Tuesday, September 15, 2009

Economics 15/09/2009: Why there is no hope...

This is, to put it in PMD's words, why there is no hope for long term growth in Ireland (here).

Throughout the years of Celtic Tiger, the Social Partnership presided over:
  • The planning system and spatial development strategies that assured the current crisis in property markets and locked tens of thousands of Irish residents in the 'commuter belt' - slaves to cars, spending hours on the roads, and now also facing punitive taxes (here);
  • The tax system that created all the incentives for generation of the housing and credit bubble in the economy as it benefited the political, unions and 'Social Pillar' partners at a cost of gross mismanagement and even abuses of public trust;
  • The system of governance and policy formation that made FAS, Benchmarking and the likes of HSE inevitable outcomes of paucity and culture of entitlement that exemplify Ireland;
  • Vast transfers of wealth from the private sector taxpayers to public sector and political classes via ESOTs, privatization payoffs and exclusive employment contracts that are the legacy of the state in former state enterprises;
  • Inchydoney Accord, Bertie Ahearn's 'Socialism' and Brian Cowen profligate spending in the budgets of 2005-2008 all were the direct corollaries of the unaccountable and feudal system of economic policy formation that relied on this cronyist 'Good Old Boys Club' operating behind the closed doors - the princely court at which the Bearded Men of the Social Pillar/Unions were outnumbering 3:1 the business representatives and at which the taxpayer was represented by the economic pie being sliced and served;
  • Retarded competition in the domestic markets that benefited the clients of the state, and so on.
Cui bono?

The self-appointed guardians of the public interest - our NGOs and trade unions - had their leadership firmly at the trough which was filled by the Government with the taxpayers cash. It is their signatures that grace every Partnership Agreement. It is their leaders who enjoyed FAS hospitality on the state body board. Their counterparts on employers' side, at the very least, had a better taste of not pretending to stand in for the little man's interest.

Now that the pipeline is dry, the Partnership unravelled. Yet, instead of fighting the legacy of the clientilist, anti-democratic, corporatist reminders of the 1930s, our 'Opposition' parties prefer to advocate the continuation of the political order that assured the current crisis.

Irony? It would be, if not for the lack of alternatives at a voting booth.

Future growth, especially future sustainable growth, will have to rely on freeing economy from the shackles of the policy making exercise that is conducted by those who add no value through their labor and are reliant only on state transfers (of money via subsidies or customers via restricted access) to stay in business. It is that simple, folks. Public sector, FAS, Forfas, all of our Departments add no real value to either productivity growth in this country or to the productive capacity of this country in general. At the very best, they can provide support. Companies are not run by their administrative assistants they are run by entrepreneurs and key personnel at the coalface of productive processes. Neither are economies.

Until the entire political class of Ireland understands it (and thus accepts the logical proposition that follows from it, namely that the Social Partnership is a problem, not a solution), my forecast for Ireland's long term growth will remain 0-1%pa. Good luck sustaining Brian Cowen's salary on this...

5 comments:

  1. I did fancy for a moment that I envied George Lee - entering the Opposition as a new TD and I thought wouldn't it be fun to be him. Going to right the wrongs of the FF era. Then I see this news from FG about Collective Bargaining and I think that I would hate to have to be a silent pro-market / anti-corruption (do I flatter George Lee?) TD and read this story in the IT. The FG announcement tells you absolutely everything you will ever need to know about the sheer, galaxy-sized, haplessness of FG. The country is about to be fiscally vaporised by the government and unions, the domestic private sector is about to be nuked. The best that FG can do? 'ER - we support collective bargaining'. It's like throwing wooly socks at a forest fire. The only encouraging thing I can think of is that Ireland is only a small place. Irish governance doesn't have a say outside Ireland. That's the main hope for our young people. Enda Kenny will not be Prime Minister of Britain, France, Germany or President of America.

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  2. Constantin wrote above:

    "Future growth, especially future sustainable growth, will have to rely on freeing economy from the shackles of the policy making exercise that is conducted by those who add no value through their labor and are reliant only on state transfers (of money via subsidies or customers via restricted access) to stay in business."

