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News : Irish Economy Last Updated: Feb 8, 2011 - 11:38 AM


Irish General Election 2011: The challenge of creating 200,000 new jobs and the media as cheerleader
By Michael Hennigan, Founder and Editor of Finfacts
Jan 30, 2011 - 3:42 PM

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L-r Padraig Rushe, chair of IFSC Banking & Treasury Group, Taoiseach, Brian Cowen and David Guest, chair of the Green IFSC Steering Group, at Government Buildings, Jan 27, 2011. Taoiseach Brian Cowen announced the Government’s support for the establishment of a Green IFSC to target environmentally-related financial services as a means of generating high value employment and revenue growth in Ireland.

Irish General Election 2011: While the renegotiation of the EU-IMF bailout will have centre place in the general election campaign, the issue of jobs for the desperate unemployed and the challenge of creating 200,000 net new jobs is likely to evoke lots of platitudes but few if any credible proposals. Meanwhile, the media is likely to continue its role as cheerleader rather than providing a forensic analysis of the flawed prescriptions for the future.

The key question for politicians proposing job creation plans, is why their plans are achievable when in the period 1998-2007 - - mainly characterised by domestic and international booms - - only an average of 1,100 net jobs were added annually in Ireland, in the internationally traded/export goods and services sectors, by foreign and Irish-owned firms, according to State agency Forfás?

Most of the 400,000+ jobs were created in construction, business services related to construction, the public sector, retail, distribution and hospitality.

In early September 2008, Shane Coleman the political correspondent of The Sunday Tribune wrote in relation to the earth-shattering decision by the Government to present Budget 2009 six weeks early, that the "real positive to take from last week is that the finance minister now seems to know what is required. It's only the start, but it's a good start."

Three weeks later, Irish banks were provided with the world's costliest bank guarantee - - across Europe, Denmark was the only other country to guarantee existing bank debt and Ireland's exposure was treble the Danish level (see chart at bottom of page).

The Dáil only sits for about 90 days annually and the format is not effective in holding ministers to account. When the chamber is shuttered, an anonymous spokesperson is often used to spoof spin in response to inconvenient truths.

The State broadcaster, RTÉ, is Ireland's key outlet for politicians peddling their wares but politicians in power invariably avoid formats where they would be subject to forensic questioning.

During 11 years in power, former Taoiseach Bertie Ahern  never felt obliged to agree to a detailed interview for a period of an hour. 

At election time, there is even less chance of that happening and leader debates are not a useful format to tease out the truth.

Other than obvious issues where it would be foolish to deny well known facts, the best tack to take is to cast doubt on a claimed fact; more likely than not, a political journalist in particular, is unlikely to challenge the spoofer. 

In the period before the 2007 General Election was called, the then Progressive Democrats' leader Michael McDowell got top billing on the RTÉ Radio flagship news programme Morning Ireland, with an announcement that the PDs election programme would include a proposal to increase the old age pension to €300 per week. It was a contribution to alleviating pensioner poverty, McDowell said.

The interviewer failed to raise the pertinent issue as to the link between the fact that more than 50% of Irish private sector workers had no occupational pension after a decade and a half of the Celtic Tiger, and pensioner poverty.

Almost 4 years later, we now know that the politicians were very good at feathering their own nests with an unfunded gilted meal-ticket for life pension bonanza; meanwhile the minority of the private sector with pensions, have had 10 years of negative real (adjusting for inflation) returns and more to come.

During the current election campaign, there will be hordes of journalists and TV crews following the leaders, television and radio debates of the type, "I didn't interrupt you," and press conferences.

In 2007, during the election campaign, there was no debate on the risks to the economy even though many barometers of stress were flashing red.

The focus was more on Ahern’s finances than the public finances.

I went to a Fianna Fáil press conference where its 250,000 five-year new jobs plan was unveiled by Finance Minister Brian Cowen and Enterprise Minister Micheál Martin.

It's not a very good use of time but I wanted to ask a question on jobs that I didn't expect to be answered.

I asked Martin what proportion of the planned new jobs in The Next Steps program, were expected in the exporting goods and services sector seeing that only 6,000 of 83,000 new jobs created in 2006 came from there.

He claimed my figures weren’t correct; Cowen blustered that I was ignoring services, which I wasn’t and what excited the journalists was Cowen’s claim that then Labour Party leader, Pat Rabbitte, as minister for finance would be a threat to the 12.5% corporation tax rate.

I said in my report (old page format) in 2007: "Nobody mentioned the fragile property market, which is also key to continued high employment levels."

Four years later and 200,000 additions to the official employment numbers, commentary on jobs is dominated by spin at political level, with the State enterprise agencies being shameful cheerleaders rather than providing a reality check.

Official jobs targets now include indirect jobs and expected job losses are ignored.

