Download A Unified Irish Economy

A Unified
Irish
Economy
May 12
2015
Fundamental economic forces determine prosperity, most especially
the division of labour. This is limited on the national terrain by the size
of the home market. A unified Irish economy allows the home market
to reach its potential. In addition there are specific synergies between
the economies on two parts of the island which strongly suggest that
the whole-Ireland economy would be greater than the sum of its parts.
Michael Burke
A Unified Irish Economy
Michael Burke*
In economics, the geographic context is a more or less immutable given. But political geography is
very different, both changeable and changing.
No-one charged solely with the creation of the optimal economic entity on the island of Ireland
would dream of separating the north-east corner from the rest of country, and imposing two
different currencies, legal and tax frameworks, and two different legislatures either side of that
border.
The optimal entity would be a single unified all-Ireland economy. The current arrangements
naturally interrupt the free movement of goods, labour and capital with the island which would
optimise growth. They also impose a cost on that movement in the form of taxes, currency hedging
costs, and opportunity costs in the form of sub-optimal planning and policy cohesion. These are the
irritations and inconveniences which are most keenly felt in the border areas but inevitably affect
the whole economy.
Yet there is a wider detriment beyond these symptoms. Adam Smith taught us that the basis of all
prosperity is the scope for the division of labour, which is itself limited by the size of the market. In
the first instance this is the size of the home market.
The history of this island is that it has never been able to establish a single, unified home market on
the island, which has important negative consequences for economic development, growth and
prosperity.
What’s In It For Us?
Addressing the issue in purely economic terms, Irish reunification increases the scope of the home
market both sides of the borderi. This especially important as both economies are obliged to operate
in the much larger European market.
In 2012 the output of the NI economy was £32.5bnii. On a comparable GVA (Gross Value Added)
basis the output of the RoI economy was €154.5bn in the same year. Table 1 below converts these
two to common currencies using OECD estimates of Purchasing Power Parities (PPPs).
Table 1. Output of RoI & NI economies, in local currencies and in PPPs terms
Actual GVA in local currency, bn
In equivalent currencies (PPPs), bn
RoI
€154.5
£129
NI
£32.5
€39
Source, CSO, ONS, OECD, author’s calculations
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From the perspective of all enterprises in RoI, whether in the private or the public sectors, the size of
the home market would increase by 25% with Irish reunification. For enterprises in NI it would
increase fourfold.
This snapshot of economic output does not take account of the likely impact on the growth rate of
both economies for reunification, where the NI economy could be projected to lead the way, in a
process of ‘catch-up’. The degree of underperformance of the NI economy is both chronic and acute.
According to the ONS, real GVA contracted by 5.4% between 2008 and 2012, making the NI economy
one of the ‘crisis’ economies of the EU. This follows decades of relative economic decline.
The element of catch-up within the process of reunification could provide a very large impulse to
growth across the island. This is what occurred to the RoI following Partition, with the major fillip
coming from EU investment in the 1980s and 1990s. Fig.1 below shows the relative performance of
three economies since Partition. Prior to partition per capital GDP in what became the RoI was a
fraction of the level on both Britain and in NI but is now the highest of the three and significantly
above that of NI. This indicates the potential degree of ‘catch-up’ that might reasonably be expected
towards RoI per capita GDP levels, which would have beneficial effects across the island in terms of
growth for all enterprises and consequent prosperity.
Fig. 1 Per Capita GDP Britain, RoI & NI, 1921 & 2013, International Dollars
Source: Maddison, CSO, ONS, OECD, author’s calculations
Therefore the 25% increase in the home market for enterprises based in the RoI is simply the current
starting-point for the actual benefits, with significant scope for greater potential benefits.
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Crucially, the development of the home market provides a missing link in the structure of the Irish
economy. The missing link is an indigenous enterprise sector which would directly relate to trends in
the Irish economy and provide high-skilled jobs on a large scale. This would be a factor in reducing
the over-reliance on overseas MNCs and the numerous distortions to the economy and economic
policy making that this generates. In supplying this ‘missing link’ the economy ion Ni would play a
particular role.
Synergies
The very different structures of the two economies in Ireland necessarily generate a combination of
shared challenges, discrepancies and complementary differences. Essentially, the NI economy has
highly developed, although somewhat distorted public sector combined with the vestiges of
indigenous industrial capacity. The RoI economy has a vibrant private sector which is overly reliant
on finance and dominated by MNCs alongside stunted public services. At the same time, both
economies suffer from underdevelopment of key sectors. These include agriculture, leisure and
tourism, and ICT. In addition, education is slightly under the OECD average as a proportion of the
economy and could be improved, not least because of the relative youth of both societies.iii
1.It is widely asserted that the NI economy is overly dependent on the public sectoriv without
examining the composition of that output. The categories, civil service (including police) and
defence, education and health account for 25.5% of NI’s economy. On a comparable basis, they
account for 16.9% of RoI’s economy, of which somewhat more is private sector activity.
