Lessons%20Learned%20from%20Ireland

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Lessons Learned from Irelands Economic
Leapfrog and Current Financial CrisisWorkshop
organised by the Reut Institute and TheMarker, 11
January 2011Rory ODonnellDirector
NESCrory.odonnell_at_nesc.ie
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The Irish story in outline

• 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

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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

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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

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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

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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
  supply-side issues.

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Consistent Policy Framework
Macroeconomic
Distributional
Supply-side
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Consistent Policy Framework

• European Monetary System leading to the euro
• 2. Public finance correction,
• focused on debt/GNP

Macroeconomic
Distributional
Supply-side
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Consistent Policy Framework
Centralised wage settlement and negotiated
approach to welfare and tax
Macroeconomic
Distributional
Supply-side
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Consistent Policy Framework

• Policies that enhance the quantity, quality and
  use of resources
• industrial policy
• long-term unemployment
• social exclusion
• education
• infrastructure
• social services
• etc

Macroeconomic
Distributional
Supply-side
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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

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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

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Origin nature of Irelands leapfrog
Policy institutional
Export sector
European Union
Social change
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Origin nature of Irelands leapfrog
Consistent Competitiveness focus Employment
focus as much a participation story as a
productivity story Institutional innovation
Experimental problem solving Networked
Developmental State
Policy institutional
Export sector
European Union
Social change
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Origin nature of Irelands leapfrog
Expanded through FDI indigenous
upgrading Competitiveness Educated labour
supply Increasingly concentrated in high-value,
high-growth, segments Extensive as well as
intensive growth of a regional economy
Policy institutional
Export sector
European Union
Social change
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Origin nature of Irelands leapfrog

• Internal market
• market access
• regulatory market-oriented reform
• Structural Funds
• Stable monetary environment

Policy institutional
Export sector
European Union
Social change
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Origin nature of Irelands leapfrog
Reversal of population decline emigration
Increased female participation Social mobility
(absolute) Rising welfare, but inequality
stable Liberalisation, secularisation,
pluralisation individualisation Entrepreneurial
culture
Policy institutional
Export sector
European Union
Social change
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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

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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

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NESC partnership in the crisis
Agreed account
Causes
Manifestation of risks
Disagreement
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NESC partnership in the crisis
Irelands Five Part Crisis February 2009
Banking Fiscal Economic Social Reputational
Agreed account
Causes
Manifestation of risks
Disagreement
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NESC partnership in the crisis
Competitiveness loss 2002-08 Fiscal reliance
on property bubble Global financial crisis
reckless Irish banking
Agreed account
Causes
Manifestation of risks
Disagreement
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NESC partnership in the crisis
Known risks inherent in our international
position Risks not identified Risks exacerbated
by national policy
Agreed account
Causes
Manifestation of risks
Disagreement
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NESC partnership in the crisis
Wage reduction real depreciation Fiscal
policy Banking guarantees resolution Job
protection
Agreed account
Causes
Manifestation of risks
Disagreement
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Banking supervision negligent
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Banking supervision negligent

• Fiscal policy technical issues uncertain
• How much genuine regional expansion?
• How much economic cycle?
• An asset price bubble?

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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

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Current policy discourse

• The culprits
• Bankers
• Builders
• Government

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Current policy discourse

• The culprits
• Bankers
• Builders
• Government
• and
• Partnership consensus

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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

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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?

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Overall

• Market signals weakened
• Financial imbalances without exchange rate
  effects
• Fiscal errors without bond market (or electoral)
  cost
• Wage growth without employment effect

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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

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Appendices
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Appendix 1Irish Industrial Policy
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Industrial Development Authority
Autonomy
Close to firms
Constraints
Upgrading
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Industrial Development Authority
Semi-autonomous agency Pursued industrial
development exports Set job-creation
targets Monitor cases thoroughly Used Irelands
tax advantage
Autonomy
Close to firms
Constraints
Upgrading
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Industrial Development Authority
Stay close to client firms Both in Ireland and
abroad 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)
Autonomy
Close to firms
Constraints
Upgrading
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Industrial Development Authority

