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Analysis/Comment Last Updated: Oct 11, 2010 - 4:23:12 AM

Ireland can choose a path to greatness or perdition
By Michael Hennigan, Founder and Editor of Finfacts
Oct 8, 2010 - 6:25:43 AM

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Swirling clouds of blue and green lit the Atlantic Ocean west of Ireland on June 2, 2006, when the Moderate Resolution Imaging Spectroradiometer (MODIS) on NASA’s Aqua satellite captured this image. The ocean is normally black in true-colour, photo-like satellite images such as this one, but a large phytoplankton bloom lent the water its brilliant blue and green hues. Phytoplankton are microscopic plants that grow in the sunlit surface waters of the ocean. When enough of the plants grow in one place, the bloom can be seen from space.

In grim times even the optimists struggle amidst the wreckage of the Celtic Tiger years. However at some point fear will be conquered and where Ireland will end up on the spectrum from greatness to perdition remains in the hands of the Irish people.

It is striking that despite the devastation caused by the failed governance system and the banking crash that there is little evidence of a significant constituency for radical reform and change. Focus has been mainly on the symptoms.

For example, the pattern of panic and slow-motion that has characterised the response to the banking crisis over the past two years is not an aberration.

It is the way governments have operated in Ireland for decades; respond to a serious issue only when it has become a dire crisis.

Ireland became the first of only two countries to guarantee existing bank debt during the global crisis. It was a panic decision and wasn't necessary for Ireland as the European Central Bank had been providing emergency liquidity to Eurozone banks since the previous year.   

The move foreclosed on options for Anglo Irish Bank before it was nationalised in January 2009 and the contrast with what was done with the floundering General Motors in the US months later, is instructive.

The Obama auto industry taskforce pushed GM into bankruptcy in June 2009, wiping out common stockholders and forcing the holders of $27bn in GM bond debt into accepting a 10% share of the new GM. The US government now plans to reduce its 61% stake in the new GM through a stock exchange floatation in coming months.

The first step to the future is to have an unvarnished assessment of the failed Irish governance system together with the Irish economy's strengths, weaknesses, opportunities and the emerging challenges in a fast changing global economy. This first step has yet to be taken.

We once aspired to be recognised as a "world class knowledge" economy by 2013. Sweden, Denmark, Finland and Norway are currently in that league and it's hardly a coincidence that they are also well governed countries where issues such a accountability are taken seriously.

In April 2009, I wrote in The Irish Times of a "a part-time parliament of 216 members, who are among the best-paid in the world but during the current crisis most voters would struggle to name five to 10 who have provided a credible response or vision, and a slow-motion process of government, where ministers are generally one or more reports away from making decisions, vividly illustrated by a 17-page reply in 2004, to a Dáil question, which confirmed that Minister for Health Micheál Martin had commissioned 145 reports over four years."

If not commissioning reports, ministers establish advisory groups to advise on policy or delay making decisions.

Last month the Minister for Enterprise, Trade and Innovation, Batt O'Keeffe, announced the fourth advisory body on research strategy since December 2008.

We have spent large sums already and billions more have been allocated but we are still in search of a road map. Meanwhile, innovation policy is a no-go area for Opposition politicians.

Surely we can do better than this on spending, at a time when the Government is scratching around to fill the budget hole?

We could understandably share a kindred spirit with the Irish parliamentarians who in 1859 were criticised by William Ewart Gladstone, British chancellor of the exchequer, for their "eagerness to plunder the public purse."

However, in recent decades with the public purse being our own, this common culture of grabbing as much as possible from the public treasury coupled with limited accountability, has been a toxic cocktail.

The annual pre-budget submission season is about to begin with many vested interests vying to influence the December budget. 

Led by the business group IBEC and the trade union congress ICTU, it would be a shock if any group advocates change that could conceivably put Ireland in the same league as for example Sweden.

