12/7/18: Romania's Uneven convergence Path: 2007-2018

A new World Bank report, led by Donato De Rosa, covers Romania's reforms and economic development experience. Worth a read! |
"From Uneven Growth to Inclusive Development : Romania's Path to Shared Prosperity" https://openknowledge.worldbank.org/handle/10986/29864.

Quick summary:

• "Romania’s transformation has been a tale of two Romanias: one urban, dynamic, and integrated with the EU; the other rural, poor, and isolated."
• "Reforms spurred by EU accession boosted productivity ...GDP per capita rose from 30 percent of the EU average in 1995 to 59 percent in 2016."
• "Today, more than 70 percent of the country’s exports go to the EU, and their technological complexity is increasing rapidly... the gross value added of the information and communications technology (ICT) sector in GDP, at 5.9 percent in 2016, is among the highest in the EU."
• "Yet Romania remains the country in the Union with by far the largest share of poor people, when measured by the $5.50 per day poverty line (2011 purchasing power parity)".  More than 26% of country population lives below that poverty line, "more than double the rate of Bulgaria (12%)."

• "While Bucharest has already exceeded the EU average income per capita and many secondary cities are becoming hubs of prosperity and innovation, Romania remains one of the least urbanized countries in the EU, with only 55 percent of people living in cities."
• "Overall, access to public services remains constrained for many citizens, particularly in rural areas, and there is a large infrastructure gap, which is a drag on the international competitiveness of the more dynamic Romania and limits economic opportunities for the other Romania in lagging and rural areas."

The positive effects of Accession were frontloaded, when it comes to structural reforms:

• "Romania was invited to open negotiations with the EU in December 1999.  Until Romania joined in January 2007, EU accession remained an anchor for reforms, providing momentum for the privatization and restructuring of SOEs and for regulatory and judiciary reforms."
• "Output gradually recovered, and until 2008 the country enjoyed high but volatile growth... Unemployment was on a declining trend, but youth and long-term unemployment remained elevated. Skills and labor shortages became increasingly widespread. High inactivity persisted stubbornly, particularly among women. Gains in labor force participation were modest overall. ...Inequality increased further, as large categories of people—the Roma in particular—continued to be excluded from the benefits of growth."
• "Although output has recovered since 2008, institutional shortcomings have compounded the effects of the crisis, contributing to significant setbacks in poverty reduction, and are again leading to macroeconomic imbalances."
• "Fiscal consolidation during 2009–2015 has helped place economic growth on a strong footing. However, lack of commitment and underfunding for the delivery of public services and poor targeting of social programs have contributed to the negative income growth of the bottom 40 percent of the income distribution (the so-called bottom 40) in 2009–2015, with poverty remaining above pre-crisis levels, and inequality still among the highest in the EU."

26/5/16: European Reforms: Mostly "No Show" grades

An interesting heat map from Moody's covering the deteriorating pace of reforms in the euro area:

Source: @Schuldensuehner 

The key point is that under the monetary easing created by the ECB, Euro area sovereigns are all slacking off on reforms, especially more politically difficult reforms, such as product markets reforms (9 out of 11 states are in red, none in green), pensions & healthcare reforms and fiscal reforms (5 out of 11 are in read). The best performing countries are, bizarrely, Spain and Italy. Farcically, Ireland apparently does not require reforms to improve efficiency of public administration. Presumably, Moody's analysts never heard of tsunami of public waste unleashed by the likes of HSE and Irish Water.

Take it for what it is - a sketchy top-level view of the reforms landscape and give it a wonder: are ECB policies helping long term sustainability of European institutions or harming it?.. In 23 out of 60 point observations, the reforms have delivered so far 'no or limited progress' and only in 6 out of 60 point observations, the reforms have delivered 'substantial progress'. Go figure...

30/11/15: WarningSignals on Secular Stagnation Threats

The readers of this blog know that I have been covering the twin theses of Secular Stagnation (long-term trend in slowdown of global growth) consistently over recent years.

Here is an interesting summary of the theses and literature on it, with extensive references to this blog (among other sources): http://www.warningsignals.org/#!Where-are-we-on-Secular-Stagnation/covf/565464fb0cf29e70f2253e70.

My own view summarised most recently here: http://trueeconomics.blogspot.ie/2015/10/41015-secular-stagnation-and-promise-of.html.