• Identified successive constraints on business
  development
• Capital
• Industrial sites
• Skills
• Telecom infrastructure
• Regulatory
• Mobilise other agencies
• Ignored economic debates

Autonomy
Close to firms
Constraints
Upgrading
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Industrial Development Authority

• Work with Irish managers in TNCs
• Focus shifted
• From job numbers to value added
• From capacity to capability
• Moved early to software and other services
• Network Irish engineers abroad
• Now links firms to Irish ST

Autonomy
Close to firms
Constraints
Upgrading
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Refocused industrial policy agencies

• Separated agencies for FDI indigenous
• Prompt emergence of Irish software
• Focus on high-potential Irish firms
• Increasing focus on ST
• Created Science Foundation Ireland

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Recent Innovation Policy

• Science Foundation Ireland (2003)
• Much increased funding for ST and RD
• Questions
• Will ST link to firms?
• Is there absorptive capacity?
• Sufficient DUI mode?
• How should it connect to welfare reform?

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Two wings of the PPA Structure 2000-2009

• Forfas
• IDA
• Enterprise Ireland
• Nat. Training Agency
• N Compet. Council
• Sci. Foundation Irl.
• Government Depts.
• Agencies/firms for
• roads, elec, telecom

• NESC
• Partnership Steering Committee
• Partnership working groups
• Nat.Training Agency
• Government Depts.
• Labour Relations Commission

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Appendix 2Futures Ireland
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FuturesIreland study 2008-9 Ireland at another
turning point Two views
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Ireland at another turning point a pessimistic
view
Economy
On top of the current crisis The basis of
Irelands prosperity in jeopardy New rivals for
FDI other threats to our special status
Society
Public policy
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Ireland at another turning point a pessimistic
view
Economy
Success of last two decades based on social
capital values built over decades Eroded by
the very growth they created
Society
Public policy
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Ireland at another turning point a pessimistic
view
Economy
Positive combination of political strategy
social partnership which yielded consistent
policy was an historical accident replaced by
conflict media-dominated politics
Society
Public policy
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Ireland at another turning point an
alternative view
Economy
Technology, once a window of opportunity for
Ireland, can become an enabler of diverse,
segmented, business opportunities (Perez) From
industrial information economy to networked
information economy (Benkler)
Society
Public policy
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Ireland at another turning point an
alternative view
Economy

• Evidence of
• cross-fertilisation between wealth creation,
  society public policy
• problem solving
• innovation
• systematic review
• What is scarce institutional contexts that allow
  people to use their capabilities, mandate that
  they review offer accountability

Society
Public policy
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Ireland at another turning point an
alternative view
Public governance could yield a better
combination of policy making, implementation and
stakeholder involvement. Innovation not
confined to private or high-tech
sectors. Disciplined review provides basis for
both innovation accountability.
Economy
Society
Public policy
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Dealing with crises turning points (1950s
1980s)
Developmentalism
Resolution of crisis faced fiscal
constraints but focused on development, both
economic and social
Reform
Use of authority
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Dealing with crises turning points (1950s
1980s)
Developmentalism
Decision to make the crisis a turning point
marked by reform creation of institutions
These given mandate to identify address
constraints on development
Reform
Use of authority
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Dealing with crises turning points (1950s
1980s)
Developmentalism
Concentration of authority in order to liberate
talent rather than increase control
Reform
Use of authority
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Making this crisis a turning point
What are the developmental challenges for Ireland
now?
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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?
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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?
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Appendix 3Developmental Welfare State
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Irelands 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

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Rethinking the Welfare State

It has three elements How well do they
address social disadvantage? support
participation and innovation? identify and
tackle un-met needs?
Services
Income supports
Innovative measure
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Developmental Welfare State

A way of reforming each of these three elements
and linking them suited to Irelands
particular economic and social situation
Services
Income supports
Innovative measures
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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 Trans
port Training Employment services
Income supports
Innovative measures
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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

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