NI Assembly offers chance for economic development

For the economy of Northern Ireland, this is the beginning of a long moment of truth. The time has come to test whether lift-off can be achieved in an economic microclimate set by a devolved, powersharing government and North-South institutions.

A recent SDLP discussion paper set out structural weaknesses in the Northern economy and took a view on the vulnerabilities of the economies, North and South. The question that hangs over the entire discussion is the extent to which the powers of the new devolved government, and the North-South institutions, are capable of addressing these deficiencies and vulnerabilities.

First, the SDLP says there is a continued dependence in manufacturing on traditional sectors like textiles and ship-building, which are vulnerable to low cost international competition. Second, there is a deficit in education and training levels, resulting in low productivity. Third, the SDLP points to the excessive public-sector inability to attract sufficient foreign direct investment.

Among the vulnerabilities are potential political and economic disruption arising from public to private sector restructuring, a "human capital deficit" in the transition from traditional to modern manufacturing, and the predominance of low productivity in indigenous manufacturing. The SDLP also mentions competitiveness shocks arising from "the sterling-euro default line" (a new name for the Border?) and "the limited scope for devolved regional policy innovation for the foreseeable future".

Finally, there is a "North-South policy mismatch" and market competition problems with the export market in the Republic.

These are very challenging vulnerabilities for any government, let alone one with limited powers. In pointing to policy success in the Republic, based on tax, education, European policy, social partnership and improving infrastructure, it is clear the extent to which similar policy instruments are not available to the new Northern government.

It can do nothing about corporation tax, a mainstay of the Republic's industrial development policy. A social partnership approach to policy in Northern Ireland, which the SDLP would favour, would be constrained by the extent of government powers. The bargain made by the Government side here of keeping inflation low and boosting real, take-home pay by tax cuts, cannot be made by the new Northern government, only by London. There would be practical difficulties to be overcome in reaching an overall wage bargain for a region within a national economy.

The challenges are formidable. It is ironic that the politically charged appointment of Martin McGuinness as Minister of Education is one area where the devolved government has real scope for policy development.

What is the imperative for North-South economic co-operation? The SDLP discussion document highlights what has been in many documents as far back as the New Ireland Forum series in 1984, namely, the value of opening up demand and supply throughout the island. But now there is the added reason of looking to the Republic as a source of best practice, and this is new. The underlying argument is that if the North wants to catch up with average income per head in Britain - it is only 80 per cent - it should look not to Britain as to how to do it, but to the Republic.

This rests on a fairly important assumption. It is worth looking South, but only as long as the Republic follows successful economic policies. Otherwise, it could be better to look to Singapore, for example, than to Britain.

The currency issue hangs over the whole discussion of North-South economic strategy. There is no denying that the currency difference is an obstacle to closer North-South economic development. Workers crossing the Border in either direction to the hoped-for new multinational investments in Border areas face a currency risk that outweighs any tax deal. A 20 per cent fall in income from currency depreciation is a serious risk. Any innovative form of currency hedging would be very welcome.

The scenarios for North-South economic co-operation would be much more compelling if painted on a single currency canvas. Imagine if the Republic had never broken with sterling. Imagine, more to the point, if Northern Ireland were capable of choosing which currency zone to belong to, the euro or sterling. That choice, if stripped of political content, would put a serious challenge to economic policy makers in the North.

Given the path of development of Northern Ireland, which must surely involve much greater US foreign direct investment, the question is, in which currency zone would the economy be better able to cope with any competitiveness shocks? An interesting, theoretical picture to paint would be of Northern Ireland in the euro zone while Britain stayed with sterling.

For the present, the SDLP and their colleagues will be right to concentrate on practical, regional policy initiatives. Having identified worrying vulnerabilities and living with their policy limits, the new ministers would best avoid high theory for most of the time and get on with the job of proving that devolved government is better economically, as well as politically.

Oliver O'Connor is editor of the monthly publication, Finance; e-mail: ooconnor@indigo.ie