Download Ireland at another turning point

National Economic
Social Council NESC
Lessons Learned from Ireland’s
Economic Leapfrog and Current
Financial Crisis
Workshop organised by the Reut Institute and
TheMarker, 11 January 2011
Rory O’Donnell
Director NESC
[email protected]
NESC
The Irish story in outline
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De-industrialisation in 19th C
Protection 1932-65
Opening & growth 1960-1977
Fiscal & economic crisis 1979-86
Stabilisation & leapfrog 1987-02
Credit-driven growth 2004-08
Crisis 2008-2011
From initial growth to crisis
• Growth via FDI, trade, public investment
but
• Indigenous industry lost in free trade
• Social need and expectations rose
• Sterling context: inflation/instability
• Industrial relations conflict
• US FDI fell in 1980s
• Stagnation with fiscal crisis 1979-86
NESC
From tri-partism to partnership
• Analysis of 1980s crisis in
NESC
• Agreed NESC Strategy report
1986
• Negotiated 3-year programme
• 8 partnership programmes
between 1987 and 2008
Orthodox economic view: fiscal and
wage indiscipline undermined business
success
Decline of inward
investment and
failure of
indigenous
business
Excessive
spending, public
borrowing and
wage growth
Institutional view: problems of stabilization,
distribution and development are connected
Business damaged
by fiscal and
labour problems.
Also reflect
developmental
challenge of a
‘regional’
economy.
Fiscal crisis has a
developmental
element.
Macro pressures &
debates also
crowd out supplyside issues.
Consistent Policy Framework
Macroeconomic
Distributional
Supply-side
Consistent Policy Framework
1.European Monetary
Macroeconomic System leading to the
euro
Distributional
Supply-side
2. Public finance
correction,
focused on debt/GNP
Consistent Policy Framework
Centralised wage
Macroeconomic
settlement
and
Distributional negotiated approach to
welfare and tax
Supply-side
Consistent Policy Framework
Macroeconomic
Distributional
Supply-side
Policies that enhance the
quantity, quality and use of
resources
•industrial policy
•long-term unemployment
•social exclusion
•education
•infrastructure
•social services
•etc…
Role of negotiated programmes
• articulate a shared understanding of key
economic and social mechanisms
• align partners to consistent and
competitive actions.
• provide framework for strategic
government policy
NESC role & method
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Joint observation of evidence
Beyond bargaining to deliberation
Re-framing to build shared understanding
Places particular demands on analysts
Examples of reframing:
1986-90: shift focus to debt/GNP
1996: partnership & enterprise-level partnership
2002-5: Developmental Welfare State
Origin & nature of Ireland’s leapfrog
Policy &
institutional
Export sector
European Union
Social change
Origin & nature of Ireland’s leapfrog
Consistent
Policy &
institutional
Competitiveness focus
Export sector
Employment focus: as much a
participation story as a
productivity story
European Union
Institutional innovation
Experimental & problem solving
Social change
‘Networked Developmental State’
Origin & nature of Ireland’s leapfrog
Policy &
institutional
Export sector
European Union
Expanded through FDI &
indigenous upgrading
Competitiveness
Educated labour supply
Increasingly concentrated in highvalue, high-growth, segments
Extensive as well as intensive
growth of a ‘regional’ economy
Social change
Origin & nature of Ireland’s leapfrog
Policy &
institutional
Export sector
Internal market:
•market access
•regulatory & marketoriented reform
Structural Funds
European Union
Stable monetary
environment
Social change
Origin & nature of Ireland’s leapfrog
Policy &
institutional
Export sector
European Union
Reversal of population decline &
emigration
Increased female participation
Social mobility (absolute)
Rising welfare, but inequality
stable
Liberalisation, secularisation,
pluralisation & individualisation
Social change
Entrepreneurial culture
Significant developments 1999-2007
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Euro launched 1999
Step-increase in science spending
Further tax reductions
Pro-cyclical fiscal policy & property tax reliefs
Inflation exceeded euro area
Public pay ‘Benchmarking’ award: generous
Housing: increased need, demand, supply & price
Switch from BoP surplus to deficit
Large scale immigration with EU enlargement
Increased social spending & transfers
Pressure on labour standards & partnership
The crisis in Ireland
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sharp drop in output
bank crisis & guarantees Sept 2008
dramatic fall in tax revenue
efforts at partnership response failed
several rounds of fiscal retrenchment
bank losses exceed expectations
eventual EU/IMF support
NESC & partnership in the crisis
Agreed account
Causes
Manifestation of
risks
Disagreement
NESC & partnership in the crisis
Agreed account
Causes
Ireland’s Five Part Crisis
February 2009
Banking
Fiscal
Manifestation of
risks
Economic
Social
Disagreement
Reputational
NESC & partnership in the crisis
Competitiveness loss
Agreed account 2002-08
Causes
Manifestation of
risks
Disagreement
Fiscal reliance on property
bubble
Global financial crisis &
reckless Irish banking
NESC & partnership in the crisis
Agreed account
Causes
Known risks inherent
in our international
position
Risks not identified
Manifestation of
risks
Risks exacerbated by
national policy
Disagreement
NESC & partnership in the crisis
Agreed account
Wage reduction & real
depreciation
Causes
Fiscal policy
Banking guarantees &
Manifestation of resolution
risks
Job protection
Disagreement
Banking supervision: negligent
Banking supervision: negligent
Fiscal policy: technical issues uncertain
• How much genuine regional expansion?
