Comment: Recent job losses have led some commentators to argue that de-industrialisation is to be expected in a sophisticated, market-driven economy, writes Michael Casey.
Moreover, according to this view, the market will bring about a shift to information-based services and higher value-added activity, which are more appropriate to a developed economy. This is all right in theory, but a few practical caveats need to be entered.
Despite the hyperbole, the economy is hardly a market-driven one. If it were, the people who were made redundant would accept the job losses as part of the process of "creative destruction". Wages in the affected areas would fall and/or unemployed people would move to another region - or country - where there was a demand for labour. This is not the response.
Instead, we are seeing pressure being put on the Government to persuade some US multinational company to replace the jobs not just in the same places but, if possible, in the same premises. The Government is also expected to take care of any reskilling that may be required.
If the jobs cannot be replaced by a suitable multinational, then the Government will be urged to send hundreds of civil servants to the affected region, like antibodies to the point of infection. Incidentally, there is no mention of local enterprise making any contribution to the problem. It is clearly the job of the Government to provide the jobs.
This is not capitalism. There is nothing market-driven about this. It is old-fashioned economic engineering and it is most unlikely to bring about the required shift of resources into higher value-added activities. If, for example, another US manufacturing firm was prepared to set up in an area affected by job losses, would the Government turn it down on the grounds that it wasn't high-tech enough? Hardly. We'll take what we can get, so it's not even good economic engineering.
The reality is that we are trying to make a virtue out of necessity. Due to complacency by Government and by the private sector over several years, we have allowed our manufacturing cost base become far too high in relation to productivity growth, which is very low in Irish manufacturing, and becoming lower if recent data are to be believed.
Instead of admitting this problem and doing something about it, there is a chorus of voices saying that manufacturing is old hat anyway and the sooner we switch over to the information economy the better. Would it were so easy. This shift might have some prospect of success if market signals were allowed to hold sway but this is not the case and it is hard to see the planners getting it right.
The argument that other developed countries have accomplished this transformation without pain is false. De-industrialisation in the UK was a most painful process for a long number of years and was matched by slow growth, high unemployment, repeated currency devaluations and considerable socio-economic strife.
The fact that the UK economy is in reasonably good shape today is in large part due to the financial centre of London, which is the largest and most prestigious in the world. It is also worth noting that the UK financial centre has strong synergies with the information sector.
The process of de-industrialisation in the US was also fraught. Productivity was very low for years and real wages hardly grew at all. There is still, to this day, a twin deficit problem in the US. Productivity , however, has more than recovered largely because of the shift to the information economy. It must be remembered that the US has a huge, dynamic information sector. One only has to think of Silicon Valley, the top American universities, the various research foundations and centres of excellence. In other words, the US economy is now playing to its strengths and has put in place an intellectual infrastructure.
The US and UK are much more market-oriented than the Irish economy and this undoubtedly facilitated their transition to the information economy, or "third age" as it is sometimes called. Those countries could devalue their currencies to ease the transformation. This option is not available to the Irish economy.
In Ireland, we don't have a large financial centre and we don't put much resources into research. Our universities rank poorly by international standards. Maths and science are out of favour with school children and third-level students. Much of our production base is foreign-owned or second-hand in terms of technology. These are hardly propitious starting conditions for a launch into the information economy.
Moreover, while higher value-added activities should entail higher wages and salaries, they are not exactly labour-intensive. There is a doubt, therefore, about whether they can sustain demand for the products and services of other sectors. At present levels of indebtedness, it is hard to see additional borrowing as a solution to inadequate demand.
Our approach to de-industrialisation should be more measured and we should move slowly. We do not yet have the intellectual infrastructure, let alone the physical infrastructure, in place for this leap. In the information economy, we cannot rely on importing the fruits of other countries' research as we have done for so many years in the past. We have to be inventive, and undertake cutting-edge research ourselves. However,this does not mean hiring consultants.
It is a tall order, made more demanding by the relative absence of market signals. The transformation may require, for example, an increase in the salaries of those who teach science subjects and a reduction in the salaries of those who teach other subjects. Without this kind of flexibility it is not clear how the fundamental changes will be accomplished. Central planning will hardly work, and we have seen that where the Government has a legitimate role - in helping to create the intellectual infrastructure, for example - very little has been accomplished to date.
Until we are ready for this transformation, we should try to hold on to our better manufacturing industries, short of subsidising them. Why can't we go upmarket with some of our industries and try to make them higher value-added activities instead of abandoning them? Why can't we design wonderful furniture like the Danes, or haute couture like the French or Italians? Why can't our agriculture be remodelled along organic lines? Why don't we generate leverage from once-great brand names like Waterford? Why don't we develop more niches? Do we not have the enterprise culture to do these things? Has the policy of depending on foreign multinationals over the years sapped Irish enterprise?
Of course, we must move into the information economy at some point and, ideally, market forces will bring this about. But it is naive to think we are ready for this transformation or that it will occur painlessly. If, because of our high cost base, we cannot retain or restructure the best manufacturing industries, then the transition is likely to be more fraught here than it was in the US or UK.
Michael Casey is a former chief economist with the Central Bank of Ireland.
