Download Ireland’s Medium-Term Growth Prospects: a Phoenix Rising? Nicholas Crafts

Ireland’s Medium-Term Growth
Prospects: a Phoenix Rising?
Nicholas Crafts
Future Directions for the Irish Economy,
January 10, 2014
Key Concepts
• Appropriate Growth Theory
• Catch-up growth
• Growth-rate effects from policy
• Ireland as a ‘regional economy’
• Growth accounting
Appropriate Growth Theory
Aghion & Howitt (2006)
Y = A1 - αkα
At + 1 – At = μn(γ – 1)At + μm(AFt – At)
∆A/A = μn(γ – 1) + μm(AF/A - 1)
‘Far-from-frontier’ countries need institutions
that raise μm while ‘close-to-frontier’
countries need institutions that raise μn
Policy experiments and endogenous growth: rise
in savings; rise in productivity of R & D
Schumpeter relationship (high λ)
x
Schumpeter (low λ)
Solow (high s)
Solow steady-state relationship (low s)
^
k
Growth of Real Output and Labour
Productivity in Ireland (% per year)
GDP
19902000
20012007
20082012
GNP
Hours
GDP/
HW
GNP/
HW
7.5
6.8
2.8
4.7
4.0
5.1
4.1
2.8
2.3
1.3
-1.3
-2.0
-3.8
2.5
1.8
Source: The Conference Board Total Economy Database
Accounting for Growth of GDP/HW (% per year)
K/HW
Labour
Quality
TFP
GDP/HW
19902000
1.2
0.2
3.2
4.7
20012007
2.0
0.4
-0.1
2.3
20082012
3.2
0.2
-0.9
2.5
Source: The Conference Board Total Economy Database
Celtic Tiger
• Very impressive catch-up growth
• Idiosyncratic features: FDI, ICT
production, employment growth, migration
• Supply-side policy made a difference
• Not a mirage but not repeatable
The Bubble Economy
• Productivity growth slowed down sharply and
loss of international competitiveness
• Change in structure associated with
construction-based boom not good
• Catch-up potential reduced but by no means
exhausted
• Weak performance in ICT capital deepening; in
2005 ICTK/HW = 13% U.S. level
Sources of Labour Productivity Growth
in Market Sector, 1995-2005 (% per year)
Labour
Quality
ICTK/
HW
Non-ICT
K/HW
TFP
GDP/
HW
France
0.4
0.4
0.4
0.9
2.1
Germany
0.1
0.5
0.6
0.4
1.6
Ireland
0.2
0.4
2.1
1.8
4.5
Italy
0.2
0.3
0.5
-0.7
0.3
Sweden
0.3
0.6
1.1
1.6
3.6
UK
0.5
0.9
0.4
0.8
2.6
USA
0.3
1.0
0.3
1.3
2.9
Source: Timmer et al. (2010)
What Does OECD (2013) Project for
Europe?
• Crisis affects output levels but not trend
growth rate; output gap closed by 2018
• Basically, it is pre-crisis ‘business as
usual’ from 2018-2030
• Catch-up growth resumes and slow
convergence towards ‘best-practice’
supply-side policy continues
OECD Real GDP Growth Projections (% per year)
2001-2007
2012-17
2018-30
Euro Area
1.7
1.2
2.0
France
1.7
1.6
2.3
Germany
1.2
1.1
0.9
Netherlands
1.9
1.3
2.1
UK
2.5
1.8
2.6
Greece
2.8
0.1
3.2
Ireland
5.4
2.5
3.0
Italy
1.1
0.3
2.0
Portugal
1.6
0.5
2.1
Spain
3.3
1.4
3.0
Source: OECD, Economic Outlook (2013)
OECD Growth of Real GDP/Worker Projections
(% per year)
2001-2007
2012-17
2018-2030
Euro Area
0.8
0.9
1.8
France
0.8
1.2
2.1
Germany
0.8
1.0
1.5
Netherlands
0.9
0.9
2.1
UK
1.6
0.9
2.0
Greece
1.6
0.2
2.6
Ireland
2.4
1.1
1.7
Italy
0.2
0.0
1.6
Portugal
1.2
0.5
1.8
Spain
0.6
1.1
1.8
Source: OECD, Economic Outlook (2013)
Growth in 2018-2030
• OECD (2013): ΔY/Y = 3.0%; Δ(Y/L)/(Y/L) =
1.7%; ΔL/L = 1.3%
• CSO (2013) has 3 scenarios for ΔL/L = 1.2%,
0.7%, 0.3% depending on migration
• No obvious reason why productivity growth
should be inferior to Netherlands and UK since
Ireland has more scope for catch-up
• 3 per cent GDP growth based on employment
growth at 0.7 and productivity at 2.3 more likely?
Long-Run Growth in No-ICTProduction Country (Oulton, 2010)
y = AkNICTαkICTβ
In one-sector model, steady-state growth is TFP growth
divided by labour share of income
In two-sector model this is augmented by additional term
which is βΔp/p divided by labour’s share
So in two-sector case growth depends on how fast relative
price of ICTK falls and ICT income share which depends
on social capability
ICT Effects and Long-Run Growth
if ∆p/p = - 7% (% per year)
ICT-Use Own β
ICT-Use Swedish β ICT-Output
France
0.48
0.68
0.17
Germany
0.44
0.68
0.33
Ireland
0.39
0.94
0.51
Italy
0.36
0.70
0.19
Sweden
0.70
0.70
0.24
UK
0.60
0.66
0.16
USA
0.70
0.71
0.22
Source: Oulton (2012)
Risks (1)
• Competition for FDI is intensifying and some
Irish advantages have diminished or been
eliminated
• For example, labour costs, corporate tax and
regulation
BUT
• Agglomeration benefits, human capital, science
base still strong cards as FDI mix adjusts
Effective Average Corporate Tax Rate (%)
2000
Belgium
2012
33.2
Czech R
16.0
16.1
France
32.0
29.8
Germany
32.8
27.0
8.8
5.3
Italy
33.8
23.0
Neths
30.4
19.1
Poland
25.5
16.7
Sweden
24.7
23.2
UK
26.9
24.8
Ireland
Source: Oxford University Centre for Business Taxation Corporate Tax Database.
Risks (2)
• Bullish story easier to envisage with rebalancing towards export-led growth
• Ireland is exposed to continuing problems in the
Eurozone (Cf. ESRI’s ‘stagnation scenario’ with
EU as ‘zombie economy’)
• OECD may be too optimistic about growth in
Euro Area; D/Y is not a drag on growth?
Structural reform appeals to voters? No more
crises?
Supply-Side Policy
• Ireland much less scope to benefit from
structural reform than, say, Greece or
Portugal
• Nevertheless, ‘horizontal industrial policy’
might be improved a bit
• A Strategy for Growth offers some hope
along these lines
Potential Impact on Real GDP/Person of “Moving
to OECD Average” Structural Policy Reforms
Labour
Market
Taxation
Product
Education Total
Market
Regulation
Greece
6.0
10.1
22.0
5.8
43.9
Ireland
6.8
0.9
9.7
0.0
17.4
Neths
1.8
1.3
0.0
0.0
3.2
Portugal
7.3
0.7
8.5
21.8
39.6
UK
1.1
0.0
0.0
4.6
5.7
Source: Barnes et al. (2011)
Policy Questions for a
Close-to-Frontier Economy
• Public capital spending is too low but
threatened by prolonged fiscal stringency?
• PISA score says scope to improve cognitive
skills; will this happen?
• OECD still sees competition policy as not best
practice; will it be strengthened?
• SME innovation policies should be high
priority; are they well-designed?