Zero-Sum-Game

If the Government is to put the breaks on job losses, it has to do better than taskforces set up to serve local interest - it has to begin thinking nationally.

The main instrument available to improve competitiveness is pay. Social partners must see the compelling logic of pay cuts. The best contribution a government can make is to provide a sense of confidence and leadership based on an ability to plan for tougher times. It is not clear this will be provided

About a year-and-a-half ago a couple of stockbrokers made a very upbeat prediction about the Irish economy. They believed the boom would last indefinitely, driven by demographics.

If the process of economic growth were that simple, most countries in Africa would be booming. The reality is economic growth and job creation are multifactorial and depend on far more variables than just demographics.

In Ireland's case much depends on foreign direct investment, quantity and quality, on our competitiveness, on the skill levels of the population, on productivity, on domestic entrepreneurship and on the state of foreign demand. Economic growth and job creation also depend on work ethic and a host of social and cultural factors that are difficult to measure.

One of the peculiar aspects of the Irish economy is that whenever jobs are lost in any part of the country the local people and politicians lobby the Government to create replacement jobs in the same locality - in the same factory if possible.

A representative of the local chamber of commerce (what do chambers of commerce actually do?) and local politicians usually demand a taskforce be set up and that the Industrial Development Agency (IDA) trawl the world to bring some other multinational company into the region.

There is never any discussion about how and whether the people who have lost their jobs could be re-employed by local entrepreneurs. Nor is there any question of people moving to other parts of the country in search of work. To be fair there is usually some discussion of retraining and up-skilling the workforce, though there are virtually no follow-up studies to verify if that approach has been successful or not.

Few other developed countries behave like this. It is a form of socio-economic engineering which owes more to old-fashioned central planning than to modern capitalism. The fact is we still depend far too heavily on foreign direct investment to create jobs.

As a strategy, it has served us well for over three decades - and it brought us the Celtic Tiger - but the downside is it made things too easy. We didn't have to do the research and development, the global marketing, the business plans and strategies. All these things, including general know-how, were provided by the multinationals.

Over the past few years the special taskforces set up to find replacement jobs for badly hit regions probably delivered some of the goods. There are a few cases where losses of manufacturing jobs were replaced by more high-skilled jobs. The taskforces would ensure the jobs would go to the region which suffered the job losses in the first place.

It is something of a zero-sum game. Suppose the IDA brings in 1,000 jobs and the taskforce steers those to the deprived region in question - some other region will not now be so lucky. But there is usually no controversy about this because the "other" region has no way of knowing it lost out. In short, the local taskforces may help the locality in question but not the country as a whole.

It is a pity successive governments have paid little attention to proper regional policy and particularly to the concept of growth poles. There is abundant evidence to suggest multinational firms prefer to work in clusters because of synergies, better infrastructure, etc.

Inward flows of sizeable foreign direct investment into Ireland will be unlikely during the US recession. It is even possible the new American president will tighten up on what he terms "the shipping of American jobs overseas".

It is also unlikely that Irish entrepreneurs will hire workers in large numbers. Construction is on its knees and the manufacturing sector is shedding jobs. The service sector tends to follow suit. Consequently, it is important to see what contribution the Government might be able to make.

First, the Government has to bring order to the public finances. But this is something of a dilemma. Increased taxes would discourage initiative and reduced spending would lead to a fall in demand. Some form of pay cuts would help restore competitiveness, which has been hit badly by the weak dollar and sterling. But the short-term effect of this would also mean lower levels of demand. The Budget is a difficult balancing act between fiscal prudence and maintaining demand in the economy. There is no guarantee the Government will get it right.

The recent improvement in the personal tax treatment of senior executives of foreign multinationals may have a marginal effect on attracting foreign firms. It is unlikely, however, that corporation tax can be reduced below 12.5 per cent for various reasons, including the budgetary situation. The Government must lobby Barack Obama on the question of discouraging US multinationals from going abroad to countries such as Ireland.

The "growth poles" concept should be revisited. It was present to some extent in the National Spatial Strategy - an excellent plan which seems to have fallen between the cracks.

Government spending on goods and services and on pay will have to be cut to some extent because its capacity to borrow abroad is being eroded by reputational risk. It is important therefore that those expenditures which are made will have the highest trickle-down effects in the economy. The "multipliers" for each item of expenditure can be calculated from input-output tables. Infrastructural projects tend to have high multiplier effects in the short term - as well as being beneficial in the longer term.

There are also possibilities for significant numbers of jobs in the provision of environmental goods and services. These areas could be identified and prioritised by State agencies.

It is unlikely that much public sector reform can be achieved in the next couple of years. However, the public sector should be put on an emergency footing; officials should be prepared to move to other areas which can contribute more to the economy. For example, if the IDA felt it could attract more jobs from overseas if it had an extra 500 public officials, these resources should be transferred from other departments in so far as the skill sets are compatible. Irish embassies abroad could become much more proactive in promoting Ireland as a location for business. The diplomatic infrastructure is already in place.

There is nothing the Government can do about the exchange rate or about interest rates - though we are lucky regarding the direction of the latter. The main instrument available to improve competitiveness is pay. Social partners must see the compelling logic of pay cuts. While, as mentioned above, pay cuts could reduce spending in the short term, the deflationary effects would be much less than those caused by redundancies. The other point to be made here is that consumer prices are falling so pay cuts in nominal terms would not necessarily mean cuts in real terms.

The Government must fix the banking problems and reasonable lending to SMEs must resume. The European Investment Bank is prepared to make funds available to SMEs by providing tranches to the Irish banks. Efforts should be made to oversee the lending on of those funds to the applicant firms. There might be merit in fostering inter-company lending, ie without the intermediation of banks. In the longer term, financial regulation will have to be significantly beefed up.

The Government will set up an innovation fund and will increase the spend on research and development. But the benefits of this action are unlikely to accrue in the short, or even medium, term.

The same can be said for reforms in the education sector. The poor performance in mathematics at Leaving Cert level is serious, especially since there is evidence of grade inflation. It is hard to see Ireland becoming a smart or innovative economy while this situation persists.

Most of the Government actions mentioned here have been touched on in the recent Framework for Economic Renewal.But some vital elements are still missing, for example: trade union acceptance of pay cuts; the report of the commission on taxation; and the recommendations of An Bord Snip. Bank lending is still a problem and the Budget is in disarray. The result: we still do not have a plan.

In a small, open, quasi-capitalist economy which is also a member of a monetary union, there is not a great deal a government can do to increase jobs. Perhaps the best contribution a government can make is to provide a sense of confidence and leadership based on an ability to plan for tougher times. It is not clear this will be provided.

All this brings us back to the subject of taskforces which, as we have seen, may have an impact locally, though not nationally. There would be merit in setting up a taskforce for national economic recovery and job creation. It probably should include not just the relevant Ministers (Finance and Enterprise) but also the Opposition spokesmen and women. It should be provided with economic back-up. Since, as Garret FitzGerald recently noted, the Department of Finance has only three economists on its staff (and most other departments have none) the expertise required could come from the ESRI, the Central Bank and the universities.

Such a taskforce would provide the best chance of coping with present exigencies and planning the sustainable development of the economy. The Government needs help. Does it have the courage to ask for it in the interests of the country?