So the reality check could reveal no new jobs added or even worse.

Last March, the inward investment agency, IDA Ireland, published a new jobs target of 105,000 by 2014 in its 'Horizon 2020' plan. On closer examination (not detailed in its glossy brochure), there were 62,000 direct jobs targeted and what the IDA chose to ignore was that there may well be NO net additional jobs.

In the international 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. So the IDA Ireland headline target of 105,000 new jobs by 2014 could end up at zero or below net jobs added, as the international backdrop to this period will be far less supportive than it was prior to the Great Recession.

IDA Ireland supported companies added 1,300 net jobs in 2010.

We have had fanciful jobs targets galore and the most farcical was the factless claim in 2010 that the 'smart economy' strategy could deliver up to 235,000 jobs in a decade (see below).

The related area, where caution is required is in changes in foreign direct investment (FDI).

Data from the United Nations agency, UNCTAD, on greenfield projects is provided by a unit of the Financial Times and the number of greenfield projects logged in 2009 was four-times the level handled by IDA Ireland which is in the main areas of FDI activity of relevance to the economy.

When Tesco opens a new shop, it's counted as an FDI 'greenfield' investment.

We hear of 'enormous opportunities' in emerging markets; true of course and as the old refrain goes, only if we could get a small slice of China's market with its 1bn+ consumers, we would be away in a hack!

However, decisions on the destination of most Irish exports are not made in Ireland and in 2009, exports to China accounted for 2% of total exports (merchandise and services) and of that 2%, foreign firms were responsible for about 95% of it.

As for India, exports were a decimal point; it does not appear in the top 15 for Irish goods or services exports in 2009 (pdf) and Hungary is a bigger market for merchandise from Ireland.

The position of Finfacts is that unless there is a realistic unvarnished assessment of the challenges, we will not have appropriate policy responses.

  • We are like a company with too many sub-optimal markets e.g. Siemens, Europe's biggest industrial giant, only set itself on a sustained profitable course when it narrowed its product range and began focussing on fast-growing markets ; the European single currency area is not fully exploited by Ireland, while apart from niche specialised areas, it's foolish to expect much from Asia;

  • For bigger companies, distance and cost would suggest that most jobs activity would be located in Asia if markets were to be developed there;

  • The 'smart economy' strategy is the only current jobs strategy and it reflects all that is wrong with Irish policymaking and its nexus of vested interests;

  • The facts overwhelmingly show that the smart economy strategy will not be an engine of growth;

  • The term 'competitiveness' is bandied about, as if we are making huge advances on competitors. However, unit labour costs have fallen mainly because exports from the Irish pharmaceutical/medical devices sector, accounting for more than 60% of merchandise exports, rose 38% in the period 2004/2010 but employment hardly changed.  From 2009, Germany's unit labour costs rose because it had up to 1.5m in its Kurzarbeit short-work scheme, at its peak. In Nov 2010, Prof. Patrick Honohan, governor of the Central Bank said: “With the structural shift towards high-productivity sectors during the 1990s and again since 2007, 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”;

  • Germany had a trade surplus in food and drink for the first time in 2008; the UK has had a number of impressive years in exporting food and drinks products and Ireland's traditional trade surplus with the UK is eroding fast;

  • New Zealand's Fonterra is the world's leading exporter of dairy products and responsible for more than a third of international dairy trade. In contrast, the Irish industry is fragmented with a concentration on low profit products; Irish cheese production has even ranked as low as Sweden's;

  • We should have public funding of scientific research but an enterprise strategy dependent on eureka moments in university labs, is a mug's game. However, what we do know, is that the global demand for food is rising and this should be a sector of strength for Ireland. Nestlé, the world's biggest food company, has more than 5,000 staff working on R&D;

  • Developing new export markets is a huge challenge that chairborne policymakers and commentators in Ireland, would find difficult to comprehend.

  • 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.

  • US economist, Tyler Cowen, argues in his recently published e-book, The Great Stagnation, that the American economy has enjoyed lots of low-hanging fruit since at least the seventeenth century: free land (depending on the vantage point!); immigrant labour; and powerful new technologies. Yet during the last forty years, that low-hanging fruit started disappearing and Americans started pretending it was still there. He says the US has failed to recognize that it is at a  technological plateau and the trees are barer than it would like to think. However, he argues that in respect of educational low-hanging fruit that the rich world is likely to reap far bigger benefits from growth in developing countries than from improvements in domestic education and research. While America tries to wring additional innovative capacity out of an already well educated population, the developing world is home to billions of people, including hordes of potential geniuses and innovators, living in poverty and ignorance.