11/10/15: Tax Code Simplification and Deadweight Loss of Taxation

In a recent speech (see notes here), I discussed the need for tax reforms in Ireland and, specifically, for flattening of the income tax system.

Here is an interesting, albeit dated, paper on the subject of tax codes simplification as the tool for reducing the Deadweight Loss of compliance and improving tax compliance and enforcement: http://www.columbia.edu/~wk2110/bin/epi.pdf.

H/T to @brianmlucey for the link.

10/10/15: IMF: "Honey, we've Japanified the World"

Much has been written this week about IMF’s World Economic Outlook and the belated catching up the IMF are performing to the reality of

1. Faltering Emerging Markets, but improving Advanced Economies
2. Flattening Global growth, but momentum recovery in the Euro area (that depends on the World demand for its exports); and
3. Largely still-ignored, but nonetheless hanging like a dark shadow over the IMF's forecasts, secular stagnation.

Now, with some time lapsed over all that media circus, let’s take a look at hard numbers.

Here is the breakdown of IMF changing forecasts.

First up, World real GDP growth forecasts. How did these evolve over the recent years?

Yep, that’s right. Back in October 2012, IMF was projecting 2015 growth to come in at 4.418%. This gradually fell back to 3.847% forecast in October 2014. This week outlook for 2015 full year global economic growth is 3.123%. All along, the IMF has been signing praise to structural reforms, ownership of various programmes (IMF-run programmes) and monetary policies efforts. Year after year, after year cheerleading the world to ‘next year things will be great’. Do observe how every forecast starts with the premise that "next year, there will be an uptick in growth". And the end game is 1.295 percentage points lower growth outrun for 2015 in October this year than back in  October 2012.

Guess what, every year from 2015 on, current forecast shows lower growth than that expected in the earliest WEO report containing such a forecast.

Ditto for the Advanced Economies, as shown in the chart below

Things are no better for the Euro area, despite the already low aspirations that the IMF had for the common currency area from the start:

And for the Emerging Markets - ditto.

You wonder how on earth can these 'rosy forecasts --> ugly reality' picture can be consistent with IMF ever-expanding 'sustainable' lending to the states in trouble? It doesn't, of course, for IMF growth projections simply do not support the lending the Fund is doing. Instead, it is the efforts of the Central Banks at printing money to monetise debt that make this pile of Government-backed junk 'sustainable' for now.

Now, 2010-2011 were pretty awful years overall for the global economy. Still, it managed to squeak out 4.828% average rate of growth in these gloomy days. Now, we have a global recovery, and volumes of structural reforms written, re-written and re—re-written. IMF is now virtually running half the planet and majority of Government are obligingly ‘owning’ their programmes. Beyond, we have tens of trillions of printed/minted/QEd/instrumented/engineered debt and cash instruments flooding the markets.

And yet:

• In 2015-2020, per IMF latest projections, Global economic growth is going to be lower than 2010-2011 average in every year.
• The same is true for the Advanced economies;
• The same is true for the Euro area; 
• The same is true for the Emerging Markets.

Actually, the rot has been ongoing since 2012. Here is the cumulative growth that has been achieved (through 2014) and is forecast to be achieved (from 2015 through 2020) since 2010 across the main regions:

You can’t make this up: even with the Euro area contained within it, Advanced Economies group outperforms Euro area group by almost 3/4rs.

The chart below slices the same data slightly differently, by looking at cumulative growth the IMF projected for 2015-2017 period.

Abysmal? You bet.

Based on 2010-2011 average, we should see Global economy expanding by 15.2% over the three years of 2015-2017. Instead, IMF projects growth of 10.86%. Advanced economies should grow by 7.4% based on 2010-2011 averages, but current forecast implies growth of 6.58%. Euro area economy should grow by 5.6% based on 2010-2011 averages, but current outlook implies growth of 4.87%. Emerging Markets should be growing by 22.1% under 2010-2011 average rates, and are now projected to expand by 14%.

Amidst all this, talking about Governments around the world ‘owning’ more reforms, as the IMF continues to do might be as close to Einstein’s famous dictum about insanity as one can get.

In the entire IMF review of the Western Hemisphere (that includes NAFTA states), there is only one, cursory mentioning of the phrase “secular stagnation” even though the entire WEO database published by the Fund screams it from every data set imaginable. But there are plenty of mentions in the WEO and the Fiscal Monitor and the GFSR for the need for the Euro area to harmonise more. Presumably because all this harmonisation before has not led us to where we are today - running an economy that is growing by margins statistically pretty darn indistinguishable from zero. There are admonitions by the IMF for the Emerging Markets to get onto the bandwagon of structural reforms too. Because the IMF prescriptions have worked so well in Europe, the dynamism of the continent is now overwhelmingly... err... what's the word here?... suffocating?..

