Friday 28 October 2016

Restoration is better left for kings and antique furniture

Published 16/04/2015 | 02:30

Back in my school days, before furniture became exciting, the word "restoration" meant the return of King Charles II to the British throne. Not that we cared much for the Merry Monarch at St McNissi's College in the Glens of Antrim, but some stuff sticks.

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Charles knew very well he was not being restored to the same throne his father had vacated so dramatically. It was a different country. Extraordinarily, his son James, of Battle of the Boyne fame, had not learnt that obvious lesson.

"Restoration" was a euphemism in 1660. But not, it seems, when it is used in demands for "restoration" of public sector pay, delivered with the usual menaces by the teachers' unions last week. But the world ruled by that merriest of monarchs, Bertie Ahern, before he lost his head, cannot be "restored".

That is not to say that teachers, and other government workers, will never again enjoy the same pay and privileges as 2007. Of course they will, and quite possibly sooner rather than later. The problem is the euphemism. If restoration is taken too literally, it can lead people to believe that no new ways of doing things are required.

There are already worrying signs of that belief taking hold. But the Crash changed economies permanently, to which must be added continuing changes from technology and the rise of emerging economies, especially China. Meanwhile, the Irish economy, as well as being totally intertwined with the global one, keeps changing in its own particular ways.

The effects of the Crash involve difficult concepts of growth, potential growth and productivity. On the local level, simplistic talk of restoring pay avoids the unpleasant reality that a good deal of the lost pay existed only as entries on banks' computers. What was never real cannot be restored. This time, it must be earned.

Claims that the cuts must be reversed without any discussion of productivity represent a startling failure to accept this reality. It may be highly convenient not to accept it but no one should be in any doubt that somebody will have to earn the money involved.

To complicate matters further, our ability to earn it may not be what it was before the Crash.

The economy has been damaged with the loss of employees, skills, purchasing power and of investment. Recovery is well under way but some of this damage is permanent and national income will be lower than it would have been had none of this happened.

Exactly how much lower is a matter of abstruse academic analysis but it is as well to recognise that the loss is there - and not just in Ireland. In its latest World Economic Outlook, the International Monetary Fund (IMF) worries that the global loss could be quite serious.

Its analysis concludes that potential growth - the amount by which output can rise without running short of labour and financial resources - will be 1.6pc a year over the next five years. Before the Crash, potential output grew by 2.25pc.

IMF managing director Christine Lagarde has called this slower growth the "new mediocre". Her organisation, along with others like the OECD, wants policies to reduce the mediocrity, such as more public investment, reductions in excessive regulation and improvements in education.

The IMF complaint that governments generally have been slow to respond may well describe a belief that, if only we all sit around long enough, the same way of doing things will again deliver what it seemed to before 2008.

In one particular but vital area for Ireland, exports, it is clear that there is no going back to the old regime. Export growth was a major contributor to the recovery, but even the most casual observer can see that the nature of those exports is changing fast.

A recent paper from Central Bank analysts Stephen Byrne and Martin O'Brien looks at these changes in some detail. They confirm that, despite the increase in exports, it has not been as fast as the growth in world trade since 2000.

But behind that figure is a sharp fall in the share of exports of goods and a rise in services. That creates a very different structure from that of the 1990s.

Then there is the Crash. One of the first signs that something was badly wrong was a collapse in shipping rates. The volume of world trade fell 16 times more than GDP during the Great Recession. Nor has it recovered as in the past, when it tended to grow faster than GDP in the upswing.

Economists wonder if this too is a "secular", more or less permanent, change. Too early to say, but the paper finds that the new services exports from Ireland do not respond as directly to increased GDP in our trading partners, as compared with exports of goods.

On the other hand, last year's export performance was better than this new pattern would have predicted. To explain that, the researchers say it is necessary to look at the growing importance of Irish exports as part of final products rather than, as with the old computer factories, being the finished product.

The importance of these "global value chains", they say, may make Irish exports move less in line with global growth but still be just as volatile, as companies shift production patterns.

Those companies are mainly foreign and the paper shows the vulnerability of the economy to any change in the exporting behaviour of the multinationals - vulnerability which may be on the increase, with the drive against corporate tax avoidance.

In 2009, more than 40pc of Irish exports incorporated goods or services imported from abroad. That is a lot compared with advanced economies elsewhere, and the Irish content of those exports was relatively low. It is also falling, with the domestic value added in services exports declining from 81pc in 1995 to 53pc cent in 2009.

The crash of 2001 continues to cast a long shadow on the Irish economy, and in unexpected ways. Many of the companies which ceased to manufacture information technology products at the time switched to providing their business services from Ireland - a very different activity, with different impacts on employment, national income and tax revenues.

There is much we do not know. At the very least, as well as more research, the whole strategy for domestic enterprise needs yet another examination from its foundations up. Ideally, tax incentives would be left out of the study itself, so as to concentrate minds for once on wider policies such as skills, research and capital.

Ireland must fight hard to save the foreign export baby from the tax avoidance bathwater which, like a lot of other things, cannot continue as it was.

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