Economics 17/05/2010: Jose Maria Aznar's proposals that ireland should adopt

When Spain beats you in a race of setting out pro-market reforms, can you still claim you are open for business? Well, that's a conundrum Ireland is likely to face. For 'all talk, no action' Messrs Cowen & Lenihan, here's a proposal from Spain's José Marià Aznar - a rather sensible list of reforms Spain needs to adopt in the next few years, published in FT:

1. Large-scale labour reform to transform collective bargaining (equivalent to killing off our own Social Partnership to which Messrs Cowen & Lenihan seem to be totally wedded), deregulate labour recruitment services (which is now out of reach for Ireland since Messrs Cowen & Lenihan subscribed to the Croke Park deal) and, lower taxes on employment (which is, of course, an impossibility for Ireland as we continue destroying our domestic and exporting capacity by saddling workers with the bills for banks and public sector rescues) and encourage the unemployed into work (a possible by-product of the next wave of public spending cuts, but not a concerted effort that pairs both negative and positive incentives and access to training and entrepreneurship resources for the unemployed);
2. a new energy policy to avoid the shutdown of nuclear plants, deregulate markets and cut subsidies on inefficient renewable energy sources (which, of course, would run counter to our Government's insistence on preserving ESB's market power and building windmills to escape modernity. Do note that our refusal to properly deregulate energy distribution rests on the Government continued protection of the ESB trade unions' interests in maintaining their ownership of the national grid);
   
3. a bank shake-up, including authorising the investment of private capital in savings banks (yeah, right, as if we really have a chance of reforming our banks with Nama assuring they will remain zombie lenders for a good part of the next 10 years);
   
4. sweeping reforms to reduce the size of regional administrations and create a viable and efficient state (again, we have no reform agenda on local authorities, and no reform agenda on creating any meaningful efficiency gains in the public services);
   
5. changes to the state pension system to guarantee its mid-term and long-term sustainability (in Ireland's case, this is equivalent to the earlier Government promise to... create a new compulsory quasi-tax on our incomes that would underpin state-controlled, privately supplied pension system, while maintaining the status quo of inefficient, and politically manipulated social security);
   
6. deregulation to increase competition, including reforms to the welfare state and further privatisation of public companies (Messr Cowen & Lenihan have not got this far, and are unlikely to get there in the future. Instead of stimulating private growth by opening state-controlled markets to competition and breaking up Government near-monopolies, our Government is keen on actually providing more cash for semi-states to engage in 'investment' which normally - DAA, anyone, or ESB - yields no real returns to the economy, but always acts to increase market power of these semi-states);
   
7. tax reform to foster competitiveness (again, not a peep on this one from Messrs Cowen & Lenihan. Instead of tax reforms, we have Commission on Taxation report and a promise of pushing tax rates even higher in the next couple of years. Take a wild guess which 'programme' will this Government pursue).
   

That's right, folks. Our ex-politicians now line up to take state jobs at the insolvent banks. Spain's ex-leaders are trying to design new policies. Any idea who's got a better shot at a recovery?

Irish Economy: a longer view

Yesterday I was asked to give a quick talk to the Marketing Institute - at a lovely breakfast gathering - on my view of Ireland's economic prospects. Here are the notes from my speech:

First, 'we are where we are'...

Fiscal problem - the real crisis:

• 2013= Euro 131bn or 91% of 2009 GNP, Euro 47,640 per adult person in debt. We will be spending 21.1% of our 2009 tax revenue servicing this debt – these are DofF projections-based estimates without Nama.
• With Nama up to 204bn in 2013, 140% of 2009 GNP or 74,200 euro per adult person. We will be spending 33% of our 2009 tax revenue on servicing the debt.
• In effect, Ireland’s debt servicing charge alone will be bigger than the entire health and social welfare bill today.
• It pays for three things - services (some we need, others we can do without), social welfare (mostly excessive in levels) and public sector wages and pensions (absurdly excessive burden). Not a hell of a lot for the loot they collect.
  

Implications:

• Credit conditions will remain very tight in the country so old model of credit-fueled growth is out of the window.
• Households spending will be down, savings will rise, but capital will outflow abroad as banks lending abroad will increase.
• There will be net emigration out of Ireland and inward migration into Dublin.
• Higher taxes are here to stay.
• Opportunities will be limited on public and private sectors sides.
• Irish businesses will be locked in a zero sum game where domestic growth of one company will require domestic losses in another.

Nama problem: a sound of vaporized wealth

• The net cost is likely to be staggering – ca €6,000-12,000 per working-age adult person under benign assumptions.
• Economic cost will be even higher due to zombie banks, zombie developers.
• Even if Nama improves credit supply (doubtful for several reasons) it will destroy credit demand (no deleveraging is possible for the households).
• Investment will be limited to firms with international markets exposure, which means business models will have to change.
• We will be exporting brighter younger people, to be replaced by marginally brighter than the remaining Irish workers younger foreigners from the fringes of Europe and outside the EU – this means our business models will have to change. New consumers will spend minimum in Ireland and will expatriate more cash out in fear of immigration policy reversals and rising nationalism.
• Public sector will remain unreformed, if slightly demoralized, by failed efforts of introducing small reforms. Which means our business models will have to change for all those who relied on public contracts.
  

Economy's problems: dead end in sight?

