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News : Irish Economy Last Updated: Mar 9, 2011 - 4:41 AM

Irish Economy 2011: Rising Irish exports, the 'smart economy' and a jobless recovery
By Michael Hennigan, Founder and Editor of Finfacts
Jan 7, 2011 - 3:07 PM

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Taoiseach Brian Cowen and Minister Batt O'Keeffe at an announcement that Polaris Venture Capital a US venture capital firm is to open an office in Ireland, in return for a $50m investment provided by the National Pension Reserve Fund, December 15, 2010. Cowen described the move by Polaris as a “significant coup for Ireland” even though the US firm may not be using a cent of its own money, similar to the situation in 2000/05, when Ireland invested €35.5m in MediaLab Europe, a digital research service using Massachusetts Institute of Technology (MIT) branding. Before it failed in 2005, MIT collected €10.6m directly and €24.9m was paid by the Government to the company.

Irish Economy 2011: Ireland needs to add more than 200,000 net jobs in the economy and while exports have recovered strongly since 2009, there has been no spurt in job creation in the international tradeable goods and services sectors. Meanwhile, the Government's much promoted 'smart economy' strategy is destined to be a very expensive failure.

Sustainable job creation is a challenge in many economies and the recent revision upwards of US economic forecasts for 2011 is also positive news for Ireland. However, the traditional relationship between economic growth and job creation is becoming more tenuous. In the United States, for example, Prof. Nitin Nohria of the Harvard Business School says the corporate sector—judging from most companies’ earnings reports—is doing well, yet people are struggling to find work.

In the old industrial economy of the 20th century growing firms would need to add workers close to their markets; now the likes of Google, Facebook, or Apple double in size, without having a big jump in their workforces. Besides, demand for Apple's iPhones and iPads has the biggest impacts on jobs in China.

In November, economists at the US think-tank, the Brookings Institution, estimated that allowing for the 125,000 new entrants to the workforce each month because of population growth, 11.8 million jobs were needed to be added to bring the unemployment rate to the 2007 pre-recession level.

In a striking illustration of the challenges ahead, Michael Greenstone and Adam Looney said that if the US economy adds about 208,000 jobs per month, the average monthly rate for the best year of job creation in the 2000s, then it will take 142 months, or about 12 years to close the job gap. At a more optimistic rate of 321,000 jobs per month, the average monthly rate for the best year of the 1990s, the economy will reach pre-recession employment levels in 60 months, or about 5 years

In Ireland in recent years, exports of chemicals, pharmaceuticals and medical devices have been the bright stars of foreign trade. While these products accounted for over 60% of merchandise exports in 2010 and the value of exports in current money terms has increased 38% during the six years 2004-2010, direct employment remained in the low 40,000s.

This is a small number relative to a workforce of over 2m, including the unemployed.

State agency Forfás reported last March that total permanent full-time employment in the manufacturing and internationally traded services sectors amounted to 272,053 in 2009. It was 276,287 in 1998. Employment in foreign-owned firms was 132,596 in 2009 and 140,281 in 1998.

Last month Enterprise Ireland said that full-time employment in Enterprise Ireland client companies stood at 137,241 in 2010. A total of 8,193 new jobs were created by client companies with a net decline of 5,355. IDA Ireland said on Tuesday that in 2010, almost 11,000 new jobs were created in foreign-owned client companies while 9,545 jobs were lost, leaving an overall increase in IDA’s employment portfolio of 1,352.

The full-time jobs level in the international tradeable sector is now at 268,000  --  the same level as in 1997 when the workforce was 25 % smaller.

Given the focus on language skills, in localisation of software and development of foreign language services by the likes of Google and Facebook, it is likely that the current demand for foreign nationals is strong.

IDA Ireland said in a statement on Tuesday that a total of 126 foreign direct investments were won in 2010 but it puts no value on the investment.

Minister for Enterprise, Trade and Innovation, Batt O’Keeffe TD said in late December that IDA Ireland aims to create 9,800 direct jobs in 2011. He did not refer to job losses.

In the boom years of 2004-2008, IDA Ireland companies added an average of 11,000 new jobs annually, with 60 % in financial services and software. It lost an average of 9,600 annually.

The international recovery will help boost demand and there will be some recovery in export jobs but with a continued overwhelming dependence on US firms as providers of foreign direct investment (FDI), the export sector is not going to become an engine of jobs growth.

The Government has been banking on its 'smart economy' strategy to be the engine of growth that will replace construction. The policy has the attraction of focusing both on the multinational and indigenous sectors. However, it's not working and pumping more scarce billions into the doomed project will not rescue it.