The following are some key facts which should inform the development of a credible jobs strategy:

  • Foreign firms are responsible for 91% of Irish tradeable exports  --  goods and services  - -  and the numbers employed in IDA Ireland and Enterprise Ireland supported companies, fell to 268,000 in 2010 - -  the lowest since 1997 when the total workforce was 25% smaller;

  • In 2006, the peak year of the boom, employment expanded by 83,000 but only by 6,000 in the tradeable goods and services sector, split evenly between foreign and indigenous firms;

  • In the period 1998-2007, when the workforce expanded by over 400,000, net jobs in the internationally tradeable goods and services sector grew by only 11,000;

  • Exports from the pharmaceutical/medical devices sector grew by 38% in the period 2004-2010 but direct employment remained in the low 40,000's;

  • Exports from the pharmaceutical/medical devices sector account for over 60% of merchandise exports (in 2009, merchandise exports were 55% of total exports including services);

  • So about 20 large mainly American-owned firms are responsible for about 33% of total annual exports but the pharmaceutical industry is under pressure with key patent expirations such as the ones on the cholesterol drug Lipitor worth $12bn a year in sales for Pfizer;

  • Since 1950 -- virtually the dawn of the modern era of medicine -- a total of 1,256 new drugs have been approved by the US Food and Drug Administration (FDA). But the industry today produces roughly the same number of new medicines that it did 61 years ago;

  • More than $65bn was invested in R&D last year in the US alone but the number of new drugs launched annually has fallen 44% since 1997;

  • During the 10 years to 2008, about €60bn (equity and bank loans) was invested in overseas commercial property but only about €1bn was invested in Irish business venture capital;

  • Decisions on the destination of the majority of Irish exports are not made in Ireland as they are inter-company sales;

  • A foreign-owned sector such as aircraft leasing generates big figures for the economy and high-paying but few jobs; In 2008, international aircraft leasing in Ireland employs 1,000 on average salaries over €110,000 according to the Federation of Aerospace Enterprises in Ireland (FAEI), which published the results of an extensive survey of the aviation leasing industry in Ireland. The survey was carried out by KPMG on behalf of the FAEI;

  • The sheer scale of the industry is impressive. Aviation leasing companies in Ireland manages almost €83bn in assets, equating to almost 3,400 aircraft. However, this data results in high services export figures but few jobs;

  • Irish food and drink exports, the main area of activity of Irish indigenous exporters, fell in both 2008 and 2009 while the sector has become increasingly important for Germany. Meanwhile, the UK has also seen exports grow and the balance of trade with Ireland, may turn positive for it;

  • In 2008, Germany became a net exporter of food and drink for the first time according to modern trade data;

  • UK food and drinks exports have grown for five straight years and Ireland is its biggest customer;

  • UK food and drinks exports grew by more than 5% in 2009 when Ireland's dipped by 15%;

  • Ireland is an increasingly important market for British food/drink exports, accounting for 27% of total earnings. Imports of food and drink from the UK topped €2.99bn in 2009, an increase of 6%;

  • There is a positive trade balance for Ireland of about €500m but it's eroding fast;

  • Ireland exports to emerging markets are not significant;

The empty Dáil Éireann chamber of the Lower House of the part-time Oireachtas (Irish Parliament). The members are amongst the best-paid in the world - - typical pay is almost equivalent to that of a United States Senator's $169,000 plus tax-free expenses, which can amount to more than 100% of pay - - but the Parliament only holds about 90 plenary sessions annually.

Taoiseach Brain Cowen will name the date of General Election 2011 on Tuesday February 01, 2011.

Smart Economy

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

The new group, under the chairmanship of former Intel Ireland  general manger, Jim O'Hara, was asked to identify sectors where public research funds should be spent and in a clear admission of failure, O'Keeffe said international experts who had completed similar exercises in other countries, should be contacted by the steering group - -  this was more than 4 years after the launch of the science strategy.

In Ireland, "knowledge economy" entered the vernacular in 2006 when Enterprise Minister Micheál Martin, a man with a weakness for superlatives, announced an €8.2bn research and development spending program with the goal that: "Ireland by 2013 will be internationally renowned for the excellence of its research, and will be to the forefront in generating and using new knowledge for economic and social progress, within an innovation driven culture."

Post the Lehman Brothers crash and the issue of the bank guarantee, the science policy was rebranded as the 'smart economy' strategy in late 2008, to replace construction as an engine of growth and to show that the Cowen government had long-term vision..

In 2010, 2 young spin-outs from the University of Limerick were acquired by American firms; good news for the promoters and the venture capital companies who funded the companies in addition to the State but hardly a viable long-term strategy for stretched taxpayers.

In December 2010, Taoiseach Brian Cowen announced that an American venture capital company was getting an investment of $50m from the National Pension Reserve Fund and the deal involved opening an office in Dublin. Cowen said it was a "coup" - -  it was at least for the US firm.

