A new study foresees a continuation of the globalisation trend. And the Republic looks likely to be a beneficiary, writes Dan O'Brien
The world changed profoundly in the 1990s. Dizzying technological change and falling barriers to cross-border interaction saw greater mobility of people, goods, money and ideas. As a result, science, the arts, education and commerce became more internationalised.
One of the central pillars of this globalisation process was an unprecedented surge in mobile investment. In the years between 1990 and 2000, flows of foreign direct investment (FDI) increased globally by a factor of 6.5. This altered radically the structure of the world economy.
The phenomenon affected most parts of the planet, and none more so than Ireland's North Atlantic hinterland. As the European and American economies became more deeply integrated by two-way investment flows, Ireland moved from being on the periphery of Europe to the centre of the new transatlantic economy. It should be acknowledged that if this change had not taken place, there would have been no Celtic Tiger.
That processes of globalisation and "transatlanticisation" are among the issues examined in a new report published jointly by the Economist Intelligence Unit in London and the Columbia Program on International Investment in New York. There is much that is relevant to Ireland. Happily, most of it is good news.
In 2006, world direct investment will surpass the $1 trillion mark for the first time since 2000. We forecast that FDI will continue to rise over the remainder of the decade, even if the rate of growth will be lower than in the 1990s. We describe the coming period as one of constrained globalisation.
This augurs well for Ireland. The prospect of more foreign-owned companies locating in the country can only add to the existing benefits, of which there are many.
Foreign firms employ as many as one in 10 people in the economy. Indirectly, via salaries spent in the local economy and business generated for suppliers, they account for as many jobs again. On average, they pay more and offer greater job security than home-grown companies.
They also invest almost twice as much in staff training, account for nearly three-quarters of all private research and development carried out in the country and annually hand over to the Exchequer more than €2.5 billion in profit taxes. The long list of benefits has silenced even Ireland's diehard anti-globalisers from criticising the multinationals. But could these companies up sticks and move to lower wage economies further afield? This question has been asked more frequently in recent years as the enlargement of the EU has given eastern European countries many of the same benefits that Ireland has enjoyed for over three decades.
But, argues the report, these concerns are misplaced. The evidence shows that the new EU members continue to attract only a fraction of the foreign investment that flows into western European countries. There has been no step change since accession in May 2004. Nor is one to be expected. We forecast that the new members' share of total EU25 FDI inflows in 2006-10 will be a mere 5 per cent.
There are a number of reasons for this. Doing business in those countries is still difficult. Economic and political instability (as recent events in Budapest illustrate), serious corruption, organised crime and clapped out infrastructure are just some of the hazards. In addition, the adoption upon accession to the EU of the bloc's stringent environmental and worker safety rules has narrowed the costs gap with western Europe.
Fears about low-wage economies taking all investment are wrong for another reason. There is not a fixed lump of global investment for which countries play a zero-sum game to attract. Just as the total amount of investment would shrink if countries implemented bad policies, creating more attractive business environments will generate more overall investment. While there may be some diverting effect in the short term, it is a fallacy to believe that more investment into one country necessarily means less for everyone else.
For Ireland, the greatest threat to keeping investment flowing is complacency at home, not competition from abroad. Making sure more well-paid, knowledge-intensive jobs continue to be created requires a relentless focus on upgrading skills levels, improving infrastructure, easing the regulatory burden and breaking up cosy cartels. Beyond Ireland's immediate interest in its own continued economic wellbeing, the report may also have implications for how the Republic, and other rich countries, aid those less fortunate.
The global economy has been driven in recent years by rapid growth in many parts of the developing world. But some countries have not managed to hitch their wagons to the globalisation locomotive. In his contribution to the report, Jeffry D Sachs - a campaigner for development in the planet's poorest countries and one of the world's leading economists - argues that economic growth in the developing world can be accelerated by using more active methods of investment attraction.
He makes a persuasive case, and it is one that could feed into the debate about how Ireland's aid programme should evolve. As the country's aid budget has increased rapidly, few would disagree that there is scope for innovation in its use. A role for IDA Ireland would seem obvious in this regard.Its unrivalled expertise in attracting investment could be drawn on to advise developing countries on building institutional capacity, tailoring policies and targeting foreign businesses.
Making sure all parts of the world benefit from globalisation is a moral imperative, but also a political necessity. The full title of the report - World Investment Prospects to 2010: Boom or Backlash? - makes clear that there are risks to our central (benign) outlook. The biggest comes from rich countries, where voices calling for assorted protectionist measures are rising. These voices articulate fears about the pace of economic change and the negative effects globalisation can have.
The truth is that participation in the global economy brings large net gains. This is not to deny that there are costs. But extra wealth created by the process allows welfare states to be strengthened, so that hardship for those who lose out is mitigated.
[ www.eiu.com/wip ]