Roaring trade required

Politicians must focus on export growth to move the tiger economy forward again In the first of a series of articles running up to the general election, Paul Tanseysets out the economic backdrop

Ireland's Celtic Tiger economy, where growth was led by exports, expired in 2001. The demise of the tiger went unmourned and for a simple reason. After hitting a flat patch in 2001-2002, the economy rebounded. Nobody much cared that domestic demand had elbowed out export demand as the engine of economic expansion. What was important was that growth was back. Never mind the quality, feel the width.

The State's headline growth figures remain impressive. Real growth in gross domestic product (GDP) reached 6 per cent in 2006, while real gross national product (GNP) attained a boom-like 7.4 per cent last year. However, net exports have made no contribution to economic growth in the recent past. All of the growth has been home-grown, and the swift pace at which home demand has been rising cannot be sustained forever.

A revival in net exports is not expected in the foreseeable future. As the boom in consumer spending gradually subsides and as fixed investment growth slows down, the rate of economic growth will decelerate to lower levels.

As the election approaches, the implications for voters of a return to more moderate rates of growth over the next five years are simply summed up: put not your trust in promises. Governments can only deliver on their election promises where they have the resources to pay for them. Slower growth dilutes the rate of increase in tax revenues, leaving less cash available to honour election commitments.

To be fair, the Government and the main political parties have been quite straight about this. The implementation of the biggest public spending commitment of all announced this year - the Government's €184 billion National Development Plan (NDP) 2007-13 - is contingent on meeting a set of tough conditions. These include a real GNP growth rate of 4 - 4.5 per cent annually over the seven-year span; an average annual inflation rate of 2 per cent, average productivity growth of 2 per cent annually and no further deterioration in the State's cost and price competitiveness in the years to 2013.

Similarly, the Taoiseach's disarming array of tax cuts and new expenditure commitments unveiled at the recent Fianna Fáil Ardfheis are based on precisely the same economic assumptions as those underpinning the new NDP.

If these stringent economic assumptions are not realised, the tax package will be diluted or shelved. So, Fianna Fáil may give with the one hand, but if times become tougher than expected, the economy may take back with the other.

Voters are thus advised to read the economic small print attached to all election manifestoes. For, as financial institutions state in their advertisements, terms and conditions may apply.

But there are larger issues at stake in this election than the tax-reducing and expenditure-enhancing promises of all the political parties. The revival of the State's export drive is fundamental to the economy's long-run health and to the future prosperity of all who live here.

Ireland cannot build success in the years ahead solely on selling goods and services to a domestic population of just four and a quarter million people. There are limits to the number of houses they can buy or cars they can drive. Eventually, satiation sets in and money runs out.

To rely on home demand as the sole agent of future expansion would be to condemn the economy to much slower growth in the future than it has experienced in the past.

Re-establishing export-led growth will not be easy. It will require policies to restore cost and price competitiveness to Irish goods and services selling on foreign markets. It will necessitate a much stronger emphasis on fostering productivity growth, particularly in services. It will call for innovative new strategies to trigger faster inflows of new foreign direct investment.

Implementing such policies in an economy where expectations are still based on the boom years will be difficult. But it beats continuing to whistle in the dark.

A dose of realism is required. In the second half of the 1990s, average annual growth of 8.7 per cent in real GNP was powered by an average annual increase of 17.6 per cent in export volumes. As late as 2000, export volumes advanced by over 20 per cent.

Then a series of external economic shocks caused the economy to skid off its long run growth path during 2001 and 2002. Thereafter, the economy swiftly returned to the road of growth, growing broadly in line with its potential. However, the pick up in economic activity after 2002 has served only to mask the seismic shift in the composition of Irish economic growth.

After 2002, export growth never recovered its former verve. In the last four years, real export expansion has managed to average just 4.2 per cent annually. It is on the evidence of Table 1 that it can be concluded that the Celtic tiger economy met its end in 2001.

For tiger economies are distinguished by one central feature: export-led growth. From the early 1960s to the Asian financial crisis of 1997, the original four tiger economies - South Korea, Taiwan, Singapore and Hong Kong - achieved remarkably high rates of economic advance powered by sustained, export-led growth. Ireland earned its tiger economy status - always something of a misnomer - for emulating the export performance of the Asian tigers during the 1990s.

However, the desultory export performance over the past five years has forced Ireland to turn in its tiger tag.

With export growth faltering, the locus of Irish economic growth has shifted decisively to domestic demand. The fundamental shift in the composition of Irish economic growth can be seen from Table 2. This compares changes in Irish economic performance over two separate five year periods - 1997-2002 and 2002-2007. These broadly correspond to the terms of the last two governments.

Between 1997 and 2002, economic growth stemmed from a doubling of net exports and an increase of two-fifths in real domestic expenditure. Over the past five years, economic growth has been wholly dependent on the domestic spending boom. The contribution of net exports to Irish economic growth after 2002 has been negligible.

Moreover, the export performance is even weaker than it looks. In the first place, the value of merchandise exports in 2006 in cash terms was lower than in 2002, indicating that the unit prices of goods exported are falling. Secondly, the State is now running a widening external payments deficit.

From a position of balance in 2003, the payments deficit reached 3.3 per cent of GDP in 2006 and is forecast at 4.3 per cent this year.

Thirdly, no imminent revival in exports is expected at official level. In Budget 2007, the Department of Finance stated rather chillingly: "No significant acceleration in the rate of export growth is anticipated over the forecast horizon (to 2009). This assessment is based on the general deterioration in cost competitiveness in recent years."

In this phoney war phase of the campaign, the air is thick with promises of personal income tax cuts and of public spending increases. This is all understandable; all part of the competitive struggle for the people's vote. But at some point in the election campaign, the politicians will need to forsake the trench warfare, lift their eyes and contemplate the wider economic horizon.

That means addressing, in policy terms, how they intend to harness the fundamental forces - business investment, productivity, competitiveness - that make the economy move forward over the long haul. For if the big economic issues are neglected throughout the campaign, winning the election may not be such a great idea.

• Paul Tansey is managing director of the Dublin-based economics and financial consultancy Tansey, Webster Stewart & Co