Truth is, folks, we are now all Japanified. Time for the IMF to catch up with that trend and think up real reforms, such as

• Dealing with debt overhangs not by bleeding households and companies dry, but by restructuring these, 
• Dealing with slacked investment and enterprise creation not by shoving more cheap funds into the banks, but by using monetary firepower (the little that is still left floating around) to free households from debt and giving them lower taxation burdens, while providing proper risk and tax treatment of debt,
• Dealing with excessive policies harmonisation and coordination by encouraging the states to take the route to greater financial, fiscal and economic management independence, and
• Promoting not the divisive, Us-vs-Them types of quasi-regional trade deals recently welcomed by the IMF under the US-led TPP and TTIP, but inclusive trade negotiations under the WTO umbrella.

Because, as Japan's example has taught us so far, Japanification can't be cured by printing presses and fiscal stimuli. And it is sure as hell can't be cured by the IMF 'structural reforms'...

4/10/2015: Budget 2016 and beyond: some priorities...

This is a summary of my speech at the local constituency meeting in Sandymount organised by Renua Ireland (October 1, 2015). Please note: I was invited to speak in a personal capacity as an independent, politically non-affiliated speaker, so all thoughts, arguments, errors and omissions in the below are mine.


Where we are?

1) Recovery in official figures:

• GDP is up 6.9% y/y in 1H 2015.
• GNP is up 6.6%
• Some 60% of GDP growth in 1H 2015 was accounted for by Fixed Capital Formation - much of which is driven by assets sales to and by vulture funds, plus by reclassified R&D spending booked by MNCs into Ireland via our ‘knowledge development box’. 
• But the aggregate data is dodgy. Our GDP is 19 percent ahead of our GNP and it is 25% over Domestic Demand, over 2000-2007 the latter gap averaged ‘only’ 10 percent.

2) Recovery in somewhat more real figures:

• Personal expenditure is up 3.27% y/y in 1H 2015. 2Q 2015 was sixth consecutive quarter of positive y/y growth. But it is still down 9.9% on pre-crisis peak. Nonetheless, the numbers coming out on this side of National Accounts are positive.
• Government expenditure on current goods and services was up 3.54% y/y in 1H 2015. But down 10.6% on pre-crisis peak. There is timing issue involved here, but for now, Government spending is rising faster than personal consumption.
• Fixed Capital Formation rose 22% y/y in 1H 2015, but is still down 12.3% on peak.

By all measures of domestic economy, we are in an official recovery since 3Q 2013. And the rate of growth is relatively robust

• Final Domestic Demand is up 7.7% in 1H 2015 on a yearly basis, although overall activity as measured by Domestic Demand is down 7.9% on pre-crisis peak. 
• But, crucially, over the last 4 quarters, personal expenditure per capita was up only 1.62% on average (y/y per quarter) against total domestic demand rising 4.3%. Which shows the role played by Fixed Capital Formation (including Nama, vulture funds, R&D reclassifications and MNCs activities) in driving up domestic demand. 

Ditto for Unemployment figures:

• Official unemployment rate (QNHS-based) has fallen from 16.3% in Q3 2011 to 10.3% in 2Q 2015. Which is a robust decline and undoubtedly good news. Other good news is that much of new jobs creation was in stronger quality category of full time employment. 
• Still, current rate of unemployment is close to 1Q 2009 and is almost double 5.9% rate recorded in 2Q 2008, more than double 4.9% rate in 2Q 2007.

However, these figures mask several sub-trends that are worrying.

• Per CSO own report: % of unemployed persons plus  others who want a job, plus part-time underemployed persons, plus those who want a job, who are not available and not seeking for reasons other than being in education or training stands at 18.3%.
• Factoring in those in State Training Programmes (e.g. JobBridge) raises actual unemployment rate to 21.9%, comparable to 2Q 2009.
• Adding in net emigration as reported through 1Q 2015 raises broadest measure of potential unemployment to 29.5 percent - a figure that puts our relative labour market performance back to 1Q 2011 levels. In other words, it took us twice longer to go from cyclical unemployment high back to 1Q 2011 levels than to go from 1Q 2011 to cyclical unemployment high. Road to recovery is, for now, twice longer than the road travelled through the collapse.
• Worse: labour force participation rate has been averaging 59.8% in 1H 2015 down from 59.9% in 1H 2014. Both are still well below pre-crisis (2000-2007) average of 61.2%.

