Irish Economy
Irish Medium-Term Economic Strategy 2014-2020: Government publishes brochure not strategy - Part 7
By Michael Hennigan, Finfacts founder and editor
Dec 17, 2013 - 2:56 PM

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This unit labour cost gain is a fantasy and Patrick Honohan, governor of the Irish central bank, has said that it is routinely forgotten "by superficial analysts, unit labour costs are a false friend in judging competitiveness developments for Ireland."

Irish Medium-Term Economic Strategy 2014-2020: We forecast last month that the Government would publish a promotional brochure for international investors rather than a strategy based on an unvarnished assessment of the challenges that would not be masked by distorted data, with emphasis on both strengths and weaknesses coupled with details on the credible paths to achieve major objectives. What has been published is a set of aspirations, not a strategy. It's an unimpressive effort.

In further confirmation that the "strategy" leaves blanks to be filled in, it has been reported that in the New Year, each department will be required to publish their own plans in the framework that is set out in the medium-term economic plan today.

The tender for work on the plan was issued last August and departments have yet to detail their aspirations!

The report is much weaker and unimpressive than we expected and it lacks any attempt at SWOT analysis: strengths, weaknesses , opportunities and threats. If only aspirations and platitudes could be monetised.

The Government has no credible ideas on how to develop a sustainable jobs engine. Yes, lots of actions can help but that is not a strategy.

A Strategy for Growth Medium-Term Economic Strategy 2014 – 2020 [pdf]

The word 'must' appears 13 times and 'weakness' once.

The report says:

We must find ways to foster greater innovation in domestically owned firms and in the delivery of our public services. It is important also to realise that innovation often does not involve step-change but rather incremental improvements."

The report says that the Department of Finance projects that the growth potential of the Irish economy is in the region of 3% per annum over the medium-term, with broadly equal contributions from employment and labour productivity. As a result, unemployment in the baseline scenario is expected to decline over the period of the Strategy, from a peak of 15% to 8.1% in 2020.

The Government’s goal is to reduce unemployment to below 10% by the end of 2016 and to achieve full employment (defined as an unemployment rate of approximately 5 to 6%) by 2020.

By 2020, the gross debt-to-GDP ratio is expected to fall to 93% of GDP, close to the current euro area average.

Provided labour productivity growth is sustained at around 1.5%, average employment growth of 2% per annum over 2017 to 2020 is expected. Under these assumptions, the economy is projected to add 238,000 jobs over the period 2014 to 2020, leaving total employment at over 2.1m by the end of the decade.

There are currently less than 300,000 direct jobs in the exporting sectors of the economy - -  both foreign-owned and indigenous firms.

However if this productivity is distorted by tax avoidance of foreign firms, then it's not reliable.

The Irish economy is at last recovering and we could do much better but we will not get to a better place unless there is a willingness to have spin-free assessments of the challenges ahead.

Most headline economic data cannot be taken at face value as the conflation of the significant foreign-owned sector (boosted by massive tax avoidance) with the indigenous sector presents a misleading picture while public relations/spin has infused the policy making system through boom and bust with no place for recognition of weaknesses.

Last April, in an official report on increasing manufacturing employment by 2020, the term 'strengths' appears 49 times; weakness or weaknesses get no mention. Competitiveness and access to finance are cited as problems but these default reports in Ireland where the selected members of expert groups produce output that seldom challenge policy makers, are an insult to citizens.

Full-time jobs in the tradeable foreign-owned and indigenous sectors are below the 2000 level -- 13 years ago, while fairytales abound and last October the US Chamber of Commerce claimed that over the five-year period starting in 2008 and ending in 2012, US firms invested more capital in Ireland ($129.5bn) than in the previous 58 years combined. They were counting what is termed 'trapped cash' as an inflow.

The more pertinent fact was that in the period 2008-2012, only 3,300 permanent net jobs were added by US firms in Ireland.

Five months before the current government assumed office, its predecessor published 'Trading and Investing in a Smart Economy - A Strategy and Action Plan for Irish Trade, Tourism and Investment to 2015' [pdf] - -  forecasting 300,000 new jobs by 2015: 150,000 direct and 150,000 indirect in State agency supported enterprises.

Six months before, in March 2010, the Innovation Taskforce report [pdf] to meet the aspiration of Brian Cowen, then taoiseach, to establish a European Silicon Valley in Ireland, the members dreamt of up to 215,000 science and technology jobs being added in a decade to vault over the original Silicon Valley in Northern California to become the world's top tech cluster. Back on Planet Earth, the oldest tech cluster in Europe is located in the area around Cambridge University in the UK, known as Silicon Fen.