The issue of economic competitiveness is not just a matter of reforming the public sector and this is where Ibec opts for the default conservative approach instead of showing that it is also pushing an agenda of radical reform of the protected private sector to match its expectations from the public sector. Meanwhile, Ictu is also stuck in a conservative rut and avoids calling for reform in the private sector as it would only draw attention to its reluctance to embrace change in the public sector.

Only baby steps have been taken to reverse bubble time costs that are not sustainable, while the Croke Park agreement on public service reform is just a wish list. The promise to reverse pay cuts in return for savings has the potential to replicate the benchmarking fudge when average pay and pensions were raised by 9%. There was no reform and the system was accurately compared to an ATM bank machine by a trade union leader.

The public staff pensions bill has increased from €1.35bn in 2005 to €2.23bn in 2010 representing a 65.6% increase over the period. There is now 1 pensioner for less than 3 workers  and the Comptroller & Auditor General reported recently that the net cost of an additional 1 year's service for ministers and judges is 62% of salary. He also reported that it was a common practice for universities to add pension years for both academic and non-academic staff.

The contrast with the private sector is glaring. The minority of private sector workers who are lucky to have a pension face funding deficits and years of low investment returns. The rest can simply eat cake.

Unless the political leadership embraces change, the potential of the economy will not be realised.

The new leadership at the Central Bank which came through a baptism of fire in taking on the powerful Quinn Group, gives a glimpse of what the New Ireland could look like.

It's hard to teach old dogs new tricks and expecting the existing senior leadership of the public service to drive change is foolish.

Overseas public service professionals who have a track record of successfully implementing change in public services, should be involved. Appointment boards for senior personnel and the commercial State enterprises should also have independent members from overseas.

"Sunlight is said to be the best of disinfectants," Louis Brandeis said in 1914 - two years before he became a justice of the US Supreme Court. He wasn't referring to a brand of soap.

The public sector consumes about €16bn worth of goods and services each year and the most radical reform would be the complete lifting of the veil of Victorian secrecy on public spending.

The current system where price information is only available on a piecemeal basis aids insiders, does not promote competition and is against the public interest.

Transparency would also force the Department of Finance to modernise its reporting systems, enabling it to track key expense categories across the public service.

In the US, the state of Missouri, with a population of 5.5 million, put all its public spending online in a searchable database for less than $200,000.

A reforming government should downsize in line with a reformed public sector, review the raft of ignored reports on competition in the private sector by the Competition Authority and declare open season on sacred cows.

What better illustration is there of the existing failed system than the public planning tribunal that has been sitting since 1997 investigating corruption? The land rezoning system that makes development land scarce in a country which is 4% urbanised, remains unreformed while lawyers working for the State have become multimillionaires.

Even if the international recovery takes hold, Ireland faces immense challenges.

Employment in the foreign-owned sector which accounts for 90% of Ireland's tradeable exports, is back to 1998 levels while the global economy’s centre of gravity is moving to Asia.

We can only benefit from emerging markets indirectly but Ireland as a manufacturing base for multinationals is not in a favourable location relative to Asia.

There is also the challenge for all the rich countries including Ireland, from the changing model of globalisation. 

The notion that the developed world can focus on high paid knowledge work while low-paid manufacturing is dominant in the developing world, is increasingly seen as redundant.

The reality is that we will have to fight for our standard of living against educated workforces in many parts of the world.

There is no free lunch and we can decline like an unreformed Japan or reform like Germany did to rid itself of the tag: "the sick man of Europe."

Change is never easy. Ireland has a history of weak governments surrendering to vested interests.

In 1991 as we were recovering from the last period of reckless mismanagement of the economy, we at least had a safety net and the US high tech boom was accelerating.

While Ireland will soon be paying 20% of its tax revenues in interest on its national debt compared with 28% in 1991, the net cash receipts from Europe in 1991 at 6.2% of GDP (gross domestic product) more than offset the interest burden. In 2013 we will become a net contributor to the EU budget for the first time since 1973 after receiving over €40bn in aid.

We shouldn't expect a return to bubble time income but we can have a competitive economy and a well-governed country like the Nordic model. The alternative is a return to 1950s scenario: slow decline and long-term emigration.

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