Top line: 

• Our GDP - at the aggregate - is now above the pre-crisis peak levels. 
• But our GDP per capita is still 0.8% below pre-crisis levels and our domestic demand per capita is 13.3% down on pre-crisis peak. Our personal consumption per capita is down 8% on pre-crisis peak. 
• Much has been achieved, the Government deserves quite a bit of credit for facilitating these achievements, if only in a 'safe pair of hands' way, yet more remains to be delivered, still and this requires more than just a 'safe pair of hands'.

What are the risks to a sustained recovery and how do we deal with these?  We should focus not short-term risks, but on bigger themes:

1. Global secular stagnation and demographic challenges
2. Global interest rates (cost of debt) normalisation
3. Our legacy debt problems and related issues of longer-term savings and investments
4. Domestic imbalances on production side: MNCs v domestic economic activity
5. Domestic imbalances on wealth distribution side (inequality, poverty, persistent and concentrated underinvestment in human capital, homelessness, debt distress, and cultural/systemic/institutional barriers to deployment of human capital).

• All of these factors are cross-linked. The realisation of which at the top of Irish political elite is lacking.
• All require a joined-up thinking to deal with.  A practice of which at the top of Irish political elite is lacking too.
• Addressing them requires a new longer-term agenda or strategy for growth and development of the Irish economy. Which we have no institutional framework for preparing, let alone enacting.

In this environment, lacking big ideas, Budget 2016 or indeed any budgetary framework won’t be enough, no matter how good the intentions and execution can be. Neither will be piece-meal approach to development of public investment, as exemplified by what we know from the bits and pieces of the Capital Investment programme for 2016-2021 announced this week.

So what needs to be done to begin addressing these bottlenecks in leadership?

Let’s start from the big picture - policy formation and implementation mechanism. We need deep reforms of how we do business when it comes to policy formation.

Key principles here should be:

1. Cross-party engagement
2. Bringing in divergent voices from the outside (given lack of political culture to do so, this should be mandated for all public boards, agencies and policy formation bodies).
3. Bringing in robust measures to stress-test all and any proposals.
4. Doing away with token talking shops of policy formation: all the Diaspora Meet-ups, all National Forums and Working Groups that are dominated by vested interests, the Fiscal Council (which has neither teeth, nor independence in its composition), etc etc.
5. Replacing the above fora with a functional National Task Force composed of both independent and vested interests-linked people with requisite expertise divided by key sectors of the economy: Domestic Economy, Internationally Trading Economy, Public Sector & Government, Households and Quality of Life. Each sectoral group should be tasked with generating & collating ideas for development of the broader sectors on the basis of counterbalancing measures applied to one sub-sector against other sub-sectors. Each group uses seconded public service assistance to cost/price proposals. All group proposals are to be published, publicly vetted and reviewed subsequently by the umbrella body based on the same principles of transparency, professionalism, factual analysis and contrarian view stress-testing. 

At the deployment level, we need to reform public sector systems and local authorities. This should at the very least involve:

1. Dramatically reducing the number of local authorities, to eliminate extreme levels of non-coordination and empire-building in individual decisions;
2. Empowering local authorities to create meaningful institutions for developing economic and social policies at a local level by providing them with full control over taxation in property sector and giving them a right to impose local prices for water delivery as well as supply water (Irish Water should be changed to a state-wide entity in charge / ownership of water infrastructure, while actual water provision should be decentralised to local authorities who can supply water into the distribution network on a competitive basis. Such system already works in electricity and gas distribution and can provide better services to consumers at lower cost, while giving local authorities more independent revenues to undertake provision of their own supports and services).
3. Bringing in functional mechanisms to promote and reward managed risk-taking and informed decision-making in the public sector, as well as to support those who reach above the mean in terms of effort and output. Merit, not tenure, should guide public sector careers progressions. Whilst this objective is not easy to achieve, I am certain that a combination of best practices and good policy thinking can result in a significant (though probably imperfect) improvement on status quo.
4. Bringing in functional measures to create a climate and culture of accountability. Not for mistakes made (and properly managed) in attempting leadership, but for lack of initiative, failure to carry out required work, any harm done by negligence and inaction.
5. We need to reform the system of ministerial advisors and oversight over departments, state boards and bodies. Again, here, the key is to bring in professionalism and remove cronyism, instill culture of debate, independence and entrepreneurialism (measured and managed taking of risks).