• How much economic cycle?
• An asset price bubble?
Banking supervision: negligent
Fiscal policy: technical issues uncertain
• How much genuine regional expansion?
• How much economic cycle?
• An asset price bubble?
Political economy issues unresolved
•Scale of public provision
•Level & incidence of taxation
•How to meet increased housing need
•Public sector reform
Current policy discourse
The “culprits”
Bankers
Builders
Government
Current policy discourse
The “culprits”
Bankers
Builders
Government
and
Partnership &
consensus
Current policy discourse
The “culprits”
Bankers
Financial Regulator
Builders
Government
and
Partnership &
consensus
The “remedy”
Centralisation for fiscal
retrenchment
Restore credibility &
credit
Export
Including reforms
Independent fiscal
council
Political reform
Ways NESC may have missed things
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Relative wages: legacy of the leapfrog?
Irish inflation ahead of euro area?
Fiscal & taxation?
Housing?
Migration?
Consistent policy framework: supply-side focus?
The euro after 2000
‘Deliberative’ role too far from bargaining?
Overall
‘Market’ signals weakened
Financial imbalances
without exchange rate
effects
Fiscal errors without bond
market (or electoral)
cost
Wage growth without
employment effect
Overall
‘Market’ signals
weakened
Financial imbalances
without exchange rate
effects
Fiscal errors without bond
market (or electoral)
cost
Wage growth without
employment effect
Institutional substitute too
fragmented
Financial supervision
Within partnership:
• Industrial relations v policy
• Private v public IR
Political-business links
NESC-Industrial policy
agencies
NESC-Central Bank-Dept
of Finance
EU coordination failure
Appendices
Appendix 1
Irish Industrial
Policy
Industrial Development Authority
Autonomy
Close to firms
Constraints
Upgrading
Industrial Development Authority
Autonomy
Close to firms
Semi-autonomous agency
Pursued industrial
development & exports
Set job-creation targets
Constraints
Upgrading
Monitor cases thoroughly
Used Ireland’s tax advantage
Industrial Development Authority
Autonomy
Stay close to client firms
Both in Ireland and abroad
Close to firms
Constraints
Upgrading
Tailor package of supports
‘Sectors are “picked” not through a
magical crystal ball of superior
state rationality but rather through
international information-gathering
and attempting to follow
international trends as closely as
possible’ (0 Riain)
Industrial Development Authority
Autonomy
Close to firms
Constraints
Upgrading
Identified successive
constraints on business
development:
•Capital
•Industrial sites
•Skills
•Telecom infrastructure
•Regulatory
Mobilise other agencies
Ignored economic debates
Industrial Development Authority
Autonomy
Work with Irish managers in TNCs
Focus shifted:
•From job numbers to value added
Close to firms
•From capacity to capability
Constraints
Upgrading
Moved early to software and other
services
Network Irish engineers abroad
Now links firms to Irish S&T
Refocused industrial policy &
agencies
• Separated agencies for FDI &
indigenous
• Prompt emergence of Irish software
• Focus on ‘high-potential’ Irish firms
• Increasing focus on S&T
• Created Science Foundation Ireland
Recent Innovation Policy
• Science Foundation Ireland (2003)
• Much increased funding for S&T and
R&D
Questions:
• Will S&T link to firms?
