the irish experience david o’donovan director investment promotion agency development...
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The Irish ExperienceDavid O’Donovan
DirectorInvestment Promotion Agency Development
International Seminar, San SalvadorJanuary 10, 2011
www.communique.ie
Six Themes
I. Brief Facts
II. Irish Economic Transformation
III. Success Factors
IV. Current Irish Crisis
V. Public-Private Alliance
VI. Conclusion
Brief Facts – Republic of Ireland
• Small island on the western edge of Europe
• Area: 70,000 sq km (about 3 times size of El Salvador)
• Population: 4.24m • Capital: Dublin (1.5m)• 800 years of British rule• Independence: 1922• EU member since 1973
Irish Economic Transformation
From poor to rich in one generation:
• 1970 – one of the poorest countries in Europe with GDP per capita of US$3,000
• Today Ireland, despite current financial crisis, is still one of the richest countries in the world
• GDP: US$224 billion
• Per Capita: US$52,000
• Population has risen 50% to 4.24 million – from 2.8 million in 1961
Irish Economic Transformation
Irish Economic Transformation
Irish exports have changed dramatically:
1970
Primarily agricultural products
2010
High value added, high technology products and services
Ireland: Strategic Productive Transformation and Upgrading
Source: Devlin-Moguillasky (2009)
Success Factors
Major factors underpinning rapid growth:
• NATIONAL CONSENSUS/SOCIAL PARTNERSHIP • PPA BODIES FOR SPECIFIC FUNCTIONS• LOW TAXES• AGGRESSIVE CAMPAIGN FOR FDI• MASSIVE INVESTMENT IN EDUCATION
Current Irish Crisis
But what about the current severe economic crisis in Ireland which resulted in the recent ‘bailout’ by the IMF and EU in an €85 billion rescue package?…..
Current Irish Crisis
Partly, as a result of phenomenal growth:
• Ireland over-invested in construction and property development
• Fuelled by massive and cheap borrowing by Irish banks
• Huge property bubble burst in 2008
• Government bailed out Irish banks to prevent collapse
• Result is massive public debt
• Government forced to raise €15 billion over next 4 years in reduced
expenditure and increased taxes to reduce deficit
Current Irish Crisis
But also, institutional failure to anticipate crisis:
• Culture of ‘light-touch’ regulation meant Central Bank/Financial
Regulator failed to spot build-up of excessive borrowing by Irish banks
• Public-Private Alliance bodies failed to recognize shift from
investment/export led economy to property construction led economy
• Both the general public and policy makers ‘blinded’ by phenomenal
rises in incomes
Public-Private Alliance
Role played by Public-Private Alliance bodies…
Public-Private Alliance
Based on Public-Private Alliance at two levels:
1. National Level (Economic and Social Policy)
2. Sectoral/Thematic Level (Competitiveness and Industrial Policy)
Public-Private Alliance
Public policy model adapted by Ireland was that of a ‘networked development state’:
• Different from more bureaucratic and authoritarian
development models adapted by Asian ‘tiger’ economies
• As a small, liberal European democracy Ireland could not
adopt a centralized authority model like the Asian countries
• Irish state interventions operate through networks of public
agencies and advisory councils all with strong private sector
involvement
1. PPA at National Level (Economic and Social Policy)
•Policy failures from 1930’s led to state of national crisis by 1960’s
•Severity of crisis brought recognition of need for Public-Private Alliance and National Consensus
•New direction for economic and industrial policy agreed
•Evidence-based approach adopted
1. PPA at National Level (Economic and Social Policy)
New Direction Adopted (1970s onwards):
• Trade opening and expansion of market access
•Private sector investment-led growth, not government sector growth
•Private sector with strong state encouragement/support to be the engine of growth
1. PPA at National Level (Economic and Social Policy)
•Cornerstone underpinning rapid Irish economic growth
•Government, employers, labour, farmers, academia and NGO sectors – all had voice in developing strategies
•Under the umbrella of the National Economic and Social Council (NESC) since early 1970s
•Chaired by Head of Prime Minister’s Department
1. PPA at National Level (Economic and Social Policy)
• Representation within NESC:– Government – Secretaries General of 7 departments (ministries)– Private Sector – 5 from business associations– Labour – 5 from trades unions– Farmers – 5 from farmer organisations– Voluntary – 5 from NGO organisations– Other – 5 independent representatives, normally technical
experts or academics
• Term of Office is 3 years
1. PPA at National Level (Economic and Social Policy)
In the early days, and up to 2008, strong recognition of:
• Interdependence between social partners
• Tradeoffs both between and within interest groups
1. PPA at National Level (Economic and Social Policy)
• Trades unions included in policy making for first time• New deal with trades unions – wage moderation in
return for cuts in personal taxation and prospects for share in future growth
• Social cohesion was a fundamental component in the dialogue of the Alliance
.