But 5% of that NI total is the excess level of civil service and defence jobs in NI. At 10% of total
output it is approximately double the proportion of the RoI economy. (This excessive civil
service/defence spending equivalent to 5% of output also almost entirely accounts for the
subvention from Westminster). Education output is broadly comparable, although it should be
improved. It is health output as a proportion of the economy which mainly accounts for the
remaining discrepancy.
Yet at 9.5% of the economy, the NI economy’s output of health services is only in line with the OECD
average. It is the RoI’s 6.3% health output which is way below the OECD average. It is not simply that
RoI would benefit from a health service more like that of NI. There is a body of expertise and
capacity which has been accumulated and managed through the Northern Ireland executive and
Health and Social Care (HSC) which can be expanded across the island.
In addition, there are clear synergies with the burgeoning medical supplies business in Ireland. This is
primarily private sector, but could be integrated with publicly directed health services and
supplemented with public R&D and education investment to become a key sector in the unified
economy.
2.The NI economy is home to a series of large firms operating in sectors which are, or have the
potential to be complementary to enterprises operating in RoIv. These include but are not confined
to food processing, aerospace, building machinery, pharma, telecoms and IT.
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First, in certain sectors (food processing, pharma, etc), reunification would provide a competitive
boost and diversification away from over-reliance on single very large firms in RoI. Secondly, other
established sectors are complementary and would benefit from integration in a unified economy.
This is especially true in the aerospace sector, where the RoI has well-established financial
engineering and other services related to leasing and other areas, whereas NI has significant
aerospace industrial capacity. Thirdly, public sector output and integration is key to economic
development across a range of services, including road and rail services, postal, telecoms, water and
energy and so on. These are some of the largest firms operating in both jurisdictions in workforce
and/or output terms. They are channels for development and economic integration, and could
facilitate a large increase in productivity and hence prosperity.
3. A degree of economic integration is taking place in any event, with many very large and some
small firms operating on a cross-border basis. But this is haphazard, subject to the hurdles and
outlined above and frequently initiated to overcome economic or financial failure. The public sector
lags this private sector trend, constrained by the political and economic settlement.
In addition, a certain element of integration is frequently initiated to overcome economic or
financial failure. In these categories could be placed the former ownership by NAMA of large-scale
property holdings in NI, the takeover by ESB of NIE being two examples. The rationalisation and
integration process is taking place. The question is whether this can be utilised for the benefit of the
entire economy and the population as whole.
Realising potential
Every reform aimed at reducing the barriers to economic integration will yield a result, however
modest. The big prize of a much larger and more prosperous economy across the island requires
unification.
The division of labour is the cause of growing prosperity over decades and more. The size of the
home market limits the scope for that division of labour on national terrain, and increasing the home
market increases the scope for greater prosperity.
In addition, all economies are also obliged to operate in a global market to some extent. The most
important international market for the RoI is the EU. The addition of a home market of 25% or more
to the existing RoI economy increases its capacity to both compete in and integrate with the wider
EU economy.
The economies of the RoI and NI have clear synergies. These occur in terms of
competition/diversification, entirely new capacity and in the balance of the public and private
sectors. These are all significant factors that, if the potential is realised through investment, could
substantially raise the prosperity of the whole island.
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*The author is an economist and has worked as an economic consultant for the past 10 years.
Formerly he published economic and financial market analysis and forecasts following a period when
he was employed in a number of roles as an economist, including as Senior International Economist
with Citibank in London. He has written extensively the Irish economy(ies).
Appendix
Structure of the economies: Selected categories of output as % of total GVA, RoI and NI
Sector
RoI
NI
Agriculture
1.4
1.5
Manufacturing
12.5
27
Construction
6
1.7
Wholesale & retail
16
9.9
Transportation
4
3.8
Hotels & restaurants
2.5
2.1
ICT
3
2.7
Finance & Insurance
4.5
10.8
Real estate
10
5.2
Professional & scientific
3.5
5.3
Civil service & defence
10
5.1
Education
6
5.5
Health
9.5
6.3
Sources: CSO, ONS, author’s calculations
i
It may of course be objected that NI loses out on the much bigger British market through Irish reunification.
But the EU is the decisive market for the British economy too and, operating outside the Europe and with low
and falling productivity it is obliged to reduce costs (including wages) continuously simply in order to maintain
market share. NI operates largely as a forgotten outpost of this declining economic model.
ii
ONS, Gross Value added (GVA) of NI http://www.ons.gov.uk/ons/publications/re-referencetables.html?edition=tcm%3A77-346342
iii
OECD http://www.oecd.org/education/skills-beyond-school/48630884.pdf (pdf)
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iv
In Britain this is official government policy, HM Treasury, Rebalancing the Northern Ireland Economy
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/81554/rebalancing_the_nor
thern_ireland_economy_consultation.pdf (pdf)
v
Belfast Telegraph, NI’s Top 100 companies http://www.belfasttelegraph.co.uk/business/top-100-companies/
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