Rising export sector will lead recovery of Ireland's economy
In a recent article (Irish Independent, December 29, 2010) David McWilliams highlights the dramatic turnabout over the past two years in Ireland's trade and financial position vis-a-vis the rest of the world.
These developments are best summarised by the recent remarkable improvements in this county's current account balance -- the most commonly used measure of a nation's external balance -- shown in the accompanying chart.
Ireland's current account is expected to move into surplus this year for the first time since 1999. Under current policy plans, the current account surplus is projected to rise next year and reach 2.7pc of GDP in 2014. For comparison, the IMF projects current account deficits for this year of 5.2pc , 7.7pc and 9.2pc for Spain, Greece and Portugal, respectively.
A large deficit had opened here in the second half of the last decade, as soaring imports -- fuelled by unsustainable domestic demand -- outpaced exports.
The bulk of the improvement in the current account position since 2008 is attributable to a huge increase in the surplus for trade in goods and services.
The past two years have seen a roughly €16bn improvement in the trade balance. In the third quarter of last year, exports of goods exceeded imports by about €10bn, which was about double the surplus in the same quarter in 2007. The trade surplus for the first nine months of last year was up about 10pc from a year earlier.
The latest data suggest that this strength is continuing. In October, exports jumped 18.5pc from the same month a year earlier, while imports were roughly unchanged.
As a result, the trade surplus for October was up an eye-popping 40pc compared with October 2009. The Purchasing Managers' index for December recorded the largest gain since May, and showed that both output and new orders rose at solid rates, while employment also increased for the first time in seven months.
More detailed data reveal that the surge in exports is broadly-based across sectors. The multinational sector is performing well and projections for 2011 look encouraging.
Indeed, the IDA recently confirmed that 126 multinational firms invested in Ireland last year and nearly 11,000 jobs were created by such firms. This made 2010 the strongest year for foreign direct investment in four years.
But indigenous exporters are also expanding. Firms from sectors ranging from software development to agriculture and agri-food are growing their businesses. Growth of indigenous exporters is especially important for job creation, since these firms tend to be employment intensive.
For a small open economy like ours, this strengthening in exports is crucial to economic recovery. As I have said previously, by our exports we will live or die.
What Mr McWilliams fails to recognise is the important role that government policy played over the past two years in setting the seeds for sustained, balanced export-led growth.
The recent strong growth in exports in part reflects improving economic conditions in most of our major trading partners. But rising incomes abroad can only be part of the story. After all, Irish exports rose only moderately over the 2004-2007 period, despite an unprecedented global economic boom.
Clearly, the revival in exports is also being driven by the significant improvements in competitiveness we have achieved over the last two years.
Wages have adjusted, productivity has improved and the cost of doing business has fallen. More needs to be done, but we are pricing ourselves back into global markets and the performance of our export sector is proof of our success.
Early on in this economic crisis, the Government identified competitiveness as the key to a return to economic growth and a resumption of sustainable employment.
Our strategy for competitiveness was derided by some commentators and some members of the opposition as "deflationary", as if cost competitiveness doesn't matter for a regional, open economy such as ours.
Those who promise to reverse the recent reduction in the national minimum wage -- despite all the evidence that a minimum wage set at too high a rate is a barrier to employment creation -- clearly suffer from similar delusions.
The Government's National Recovery Plan sets out in detail the specific measures we plan to take over coming years to build on this strong export performance by further improving competitiveness in sectors such as waste, energy, transport, telecoms, professional services and public administration.
We will continue to overhaul welfare and labour market policies so that work is rewarded and those seeking employment have a pathway to work, education and training. We will continue to enhance our productive capacity by maintaining investment in key infrastructure projects and in education.
Every transaction involving goods and services has a financial counterpart. So the current account balance is also a measure of the extent to which the economy as a whole is lending or borrowing from the rest of the world.
As such, the current account balance reflects the combined financial deficits or surpluses of the private and public sector. During the period 2005-2007, the private sector borrowed heavily, while the public sector recorded small surpluses.
It's important to note, however, that, in part, the public sector surplus reflected inflated tax receipts from the property sector -- a sector that was bloated by private sector borrowings.
Data released just before Christmas show that a dramatic swing occurred in 2009, with the private sector now running a very large financial surplus and the public sector borrowing heavily to finance the budget deficit.
Of course, had the Government not taken measures to stabilise the budget deficit, the public sector deficit would be much larger, and the current account balance would likely have remained in substantial deficit.
Mr McWilliams draws three conclusions from these developments, all of which are based on flawed analysis.
First, it is wrong to conclude that running current account surpluses over the next .few years will be detrimental to the Irish economy.
These surpluses, generated by rising exports, mean that Ireland will be rebuilding the national balance sheet, in part by paying down external debt. In the aftermath of an unsustainable credit-fuelled boom, repair of the country's overall financial position should be seen as a healthy development.
The claim that Ireland will be "exporting capital" which will starve investment projects here at home of funds is nonsense.
This claim confuses physical investment in new plant and machinery with the accumulation of financial assets such as stock and bonds.
A country can, at the same time, record a current account surplus and a high rate of domestic investment. China is an obvious example.
Second, a current account surplus does not mean that "we can finance the whole thing internally" without recourse to international financial markets or the IMF and EU.
This claim confuses net and gross financial flows. It is true that, in an arithmetical sense, a current account surplus means that there is sufficient domestic private savings to finance the government deficit if all these savings were used to purchase Irish Government bonds.
But a large chunk of Irish households and firms' savings are invested in foreign financial assets, as is natural given Ireland's openness.
Unless Mr McWilliams is advocating the introduction of draconian capital controls which would prevent Irish residents from buying foreign assets, it is wrong to conclude that we do not require external funds.
Finally, claims that reductions in the fiscal deficit will result in a continuously shrinking economy do not square with the experiences of many small open countries that have introduced successful fiscal adjustment programmes. Sweden and Canada in the 1990s are examples.
In all cases the recovery process begins with a revival in exports through enhanced competitiveness.
Export growth in turn stimulates the domestically trading sectors of the economy, boosts consumption and, over time, reduces unemployment. This process has begun in Ireland.