In January, BAE Systems, the UK defence industry giant, announced it was acquiring the Irish high-tech firm, Norkom, for €217m.  

The key takeaway from all this is that, be it exits for venture capital companies or high-tech companies who grow beyond university research, there is little value added for the Irish economy.

Israel is the only country in the world where indigenous high-tech is a significant jobs growth engine and in the early 1990s, it had benefited from possibly the greatest movement in intellectual capital in history, in a limited time-period. The country had an existing significant research base to support the development of the sector.    

On the multinational side of the strategy, Batt O'Keefe said last year that  in 2 years, the number of IDA Ireland investment wins with a research and development component had gone from 10% to 49%.

This of course should be taken with a pinch of salt; no hard data is published and what does "component" mean in political parlance? Much or little?

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."

 Among the flaws in the 'smart economy' strategy are:

  • The common delusion in Western countries that the model of globalisation is one where knowledge-based work will remain the strength of advanced economies while low-cost manufacturing will continue to be dominant in emerging economies;

  • The delusion that Ireland can outrank Nordic countries in the knowledge economy arena, without any reform of the failed governance system, with its buck-stops-nowhere culture;

  • A politically driven agenda that ignores inconvenient facts, helped by the absence of credible scrutiny from Opposition politicians;

  • An academic research community where there is apparently an omertà against any dissent from insiders about the bonanza of public funds coming their way and the opportunity to hit the jackpot without taking the risks of the entrepreneur;

  • A lack of any clarity on the division of focus between the needs of the multinational sector and the promotion of indigenous enterprises;

  • There is no case made that development of links between start-ups and US companies in Ireland, will have an impact similar to America’s Silicon Valley. The record of Silicon Valley clones outside the US, has been mixed at best ;

  • The lack of clarity on where the markets will be and if the public sector will need to be the biggest customer of the output of the new firms, as it is for IT companies in economies such as the UK's;

  • Policymakers and university presidents on guaranteed incomes for life promoting entrepreneurship but having no experience of the immense challenges of developing new markets, in particular overseas;

  • Given that US high-tech firms have a 25% of reaching their seventh birthday, there is no precedence for the number of new Irish high-tech firm creations and failures, that are required;

  • One of the first high tech clusters in Europe was in the UK in the area around Cambridge University. It is called Silicon Fen and has five times more research and development jobs than the UK average. There are more than 30 leading research institutions across the East of England, and the area is said to be characterised by a culture of science-based start-ups and university spin-outs;

  • After 30 years, Cambridgeshire has about 30,000 jobs in technology companies and the majority of firms employ less than 10 people;

  • There is one unique exception: In the early 1990's, Israel had highly trained graduates in both its defence forces and the defencse industries. At that time, in the aftermath of the collapse of the Soviet Union, and influx of close to one million people, Israel's overall population increased by 20 %. Nearly 40 % of these immigrants held academic degrees, many of whom were scientists, engineers and specialised technicians;

  • A thriving independent local VC industry, which began as growth of the US high-tech sector was accelerating, has been established comprising close to 80 VC funds with the total capital under management in excess of $10bn;

  • Sixty-five Israeli companies with a total market capitalisation of over $50bn are listed on the US Nasdaq Stock Market. These companies represent 90% of the total number of Israeli companies listed on a US exchange;

  • Enterprise Ireland said in July 2010 that investment in over 800 start-up companies over a 20 year period (1989 - 2009) yielded only about 14,000 jobs. Since the agency started funding the commercialisation of academic research over 10 years ago, 140 spin-out companies have been created employing over 1,000 workers -- an average of 7 employees per firm;

  • The survival rate of the supported spin-out firms is about 90%, suggesting that most of them are very small with a limited exposure to the market;

  • Europe's top technology university, ETH Zurich (Swiss Federal Institute of Technology), could only produce 900 jobs from more than 100 spin-out companies from its research in the period 1998-2007;

  • Finally, when a State agency, Science Foundation Ireland, praises the early-stage sale of a spin-out from university research to a US firm, it highlights the risk of low value-added for the Irish economy from the huge investment of public funds.

Finfacts article, 2011: Irish Economy 2011: Rising Irish exports, the 'smart economy' and a jobless recovery

Finfacts article, 2010: Innovation: Ireland's 'smart economy' strategy, universities and free-lunch entrepreneurship

Finfacts article, 2010: Foreign-owned firms accounted for 91% of Ireland's tradeable exports in 2009; Food & drink exports fell 15%

Finfacts article 2011:Age of low-cost food is over study warns; Third of world’s food is currently being wasted

Finfacts article 2009: Ireland: A "smart" economy in food better than pie-in-the-sky aspirations?

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© Copyright 2011 by Finfacts.com

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