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News : Irish Economy Last Updated: Sep 20, 2010 - 9:21:58 AM


Ireland in a state of chassis
By Michael Hennigan, Founder and Editor of Finfacts
Sep 17, 2010 - 3:56:04 AM

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Minister for Finance Brian Lenihan, flanked by ministers, Micheál Martin and Mary Hanafin in Galway, Sept 13, 2010. Both of them are also teachers and their three public pensions are worth about €140,000 a year in total. Martin and Hanafin are still employing temporary teachers to fill their permanent positions. Martin left his teaching post in 1989 while Hanafin took secondment 13 years ago. This is a metaphor for the gulf between the governing class and the governed.

The majority of Irish private sector workers don't have one occupational pension and for those who do, many funds are in deficit and investment returns are expected to be low for many years. It's bad enough to be a victim of monumental mismanagement of the economy but the authors of the misfortune have gilt-edged meal tickets from the State for life.

"Th' whole worl's in a terrible state o' chassis," the Captain Boyle character laments in Irish playwright Seán O'Casey's celebrated 1924 play, Juno and the Paycock. While Ireland today is in a state of chassis, it can recover to a sustained lower level of prosperity but there are many obstacles ahead.

Solvency is not a short-term threat but the lack of enthusiasm for significant reform of a failed governance system coupled with the plateauing of the crucial foreign-owned sector, are serious concerns.

The gross debt position is expected to increase to 105% of GDP by 2013 and the servicing cost will amount to 4% of economic output. In that year, Ireland will become a net contributor to the EU's budget for the first time since 1973 and net receipts of over €40bn, averages at 3% of GDP.

While Ireland will be paying 20% of its tax revenues in interest compared with 28% in 1991, the net cash receipts from Europe in 1991 at 6.2% of GDP more than offset the interest burden.

Meanwhile, Irish household debt as a percentage of disposable income rose to 175% in 2008 from 48% in 1995.

The US dominant foreign-owned sector is responsible for 90% of Ireland's tradeable goods and services exports. While Ireland's export/GDP ratio rose from 49.6% in 1989 to 103.2% in 2000, during the boom years as the workforce expanded by 25% to over 2m, there was only a negligible increase in employment in the tradeable sector.

The bright star during the recession has been the pharmaceutical/medical devices sector, which accounts for over 50% of merchandise exports. However, the rise in exports in this sector over a 5-year period, has resulted in no net job creation and with many of the big firms facing patent expirations, the sector is vulnerable and the risk is that it will contract as the computer/electronics sector did.

For example, the Eli Lilly plant at Dunderrow, near Kinsale, employs 450 people. The US parent expects that patents covering drugs accounting for three-fourths of its current revenue will expire over the next few years. Sales have been disappointing in recent times for the blood thinner Effient, Lilly’s first new product in five years.

Employment in the foreign-owned sector sector is now back to the 1998 level at a time when Ireland needs an engine of growth to replace construction.

The current focus of enterprise policy is on developing a knowledge economy, with an emphasis on university research. However, contrary to common belief, most high-tech firms create few jobs and the policy is a faith-based one that ignores inconvenient facts.

While the Irish government has taken some tough measures to bring order to the public finances, there has been little progress in reform with the exception of financial regulation.

The recession has of course had an impact on some costs but this is temporary.

The Irish political system has much in common with Japan's with long-governing dominant parties characterised by nepotism, clientism, close ties to the construction industry and a resistance to change.

One of the key characteristics of the Irish governance system is the pass the buck culture, where accountability is hard to pin down.

Public tribunal lawyers have become multi-euro millionaires while investigating planning corruption but nothing has been done to change the rezoning system that makes development land scarce in a country that is 4% urbanised.

There has been no reform of the failed governance system, the public sector or the powerful protected private sector.

An agreement with public sector unions on changes in work practices is to take effect in coming years but there is little optimism that significant reform will take place.

A milestone on the road to recovery would be a general election, due at the latest by May 2012.

The dominant political party, Fianna Fáil, has been in power since 1997 and it’s credibility with the public is at rock bottom.

Ireland remains a low tax country and employer payroll taxes are among Europe's lowest. However, while the majority of private sector workers do not have an occupational pension scheme, the public staff pension bill has risen by 66% since 2005.

Apart from stamp duty on purchase, there is currently no annual property tax other than on second homes and local government service charges are limited.

So there is both leeway on taxes, ending closed shops in the professions and tackling bubble-era costs.

Ireland remains a conservative country where change happens very slowly.

Both the main business group, IBEC, and the congress of trade unions, ICTU, eschew advocacy of serious reform as they have too many vested interests to pander to.

In 1977 when Fianna Fáil won power, it embarked on a public spending splurge that resulted in a budget deficit of 17½% of GDP in 1978. It was the highest for an advanced country in the period 1970-2008, according to the IMF.

It took more than a decade to get the economy back on track and then with the benefit of the accelerating high-tech boom in the US.

This time, there is no benign international environment among advanced countries. However, there is the opportunity to have a well-run competitive Nordic-style economy if there is the political will to take on many sacred cows.

The failure to seize the opportunity will return Ireland to long-term emigration.

We at Finfacts take facts seriously and it's very important when commenting on economic trends and policy.

There is the simple support for an argument by citing relevant facts. There is alternatively the selective use of facts to support a position and there was a classic example of both in the Irish Independent on Wednesday.

Economist David McWilliams wrote in making the case for exiting the euro: 'The most damning statistic of our entire euro venture is that from 1990-2000 when we had our own currency and we devalued in 1993 to get competitive, Irish exports grew by 360%. Between 2000 and 2009 with our overvalued new euro currency, Irish exports grew by 0.3%. That says it all really and yes, that figure is 0.3%, not 30%!'

The last point is emphatically made but absolutely wrong.

In 2000, tradeable goods and services exports were €102bn; in 2009 they were valued at €144bn - yes, an increase of 41%!

There was a 10% devaluation in 1993. So that is a fact but it is not credible to claim that an export boom depended on a small scale currency revaluation while ignoring a key fact that with 1% of Europe's population, we were attracting 25% of US greenfield investment. Besides, a paper published by the Central Bank in 2005 shows that the trend of exports from Irish-owned firms in the period 1990-2002, hardly changed. Have a look at a chart here which shows the true facts.

Intel, Dell, Hewlett-Packard, Microsoft and a raft of world-class pharmaceutical companies triggered the export boom not the Minister for Finance Bertie Ahern who was left with no choice but to agree to a market-forced devaluation in 1993.

-  - Michael Hennigan

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