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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 1|Page 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. 2|Page 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. 3|Page 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. 4|Page *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) 5|Page 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/ 6|Page