    I am afraid you are probably correct in most of the above. It is quite a complex thing, when you get into it. The problem deserves someone with a new perspective, a new approach. What worries me, is that we are so slow in adopting new ideas at the moment.

    I was listening to Derek Brawn last night, on an old Pat Kenny presented Late Late Show episode, from earlier in the year. Brawn is a whistleblower if you like, with a fresh perspective on a lot of things. However, I did notice a comment he made in relation to density of development. That perhaps, density wasn't about getting more sustainable development. But density, merely contributed to the land speculation problem. I hadn't thought about it before like that. Because, looking at it from my architectural and planning perspective, I cannot see anything wrong with density of development in the right location. However, I have to admit now, that Brawn had a point. As for the auctioneer who Pat Kenny interviewed with Brawn that evening, one can only say, there it is folks. The lack of fresh, new thinking. The auctioneer rightly of course, is looking to get the best deal for the person selling the property. Unfortunately, as Brawn pointed out, developers were making over four hundred thousand gross profits per apartment unit.

    http://www.rte.ie/tv/latelate/20090501.html

    You have to click the 'more' button at the bottom, and you will see the clip called the 'property debate'. It is a nice piece of broadcasting archive. Worth watching. I know things have not improved since the show was aired last May '09. Brawn has wrote in some comments to the Sunday Tribune on property matters in recent weeks, which aren't bad.

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  3. Where will the growth come from?

    As I understand it most of our exports are from Multinational companies based here.
    The indigenous sector is in decline.
    The SME sector are mostly small Irish firms who are not getting bank credit and many who probably dont deserve it.
    Where is the finance for the MNC's coming from ? is it from the corporate bond sector and non Irish bank funding.?
    It seems to me it is the domestic sector that is dependent on Irish bank credit,so if that credit squeeze continues then there is no hope.
    Most of the growth will be in MNC's and that created wealth will be transferred overseas anyway to their shareholders.
    So NAMA is unlikely to have any positive effect.

    Regards,
    Sean.

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  4. I would add something to what you have said in relation to growth above Sean.

    I read in the Innovation magazine, that used to drop into the office a couple of years back, that much of venture capital spending in Ireland during the height of the building boom diminished. Two things were probably happening:

    (1) Resources, as in 'human capital' to borrow DD's phrase from his Irish Times article, was being diverted away from home grown buiness venture and towards property related enterprise.

    (2) Venture capital followed the 'human capital' across the border away from traditional enterprise and startup companies, into property related type companies.

    Venture capital investment in Ireland at the height of the building boom, had decreased compared to previous years. I don't have a link or document to prove that, but I remember reading it. Please advise otherwise, someone, if I am incorrect.

    Now the 'digestive system' of SME in Ireland to absorb injection of sustainance in the form of venture capital, or any other kind of capital has shrunk to such small levels, it will need to be spoon fed and drip feed for quite a number of years, to get its health back up to somewhere, where it can absorb cash resources, and convert it into value.

    At the moment though, throwing cash at SME is a waste of time. It will probably only hold the cash in its mouth, get saliva all over it, and barely manage to spit it back out again, exactly the same amount as put in. Except some enthuasiastic venture capitalist will have lost their enthuasiasm for Ireland by then, and have told his or her friends also.

    That is the thing with investment, you have to have momentum. We are at 'stall speed' currently. Beranke warned of the same problem in the US I believe, hence these notions of W-shaped recoveries etc. There is not enough momentum for a full V-shaped one.

    Brian O' Hanlon

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  5. BTW, I have been paying some attention to Iulia Siedschlag's writing recently.

    At the Irish Economy:

    http://www.irisheconomy.ie/index.php/2009/09/08/how-efficient-is-public-spending-on-rd/

    Featured in the Irish Times:

    http://www.irishtimes.com/newspaper/ireland/2009/0915/1224254553386.html

    NAMA, budget, Lisbon is one thing. But who is coming up with the plan when the other plans are sorted out?

    Brian O' Hanlon

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