• Is there absorptive capacity?
• Sufficient DUI mode?
• How should it connect to welfare
reform?
Two wings of the PPA:
Structure 2000-2009
Forfas
NESC
IDA
Partnership Steering
Committee
Enterprise Ireland
Partnership working
Nat. Training Agency
groups
N Compet. Council
Nat.Training Agency
Sci. Foundation Irl.
Government Depts.
Government Depts.
Labour Relations
Agencies/firms for
Commission
roads, elec, telecom
Appendix 2
Futures Ireland
FuturesIreland study 2008-9
Ireland at another turning point
Two views
Ireland at another turning point
– a pessimistic view
Economy
On top of the current crisis
Society
The basis of Ireland’s
prosperity in jeopardy
Public policy
New rivals for FDI & other
threats to our special
status
Ireland at another turning point
– a pessimistic view
Economy
Society
Success of last two
decades based on social
capital & values built
over decades
Eroded by the very
Public policy growth they created
Ireland at another turning point
– a pessimistic view
Economy
Society
Positive combination of political
strategy & social partnership
which yielded consistent policy
was an historical accident
Public policy replaced by conflict & mediadominated politics
Ireland at another turning point
– an alternative view
Economy
Society
Technology, once a window of
opportunity for Ireland, can
become an enabler of diverse,
segmented, business
opportunities (Perez)
From ‘industrial information
economy’ to ‘networked
Public policy information economy’ (Benkler)
Ireland at another turning point
– an alternative view
Evidence of:
•cross-fertilisation between wealth
creation, society & public policy
•problem solving
Society
•innovation
•systematic review
What is scarce: institutional contexts
Public policy that allow people to use their
capabilities, mandate that they
review & offer accountability
Economy
Ireland at another turning point
– an alternative view
Economy
Public governance could yield a
better combination of policy
making, implementation and
stakeholder involvement.
Society
Innovation not confined to private
or high-tech sectors.
Public policy Disciplined review provides basis
for both innovation &
accountability.
Dealing with crises & turning points
(1950s & 1980s)
Developmentalism Resolution of crisis
faced fiscal constraints
Reform
Use of authority
but focused on
development, both
economic and social
Dealing with crises & turning points
(1950s & 1980s)
Developmentalism Decision to make the
Reform
Use of authority
crisis a turning point
marked by reform &
creation of institutions
These given mandate to
identify & address
constraints on
development
Dealing with crises & turning points
(1950s & 1980s)
Developmentalism
Reform
Use of authority
Concentration of
authority
in order to liberate
talent
rather than increase
control
Making this crisis a turning point
What are the developmental challenges
for Ireland now?
Making this crisis a turning point
What are the developmental challenges for
Ireland now?
What institutional reform & creation is
now necessary to achieve fiscal
correction, address constraints on
development & limits on
accountability?
Making this crisis a turning point
What are the developmental challenges for
Ireland now?
What institutional reform & creation is
now necessary to achieve fiscal
correction, address constraints on
development and limits on accountability?
What concentration of authority is
necessary to achieve reform & liberate
capabilities?
Appendix 3
Developmental
Welfare State
Ireland’s social debate
• ‘Celtic Tiger’ v. society
• Employment miracle v. poverty rate
• Increased social spending v. social deficits
Choose a European model of welfare:
• Scandinavian universalism
• Continental insurance
• Liberal targeted
• Legal/constitutional social rights
Rethinking the Welfare State
It has three elements…
Services
How well do they:
address social
disadvantage?
support participation and
innovation?
Income
supports
Innovative measure
identify and tackle un-met
needs?
Developmental Welfare State
A way of reforming
each of these three
elements…
Services
and linking them…
suited to Ireland’s
particular economic
and social situation
Income
supports
Innovative measures
Developmental Welfare State
A radical
development of
services is the most
important route to
improving social
protection…
It has a triple logic,
reflecting 3 social
deficits…
social and economic
Services
Education
Health
Childcare
Eldercare
Housing
Transport
Income
Training
supports
Employment
Innovative measures
services
Beyond economic constraints
and social possibilities
The long-term
strength of the
economy now
depends on
effective social
policy
Social policies must
share
responsibility for
economic
performance and
participation