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Analysis/Comment Last Updated: Sep 12, 2010 - 10:28:00 AM

Ireland's Choice: Reform or risking status as a failed rich State
By Michael Hennigan, Founder and Editor of Finfacts
Jan 29, 2010 - 5:11:02 AM

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George Papandreou (l) , Prime Minister and Minister of Foreign Affairs of Greece, and José Luis Rodríguez Zapatero , Prime Minister of Spain, captured during the session 'Rethinking the Eurozone' at the Congress Centre at the Annual Meeting 2010 of the World Economic Forum in Davos, Switzerland, January 28, 2010. © World Economic Forum swiss-image.ch/Photo by Monika Flueckiger.

Papandreou said Greece's "biggest deficit is not the financial deficit but the credibility deficit," in a reference to his country's fiddled statistics. The PM said its problems are "home grown"

“I would first of all put the blame on us,” Papandreou said, but he added that the previous government was primarily responsible for the mismanagement, patronage and corruption that helped ruin the economy. “We did not take the structural changes to make Greece more competitive.”

Greece and Ireland were among the small number of advanced countries which were recklessly misgoverned during the international credit boom. Now, Ireland is stabilising its public finances but the forces of conservatism who dominate insider - - public, business and trade union - - groups, show no interest in fundamental reform, despite the economic crash.

Ireland is one of a small number of the 24 rich countries of the Paris-based Organisation for Economic Cooperation and Development (OECD) that has suffered the worst of the global recession but it is striking that beyond short-term measures to correct the public finance imbalances, there is no evidence of serious interest in fundamental reform among the political class nor is there public pressure for change. Given the largely avoidable economic calamity, and the overwhelming dependence on foreign firms to deliver long-term prosperity, with the exception of the new reforming leadership at the Central Bank, it's mainly business as usual elsewhere. It's a valid question to ask, if an unreformed Ireland is destined to be another failed rich State like Japan?

This month, Chile became the 31st member country of the OECD. It has an economy about the size of Ireland's and a conservative president-elect will soon take power from a left of centre party that delivered two decades of prudent economic management, coinciding with democracy. In 2007, Chile became a net creditor for the first time since independence from Spain in 1810 and in the previous year, to avoid a spending spree during a commodity boom, a law was enacted requiring the annual budget to be based on an independent committee's estimate of the average copper price over the following 10 years -- not on the current market price. Any copper income above the budgeted price goes into a savings fund held outside the country. During the recession, Chile was able to fund one of the biggest stimulus progarmmes relative to its economic output.

In September 2006 in Ireland, the then Tánaiste Michael McDowell had said that the Government could afford to cut stamp duty on house purchases because it was raising too much money. Exactly two years later, the Irish economy was a busted flush with the State having to put an enfeebled banking system on a respirator via the State guarantee and it was among the few basket-case rich countries that could not afford emergency spending measures to counter the global recession. By 2009, employment had fallen over 180,000 - - the equivalent of two full Croke Parks.

During the Celtic Tiger period, there was an impression that Ireland had modernised following the receding of social conservatism. However, while the arrival of American world class companies, provided a modern tradable goods and services sector of significance, the governance and vested interest systems remained relatively unchanged since independence. Under the veneer of modernity, a system of limited accountability where high level officials passed the buck, was predominant; issues of public importance only got attention when there was a dire crisis and in the Celtic Tiger period, the biggest "reform" in decades was a politically motivated aspiration to move half the central public service out of Dublin. In the previous year, the Minister for Finance Charlie McCreevy, following a bizarrely named "benchmarking" process, had given public servants and retired staff, and politicians including himself, a special payment of an average of 9% not in return for reform, which is still promised, but on a case, unsupported by credible data that public staff were underpaid compared with counterparts in the private sector.

The people can be blamed for tolerating mediocrity and an expectation of the politician's role as a messenger boy/girl, although there is no effort made to determine how many members of the public rely on TDs as a conduit for contact with Government departments and public agencies or how a more comprehensive citizens bureau service could handle much of this work. Despite additional staff resources and payments for politicians, the part-time Oireachtas has failed the country. Only a small number of the 216 membership have the capacity to inspire fellow citizens and credibly address issues such as the economy and banking crisis.

Besides the political class, the vested interests who are also responsible for the economic dénouement, are not in the business of embracing change at a time when it is so necessary.