After just over 50 years there are about 50,000 jobs in 1,400  high-tech firms in the cluster:

  • 40% of firms are micro and employ 1-5 people;
  • 20% of firms are micro and employ 6-10 people;
  • Only about 2.5% of firms employed more than 200 people.

Entrepreneurs and private investors can dream but it gets a bit dodgy when ministers have no interest in evidence

The Department of Jobs, Enterprise and Innovation told Finfacts on Monday:

Minister Bruton and the Department of Jobs are unashamedly ambitious for the potential of scientific research in Ireland to support economic growth and job-creation in Ireland. In recent years we have improved our ratings for basic research to the point where we are now very competitive internationally - the challenge now is to achieve greater returns in terms of commercial outcomes and jobs from this research."

So they are "unashamedly ambitious for the potential of scientific research in Ireland" and this is effectively the  main enterprise policy. An inflation adjusted €24bn has been spent in the past decade in this area and all they can cite are citations in journals while patent applications are at a 30-year low.

The inconvenient evidence is that resident companies whether Irish or foreign-owned do not do research in Ireland that merits patent filings in Ireland and Europe while there has been an increase in filings made by third level institutions.

The private sector hasn't much value in the research as an unusually large number of firms are involved in each collaboration project.

Last week the Government launched a data analytics centre with the participation of  four universities and 30 firms, including RTÉ, The Irish Times, Cisco, Microsoft, Alcatel-Lucent, Santry Sports Clinic and the IRFU.

It was announced that the State will provide €58m of the €88m cost but this is misleading, apart from the cost of the benefits of the 25% R&D tax credit and public grants.

The Department told Finfacts that the "cost" does not include "other state funding such as academic salaries, buildings, in universities etc which may be used at times by the research centre" - - simply, Joe Taxpayer is covering most of the cost.

High-growth firms in the UK and US are not typically in high-tech:

NESTA (National Endowment for Science, Technology and the Arts), a UK science advocacy group, said in a report [pdf] in 2011 that a small minority of fast growing companies account for half of new jobs in the UK. It also said:

Some of the most startling high-growth businesses of the last decade have been technology companies, specifically internet companies. The allure of these businesses, and the goal of creating a British Google or Facebook, is an admirable one. But the Silicon Valley tech company is not representative of the majority of high-growth businesses.

NESTA’s analysis of growth companies from 2002 to 2010 shows that they are distributed across the economy, from mining to banking."

A report published in 2012 by the Kaufmann Foundation, America's leading entrepreneurship think-tank, said that state economic development programs, which traditionally target high-tech firms, may be missing 75% of high-growth companies.

"Our analysis of these fast-growing firms shows us that high-growth company founders can come from anywhere," said Dane Stangler, director of Research and Policy at the Kauffman Foundation. "Their firms can be found throughout the country and, rather than following the conventional expectation that high-growth companies are grouped into a narrow technology category, they represent exceptionally diverse industry segments. These findings offer important lessons for economic development leaders, such as to target firms that are high-growth rather than high-tech."

Despite all the blather on exports which exceed 100% of GDP, most jobs are in the non-exporting sectors:

Central Bank economists, Martina Lawless, Fergal McCann and Tara McIndoe Calder, said in a 2012 paper [pdf]:

the vast majority of indigenous employment (which makes up 78% of private sector employment) is still accounted for by traditional sectors such as Hotels & Restaurants, Wholesale & Retail, Business & Administrative services and Transport & Storage.

These figures suggest that, while export growth and export linkages are vital to modernisation and growth strategies, the role of the typical domestic-demand driven services economy must not be overlooked when contemplating strategies for employment creation.”

Finfacts: Irish Medium-Term Economic Strategy 2014-2020: Exports to plunge by €50bn - Part 1

Irish Medium-Term Economic Strategy 2014-2020: FDI, SMEs, New Normal - Part 2

Irish Medium-Term Economic Strategy 2014-2020: Innovation and entrepreneurs? - - Part 3

Irish Medium-Term Economic Strategy 2014-2020: Exports to Japan and emerging markets -- Part 4

Irish Medium-Term Economic Strategy 2014-2020: Change comes ever so slowly in Ireland -- Part 5

Irish Medium-Term Economic Strategy 2014-2020: Government says expect aspirations not strategy - - Part 6

Irish Medium-Term Economic Strategy 2014-2020: Where will 300,000 net new jobs come from? - - Part 8

In our series we highlighted:

