2006. Property made Ireland the second richest country in Europe (on paper). And yes, indubitably, there was a lot of “froth” in those figures, he said. But the big splurge in property came late. Something dramatic happened earlier which made Ireland rich. And that something was exports. He said they were the driver of the real Celtic Tiger in the 1990s. And they may be the driver now. He said the resilience of exports was stronger than was thought.

Exports in 2009 were down 25 per cent across Europe and 35 per cent in Sweden. In Ireland they were down but only by 5 per cent. That was vigorous, given that Ireland was worst hit by the devaluation of sterling. His messages: Irish exports are resilient. Chemical and medical devices are very successful. Some business services are strong. Improving exports will be a vital component of recovery. It may even keep Irish incomes above European levels, although tackling the steep rise in unemployment is a new problem that will take a long period to iron out.

Harry McGee is a member of the political staff of The Irish Times