It's important to understand that the announcement of what was dubbed the 'smart economy' plan in December 2008 was a rebranding of a science policy that was launched in 2006 with the goal of spending €8.2bn by 2013 when Ireland would be recognised as a 'world-class knowledge economy'.

Minister Batt O’Keeffe said in December that nearly half of new IDA Ireland investments won in 2010 were research and development-based but the R&D component could vary from a little to a lot.

There is little basic research done in the Irish private sector and the definition of R&D is broad with an opportunity to reduce the effective rate of tax paid on profits. So the public policy focus on raising the number of doctorate graduates at Irish universities can benefit other countries rather than Ireland. The Economist said in an article on PhDs in its Christmas issue, The disposable academic - - Why doing a PhD is often a waste of time, that there is an oversupply of PhDs. Although a doctorate is designed as training for a job in academia, the number of PhD positions is unrelated to the number of job openings.

The example of Germany shows that high university enrollment is not necessarily a predicator of economic success. It has far fewer graduates than France; according to Enterprise Ireland 100 spin-outs from university research resulted in the creation of 1,000 jobs in 10 years; the default exit for a venture capital investment in a young Irish tech firm is a sale to an American firm before the taxpayer sees any value-added; without a domestic market, it's difficult for a firm to become a successful exporter and while start-ups are essential for growth in an economy, innovation is a lot more than in the narrow area of high tech.

Last month the Irish National Pensions Reserve Fund (NPRF) announced a $50m investment in US venture capital firm Polaris Venture Partners. Taoiseach Brian Cowen said it was a “significant coup for Ireland,” that the firm decided to open an office in Dublin, even though we are paying them for it.

With the exception of Israel, which was the beneficiary of the greatest movement of intellectual capital in history over a limited time, after the collapse of the Soviet Union in the early 1990s, the Silicon Valley model has not been successfully replicated elsewhere. Israel had the advantage of developing a commercial high tech sector as it already had a significant defence research capability.

The challenge of providing hope to desperate unemployed people is a very difficult one.

Contrary to the mantras on improved competitiveness resulting from the severe recession, it takes hard work to develop new export markets and should be a long-term goal.

Competitiveness resulting from genuine reform in the public sector and the protected private sector coupled with an accountable political system similar to what has provided success for the Nordic countries, should be the objective.

While there should continue to be a public commitment to research, it is time to call a halt to the wanton waste on this 'smart economy' project where amateur politicians have been egged on by university presidents lobbying for public funds to boost their positions on league tables; tenured research professors with access to funds have the opportunity to strike it rich; private entrepreneurs in search of public support understandably give their approval, while an Opposition that is reluctant to question the university elite, together with technology journalists as supporting cheerleaders, has given a policy that ignores facts momentum.

Ireland made the mistake of abandoning hands-on engineering and manufacturing for financial engineering and a focus on promoting mostly 'smart economy' jobs, Seán O’Driscoll, chief executive of Glen Dimplex, one of Ireland's most successful indigenous companies, said last September.

O'Driscoll noted that the countries leading the way out of the recession, such as China and Germany, are all countries with a strong manufacturing base. Those in the most trouble are countries such as the United States, Ireland, and the UK, which slashed and exported much low to high-end manufacturing.

"We need to go back to making things again, to real engineering, not financial engineering," O'Driscoll said. "We need to export our products, not our jobs."

Intel co-founder, Andy Grove, asked in an article published by Bloomberg last June:"...what kind of a society are we going to have if it consists of highly paid people doing high-value-added work - - and masses of unemployed?"

Grove said manufacturing employment in the US computer industry is about 166,000, lower than it was before the first PC, the MITS Altair 2800, was assembled in 1975. Meanwhile, a very effective computer manufacturing industry has emerged in Asia, employing about 1.5m workers - - factory employees, engineers, and managers.

Finally, as for Irish competitiveness and the premium rises of up to 45% by State health insurer VHI, the National Competitiveness Council says that Irish medical consultants are the highest paid in the OECD area, earning almost double the salaries in countries such as Finland and Norway.

Norway is Europe's richest country and it has a sovereign wealth fund valued at in excess of $500bn!

Recently published Finfacts articles:

Irish Live Register: Monthly increase of 5,200 to 437,079 in December; Non-Irish nationals fell by 874 in 2010 to 76,645

Exports from Ireland grew 6.7% to €161bn in 2010 but no net direct jobs were added

Innovation: Ireland's 'smart economy' strategy, universities and free-lunch entrepreneurship

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