• What is our ‘next big thing’? Do you know? I can’t see one.
• Is it ‘knowledge economy’? Not likely – late to the races, high taxes, wrong taxes, power rests with entrenched Social Partners (older, non-productive, fearful of competition). We over-rely on Government sponsored research. Private sector in Ireland is adaptive, not creative, which means it does not want to waste money on longer-term research projects.
• Knowledge economy will be happening in only a few bright spots: international finance will be back (can you leverage anything to get into this field?); few internationally traded services (TCD, UCD in education, some smaller education players; may be some private medicine, though unlikely; legal and tax services – but only domiciling into Ireland. One big and growing bright spot might be in MNCs shifting more into traded services areas (IBM model for some, start-up Googlelites, Facebookers etc).
• Domestic economy will see decline of the Irish Brands – we will be more Anglocized in terms of our consumption patterns, especially if Northern Ireland continues to open up to business.
• Is the future a ‘Green economy’? well, sort of – only with much fewer wind mills and other traditional ‘green’ production firms. Instead, there is room for using our countryside much smarter than we’ve been doing so far – tourism, smart and recovery health tourism and work-and-play tourism have some future, if we can clean up our act on bungalow blitz and passage rights with farmers. Also, smaller boutique producers of ‘green’ agricultural products have a future. But these are all small fry to sustain real growth. Spirit of Ireland is a good initiative, but will it fly or will ESB cronies shut it down?
• On house prices and property prices: peak to trough fall of 50-60% on average. Equilibrium, or long-run prices should be at 3.5-4 times average income. This roughly means 210-240,000 per house. This will be our long-time average. Trough will undershoot this target, so we can see 200,000 tested.
  

Business environment: exit the stage

• Indigenous firms will not be looking at higher margin activities, e.g strategy and market expansion at home.
• Companies will be retooling to grow abroad.
• Europe will continue pursuing regulated markets model – can we get any value out of this? Not likely – loads of competitors closer to the feeding trough and loss of our own agility can spell a disaster for out incoming FDI.
• What do businesses need to grow in this environment – step out of the shell of ‘we are Irish, we are European’ and go for ‘we can bring you into Europe, help you grow in here and keep you as a happy client’ – don’t forget to translate this into Chinese?
  

Alternatives to a slump: Doing the right thing

Reform public sector and policymaking: Introduce separation of payer and provider in public services. Let the state pay for access to service while we, the private sector, provide such services – growth opportunity space is converting some 20-25% of our GDP into world class competitive services and growing them by adding non-public customers.
Examples:
- Medical tourism
- Education
- Legal domiciling
- Logistics and distribution services
- Outsourced sales
- Marketing and advertising outsourcing?

Reduce the size of public sector and use this reduction to cut taxes on personal income at the upper margins. This introduces proper incentives for investment in Human Capital. It also feeds growing education sector that is actually productive.

Eliminate reliance on outsourcing bodies (Quangoes, FAS, Forfas and Social Partnership) in setting public policies. Rebate savings to taxpayers, but also force more direct democratic interactions between people and policies. Require that best practice analysis and economic feasibility (including environmental and social impact assessment) must be performed for any Government ‘investment’ – this improves quality of investment and returns.

Ireland as Western Hong Kong model

Make public procurement and salaries and wages costs transparent – publish them on the web.

Introduce Land Value Tax – infrastructure returns, reduced speculative holdings of land.

Abandon national spatial strategies – focus on Dublin, Cork, Galway and Limerick. This simply reflects the reality of where growth will be concentrated.

Reform immigration policies: we will still depend on inflow of talented foreigners, but we must incentivise these flows:

• Create a meaningful Green Card – giving people full rights (save for voting) and allowing them to travel visa-free across the EU (Schengen plus UK). Green Card should be issued for 1 year, then 3 years, then permanent.
• Allow no access to welfare of any kind for the first 5 years of residence for all foreign nationals. Sign bilateral agreements with other EU states whereby Irish Government will as EU states to pay for their citizens’ access to social welfare and unemployment assistance and in exchange Ireland will assume provision of those services for Irish citizens abroad.
• Have language and educational/experience – tested system of admissions (not a sole route for entry, but one of them).
• Streamline citizenship naturalization to reduce red tape. Access to naturalization should be allowed on the points system basis – number of years in residence in Ireland, having Irish family members, employment type etc should add points and speed up both naturalization eligibility and the processing time to naturalization.
  

Reform bankruptcy and directors laws:

• We must allow those who try and fail to get up back on their feet, so personal and business bankruptcy restrictions should apply for 1 year at most, the record of bankruptcy should apply only for 3 years. It should be fully cleared after 3 years.
• Stop the idiotic practice of pursuing people personal assets in collection of mortgage arrears.
• Directorship disqualifications must be reduced to cases of clear abuse.
  

Reform regulatory systems:

• Link regulators pay and pensions to their performance in office – assessable by the independent review board. If we pay them well, they should perform well.
• Reduce the number of regulators – does a small-town economy really need a Taxi Regulator? a SMS Regulator? and so on.
  

Reform banking:

• Most of reform will come from abroad – EU, G20, Basle III. Most of these reform will be painful and costly – Nama Squared?
• Domestic reforms must include:

1. Breaking a cozy ‘Old Boys’ cartel between banks and other elites. Sadly – we have no record of doing this even after all the banking scandals of the past;
2. Introducing more competitive domestic banking by reducing market shares of Irish banks – sadly, we have no record of doing this either;
3. Using Nama to bring more transparency into Irish banking – sadly, we are doing the opposite.
   

Hope is in a short supply, treat it carefully. We need some serious drastic changes and these will have to take place at the head of the table.