  • That the claim by the Department of Finance (see chart above) in respect of the period 2008-2015: that "continued competitiveness boost through reduction in unit labour costs with a 21% relative improvement forecast against the Eurozone average," is based on virtual output/exports arising from massive tax avoidance not real economic activity. Patrick Honohan, governor of the Irish central bank, spoke in November 2010 of "the accounting and measurement challenges that have been presented by the extraordinarily globalized nature of the Irish economy as it evolved over the years...unit labour costs tend to fall even if wage costs for any individual firm or industry are increasing. Because of this shifting composition effect, as has been well-known for decades, but is routinely forgotten by superficial analysts, unit labour costs are a false friend in judging competitiveness developments for Ireland. Measurement and accounting are of crucial importance at times of structural change. Careful scrutiny is needed to ensure that policy choices are quantitatively well-judged...Analysing the distinctive structure of the economy that it created requires careful analysis of good accounting data, both national and private";
  • It's a lie to claim that services exports growth excluding tourism, reflects improved competitiveness;
  • In recent years services exports have surged because of tax avoidance: Google booked 41% of its 2012 global revenues in Ireland; Facebook booked 48% and in 2011/12, Microsoft diverted 24%. Add in Apple and a number of others and these virtual output/exports it adds up! More here on fake services exports and taxes.
  • When international tax rules change, services exports of up to €50bn may vapourise;
  • The European Commission this year classified Ireland as a leader in innovation but most of the 16 'Irish' companies in its top 1,000 R&D spenders are American with head offices in Ireland. Seagate Technology spends more than $1bn annually on R&D but not in Ireland;
  • There is a delusional hope that a world class knowledge economy can be created but firms such as Google and Facebook are mainly engaged in sales and general administration. Microsoft, Intel and Apple have strategic R&D centres in Israel and less than one-third of IDA Ireland client companies do even minimal R&D;
  • Irish originated exports to BRIC countries (Brazil, Russia. India and China from the original classification plus South Africa) are very low and are mainly made by the foreign-owned sector. Exports to these five countries only accounted for less than 5% of total exports in 2012 with China accounting for the lion's share.
  • As most of these exports come foreign-owned firms, decisions on the destination of the exports are not generally made in Ireland. Putting Mandarin on the school curriculum is a typical proposal from armchair ‘experts’ who have no experience of the challenges of selling in China - - 1.3bn consumers and all we need is a very tiny slice of the pie!
  • In the real world developing new export markets is a hard slog and Ireland has had limited success;
  • Irish full-time employment in the internationally tradeable goods and services sectors (foreign and indigenous) at the end of 2012 was at about 295,000 compared with 320,000 in 2000 despite headline exports growing at current prices by 71% in the period 2000-2012 and at constant prices by 59%;
  • Despite Irish SMEs (small &medium size firms) having very low corporate and employer social security taxes, they have a very poor exporting record;
  • Two-thirds of private sector workers are in indigenous non-exporting firms while 56% work for indigenous non-exporting SMEs;
  • Pay in the SME sector is generally low with no pension coverage and basic redundancy available;
  • Entrepreneurship is at a low level;
  • During the Celtic Tiger period, Ryanair was one of the few significant international business successes,
  • This year, Elan, once the 20th most valuable global drugs company and the top indigenous biotech firm was sold off to an American firm.
  • Forfás, the policy advisory agency, said this year: "Overall, in 2011, foreign-owned firms accounted for 89% of exports in the Manufacturing Category, 95% of exports in the Internationally-Traded Services";
  • Even if fake tax-related services exports and US firm manufacturing prices were not padded for tax purposes, Ireland's indigenous exports would only account for about 22% of the resultant total exports total.

The OECD said in its Economic Survey of Ireland last September:

  • "Reflecting significant uncertainties about the effectiveness of various innovation policy tools, independently and regularly evaluate all actions in this area, strengthen programmes with proven higher returns, and wind down the others. To promote effective evaluation, ensure all innovation and enterprise supports have sunset clauses;
  • The number of programmes and agencies multiplied during the period of booming growth. There are now over 170 separate budget lines, sometimes for very small amounts of money, and 11 major funding agencies involved in disbursing the Science Budget, although it is small by international standards. This fragmentation raises overheads, risks duplication and hampers resource reallocation. Gains would be achieved by consolidating funding into a drastically smaller number of agencies, with one group dealing with science and basic research, and another with applied research and innovation. This should be coupled with a high-level co-ordination committee to prevent gaps or duplication."

Sunset clauses? What radicalism!

With the bailout Troika departed, there is nobody responsible for pushing for even mild change at governmental level. Anything radical is absolutely out of the question in conservative Ireland.

During the last economic debacle, John M. Kelly, the late UCD constitutional law professor and Fine Gael TD, said in 'The Sunday Tribune' in October 1986:

Ireland's political and official rulers have largely behaved like a crew of maintenance engineers, just keeping a lot of old British structures and plant ticking over.."

Perish the thought that today we could be as adventurous as the Swedes and the Finns, running other small countries with competence!

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