Friday 22 November 2019

Export growth will reduce debt – but only if spending is curbed

'IF only we had the weather," Irish people often sigh as they survey the country's magnificent beaches. "The Mediterranean wouldn't stand a chance."

Maybe there is more to it than just a different climate. The old chestnut of public versus private sector was given another roasting last week, with ESRI researchers claiming the gap between the two was 19pc, rather than the 7pc estimated by the Central Statistics Office.

I'm not going to get into all that this week. Instead, there is the observation which seems to be common to both the ESRI and the CSO; that private sector pay tends to be higher than public sector in northern Europe, but it is the other way round in southern Europe – and Ireland. We have indeed everything but the weather.

Why should this be? Since the obvious thing that these countries have in common is that they were all Catholic, a popular theory has been that there is something in Protestantism that promotes the interest of private enterprise and distrusts government.

There may be something in that but a more proximate explanation is obvious. This is that the industrial revolution flowered to a greater extent in the northern European countries than the southern (and Ireland) – and that it happened in the 19th Century, not the 20th.

What we can see in developing economies in the late 20th Century is the desire to have the kind of societies which northern Europe developed slowly and painfully, before the private economy has productivity to support them.

This has been the Irish experience. The financial disasters of the 1980s and 2000s do not seem to me to be unfortunate accidents. Their causes lie deep in Irish society.

If so, it means something similar is quite likely to happen again. Things like pay ratios are not causes but symptoms of a flawed self-image of ourselves, and our place in the world.

IMF paper

A different image is presented in a recent working paper from the International Monetary Fund. The title means it does not represent the views of the IMF itself, but the calculations and abstractions of the analysis certainly accord with common sense.

The purpose was to examine the chances of Ireland growing its way out of the present financial mess. The common sense bit is the finding that exports are key.

Yet almost all of the debate is about stimulating domestic demand, which is fine and dandy, but not if the proposals do not take account of the effects of such stimulus on our ability to sell abroad.

The report finds a strong relationship between exports and total economic output (GDP), and that the level of economic growth is reflected in government debt.

On average, a one percentage point increase in GDP would be associated with a four percentage point fall in the public debt/GDP ratio.

So export growth would reduce the debt burden, if spending is kept in check. There is the first policy challenge. Another is the preservation and enhancement of foreign investment (FDI), which remains crucial to the economy's prospects.

One statistic which had rather slipped my attention was that the stock of foreign investment fell from 100pc of GDP in 2000 to just 20pc in 2007. Part of this was the excessive growth of GDP, but the rest was down to losing plants faster than new ones were being built.

One worry about how we see ourselves is the amount of political capital being expended on the search for a deal on the Anglo promissory notes. It is already clear that Ireland will be expected to repay in kind on things like corporate and financial taxes.


A cold appraisal of what the economy most needs in the long-run might question whether even a €2bn a year deal would be worth it, given what we may have to give up in policies to lure foreign investment.

In which case, costs will be even more important. The report finds that changes in labour costs per unit of production matter more than changes in the price of consumer goods – the standard measure of inflation.

It is nice to see endorsement of my long-held belief that policies to tie wages to consumer prices are among the most self-destructive possible in an economy like Ireland's. It is not so nice to see that it is still central in the arguments about the public finances.

For me, the real warning in the study was the sentence: "Once the slack in the economy dissipates, an important issue for Ireland would be to contain domestic prices and labour costs."

Even the most casual observer could hardly fail to notice the widespread sense that, once the slack in the economy dissipates, it will be back to the future, and life as we have known it.

No it won't. The fact that median income is now some €40,000 a year, along with probable developments in Europe, means that even the recent past is, as the poet said, a land of lost content where we cannot come again.

The authors of the report readily concede that their analysis does not include the domestic mess of high household debt, high unemployment, and weak banks.

They do claim, though, that what they do put into their calculations can explain 80pc of changes in economic growth.

That is encouraging, but we are going to need a bit of luck, as well as wage restraint and very limited growth in public spending.

The reason is that the single most important factor is found to be demand in overseas markets – by definition something over which we have no control.

The performance of our trading partners is a "game-changer", the report says, strikingly if not very originally.

If official forecasts of 4.25pc growth in demand for Ireland's exports over the next four years prove correct, they should deliver modest growth in Irish GDP and government revenue.

Foreign growth

It may take stronger foreign growth to achieve debt sustainability without significant re-structuring. If the eurozone recession should continue, the consequences are sadly obvious.

In the end, this is an analysis of the characteristics of a small open economy, and how vulnerable such entities always are. They must voluntarily restrain consumption when external conditions are good, so that they can survive the inevitable periods when they are not.

This is not how we see ourselves. The failure has been, not a lack of confidence, but a lack of fear.

Irish Independent

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