The public sector dominated trade unions say they could deliver "transformational" reform but it's a menu without prices; employers' group IBEC panders to its conflicting constituent interests, including public agencies and companies and does not push for the reform that it knows is critical for Ireland's future. Meanwhile, accountancy institutes and other bodies whose biggest member groups made huge earnings not only from the boom but directly from public services, remain silent, all well knowing that the Victorian era secrecy on public spending and lack of competition in the non-export sectors of the private economy, is in their interest but not in the public interest.

Japan, the world's second richest economy, has shared with Ireland a system of cronyism and the dominance of one political party. The hope provided by the victory of the Opposition last September has dissipated and this week, a leading credit agency put Japan's sovereign debt on watch.

Reports that Fine Gael plans to propose significant Irish political reforms, is potentially very significant development in Ireland. If it prepares well and in government resists the backwash from the forces of conservatism, then it can declare open season on other sacred cows.

Vested interests will fight tooth and nail to retain their plums and the argument will be made that say Oireachtas (Parliament) reform would only save x or y but if we accept the Chinese saying that a fish rots from the head down, we should know where to start. We can have a rake of public inquiries on various issues but unless the governance system is fixed, what hope can there to be to aspire to become a well run country like Denmark?

"Something is rotten in the state of Denmark," William Shakespeare wrote in Hamlet, four centuries ago. Substitute Ireland today.

The people of Denmark voted to abolish the Upper House of their parliament, the Folketinget, in the early 1950s.  Backbench MPs get paid the equivalent of about €100,000, including expenses. Their counterparts in Ireland, can rake in more than double that. 

Why not make Denmark, with its successful knowledge economy, a model to aspire to?

Turning a blind eye to failure and failures has brought ruin to our economy.    

Last November, at the launch of the OECD's latest economic survey on Ireland, the Minister for Finance, Brian Lenihan, welcomed what he termed the OECD’s fair and balanced assessment of the Irish economy and said it should be "compulsory reading" for understanding the challenges the country faces.

There isn't need for more reports on the OECD report or delaying taskforces. What is missing is vision, political will and a public that needs to wake up.

Do we have to wait to see the writing on the wall?

Why accept a system where the insiders shield most detail on public spending from public glare? Who does such a Victorian era culture of secrecy serve? Well connected insiders who are protected from competition or the public interest?

Compared with money politics in the US, where bribery has been virtually legalised, corruption in Ireland is on a minor scale but it still has a pernicious impact.

Two senior ministers continue to hold jobs as teachers - - over 20 and 12 year after appointing temporary teachers to fill their positions. They are currently building credits for 3 very generous public service pensions. The fact that this abuse of position is tolerated, speaks volumes for what is accepted in Ireland.

The concept of  "conflict of interest" is rarely an issue in Ireland and local councillors with commercial property interests, can vote on land rezoning decisions.

It is absolutely foolish to believe that Ireland can muddle through without significant reform and the restoration of public trust in the political process.

Within a generation, reckless politicians twice wrecked the Irish economy and left in their wake, misery on a huge scale. So besides institutional reform, laws should be put in place to prevent a third occurrence since independence.

Panaceas such as leaving the euro are proposed as beguiling alternatives to reform. We could risk becoming a confirmed basket case in search of instant competitiveness and then we would be soon back to the issue of change, reform and modernisaton.

Despite the optimism of a number of economists that Irish exports will grow vigorously from 2012, the Eurozone, the US and the UK, face serious multi-year fiscal challenges. Ireland is more dependent on US firms than any other economy and almost 90 per cent of Ireland's tradable goods and services exports are made by foreign-owned firms. Emerging markets China and India are expected to grow rapidly but currently, Irish goods exports to China are less than to Switzerland and indigenous firms account for about 6 per cent of shipments to China. Total Irish exports to India are insignificant.

We need to take a good look in the mirror and with our dependence on firms from other advanced countries who have responsibility for almost €9 for every €10 worth of our exports, surely we should have the responsibility to fix a broken system that has destroyed the lives of tens of thousands of fellow citizens? Japan like Ireland is still rich but now over a third of its workforce are temporary workers on less than the Irish minimum wage. For Ireland, there is also nobody guaranteeing a free lunch. The time for action is long overdue.

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