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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 1. 2. 3. 4. 5. 6. 7. 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 • • • • 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 • • • • • • • • • • • 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 • • • • • • • 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 • • • • • • • • 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