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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?