1. PPA at National Level (Economic and Social Policy)
• Private setting to facilitate frank discussion
• Representative but manageable number of private participants (25)
• Political relevance by meeting once a month for half day or more and presence of PM office
• Dialogue oriented to fact-based problem solving with support of neutral technical secretariat
• Representatives exclude themselves when discussion is on a topic where there may be a conflict of interest
• 3-year public report of Alliance conclusions and periodic publishing of Secretariat studies
1. PPA at National Level (Economic and Social Policy)
• Led to industrial peace, wage moderation and low inflation with strong ‘buy-in’ from Trades Unions
Source: ILO (International Labor Organization)
1. PPA at National Level (Economic and Social Policy)
But, unfortunately:• Current financial crisis has put intolerable strain on
public-private alliance model• Government implementing major cutbacks in
expenditure and increases in taxation• Public service staff reductions and pay-freeze for 4
years• Trades Unions strongly objecting to plans• Result – collapse of PPA at National Level in area of
economic and social policy
Public-Private Alliance
2. Public-Private Alliance at Sectoral/Thematic Level (Competitiveness and Industrial Policy)….
• Combination of government departments, state agencies and advisory councils
• Each with its own specialist function
• All well funded by government with focused operational budgets
2.PPA at Sectoral/Thematic LevelCompetitiveness and Industrial Policy
• Boards contain both public and private members
• Cross-board memberships for CEOs to help co-ordinate industrial policy support programs
• Professional, permanent public staff who do not change with changes of government
• High degree of operational autonomy for public executing agencies
2.PPA at Sectoral/Thematic LevelCompetitiveness and Industrial Policy
2.PPA at Sectoral/Thematic LevelCompetitiveness and Industrial Policy
2.PPA Sectoral/Thematic LevelCompetitiveness and Industrial Policy
National Competitiveness Council (NCC) has 16 Members:
• Government 4• Private Sector 8• Trades Unions 2• Academia 2
2.PPA Sectoral/Thematic LevelCompetitiveness and Industrial Policy
• Secretariat and professional research facilities provided by Forfas, the State Strategic Planning Agency for Ministry of Enterprise, Trade and Employment
• Reports directly to Prime Minister of the day
Strengths
At National Level (Economic and Social Policy)
• NESC represented all the social partners and its reports were
highly influential
• NESC argued for a ‘developmental welfare state’
• Good economic development and better social development not
opposed to each other but not guaranteed to occur together
• Argued successfully for better coordination between economic and
social policy
Strengths
At National Level (Economic and Social Policy)
• Led to eight national wage agreements over two decades
• Facilitated Ireland’s long term development strategy – heavy
investment in education, attraction of inward investment and
full European integration
Strengths
At Sectoral/Thematic Level (Competitiveness and Industrial Policy)
• National Competitive Council (NCC) reports also highly influential in
setting the agenda for improvements in Ireland’s competitiveness
• Forfas (strategic planning agency for DETE) reports focused
effectively on institutional capacity for the drive for inward investment
(IDA), building indigenous industry (Enterprise Ireland) and research
capability (Science Foundation Ireland)
• These bodies operate with a high degree of specialization and are well
connected and coordinated with each other
Weaknesses
• PPA bodies at National Level (NESC) and
Sectoral/Thematic Level (Forfas and NCC)
developed parallel but weakly connected analyses
and policy recommendations
• Crisis of 2008-2010 exposed significant weaknesses
in Ireland’s overall policy approach
Weaknesses
Major weaknesses seen to be:• Political
• Institutional
• Regulatory
Weaknesses
Political:• Divergence between political decision making and policy analysis in
the institutons
• Led to policy capture by influential actors from construction and
banking closely aligned to governing party
• Won excessive tax incentives for construction further boosting a boom
already under way and created illusion – mistaking asset inflation for
real wealth creation
• Led to loss of previous developmental focus
Weaknesses
Institutional:
• Trades Unions saw the creation of the National Competitiveness
Council as favouring the business agenda
• Regarded it as giving employers a separate and stronger institutional
channel of policy influence with the Government
• Probably was a mistake to create the NCC outside the institutional
structure of the NESC as it “balkanized” the social dialogue
• Major divergence between wage bargaining in the public sector (highly
centralized) and private sector (localized)
Weaknesses
Regulatory:
• Complete failure of the Irish Central Bank and Financial
Regulator to see the build-up of massive and excessive
borrowing by Irish banks that fuelled the property boom
• Tragedy is that complacency at the macro/financial level and in
the Alliance created a crisis that undermined a very successful
strategic industrial policy for productive transformation at the
sectoral level
Conclusion
• Ireland enjoyed phenomenal growth and success in the period
1970 to 2008
• Some lessons can be learned from that – what made it work so
well
• But our success blinded us to problems building up which
resulted in the current economic crisis
• Lessons can be learned from that too
• Nevertheless the economy still exhibits many sectoral strengths
in manufacturing, particularly high tech
Conclusion
• The debate about the causes of the crisis and our
future development rages on in Ireland
• For those interested some interesting websites
containing these debates are:
• www.progressive-economy.ie
• www.irisheconomy.ie
THANK YOU!