Let’s go on to specifics of policy objectives.

Ireland is a demographically young country trading in global markets in higher value-added goods and services. This means we are a country based on human capital. And this also means we face global competition for human capital.

What is human capital? A sum total of skills, formal and informal education, aptitude to work, attitudes to risk, ability to manage risks and uncertainty, creativity, capacity to innovate and to adapt to innovation. It also includes health, emotional and psychological well-being, cultural capital, and so on.

So what do we need to do to shift our economic model firmly in the direction of relying on human capital?

The core principles of human capital-intensive economy are:

• The need to attract human capital from outside
• The need to retain human capital that is already present in the economy
• The need to create new human capital within the economy, and
• The need to enable human capital to add value in the economy.

I have a catchy name for this system: CARE.

Primarily, in the short term, we have to rebalance our tax system. This is something that can be started with the budget, but will require more effort than just altering tax rates.

We need to shift burden of taxation away from taxing individual returns on human capital - in other words, we need to cut tax burden on income from skilled labour and entrepreneurship, but also from other forms of human capital. Incidentally, because human capital is a very broad concept, human capital-intensive value added is being created across the entire economy: public and private, lower income and higher income and so on activities. Human capital economy is not about rich v poor, and it is not about unemployed v employed. Every person in any occupation should be encouraged to invest in their own human capital in whatever form suits them, and every person in every occupation should benefit from reaping the returns on such investments.

To do so, we have to shift some of the current taxation burden away from income tax arising from investing own effort and talents into work, and onto something else.

Best target for such a shifting of burden is to shift it onto those assets that have the least productive use (in terms of value added) in the economy and that, simultaneously, cannot be moved offshore. Such assets are land and fixed capital - buildings and distribution networks.

It is worth noting that in sectors where land plays significant role in overall production, such as agriculture, human capital matters too, and land occupies still lower importance in production chain than we tend to think. Agriculture producing commoditized goods (e.g. generic grains or milk) still accrues value added via types of production, quality of supply, etc. Which are non-land outputs. Beyond that, agriculture also involves increasingly higher value added production – e.g. specialist grains, processing of milk, production of organic and/or artisan and/or specialist types of dairy products, etc. A land tax does not mean a tax on agriculture, but a tax on those activities in all sectors, including agriculture, that use land less efficiently.

Budget 2016 can start on this path by eliminating two or three upper marginal rates under the USC. Or better yet, eliminating USC altogether. And introducing a land or site value tax.

We also need to eliminate all penalties on taxation of self-employed and, unless we bring in symmetric access to benefits, we need to stop charging self-employed for services they have no access to.

We also need to create a system of taxation that recognises that self-employed face high volatility of income year-on-year. A system of 3 year average minimum taxation can be developed to address this, providing self-employed with a limited, but meaningful temporary credit for taxes paid in the case their income dips below, say, 75% threshold for previous 3 year average. These credits can be recouped in subsequent years when their income exceeds, say 110 percent threshold. Numbers here are illustrative and can be estimated more precisely, but it is the principle that matters. As economy becomes more and more linked to the ‘Gig Economy’ principles of work, the volatility of incomes and asynchronicity of tax liabilities will wreck more and more havoc in the households’ ability to fund basic purchases and investments, savings and debt repayments.

But, real reforms will require simultaneously bringing in some sort of income transfer system that guarantees high quality of life for those in needs of social transfers, while not relying on excessively penalising those who invest in their own skills and labour. So longer term reforms should involve introduction  of basic income. This will, accidentally, retain progressivity of taxation under flat rate income tax. And it will assure that those who are well-off can not benefit from social transfers.

Parallel with this, we need to close all targeted incentive schemes within our tax codes. The state should get out of business of picking and choosing future ‘winners’ or ‘champions’ of Irish economy and get into business of administering payment for & provision of core public services.


We also need to stimulate enterprise formation and entrepreneurship. These are two different but adjoining concepts.

• So we need to reform tax codes to allow entrepreneurs who exit their recent ventures to reinvest in new ventures. In other words, we need to recognise the reality of modern entrepreneurship: it takes more than one or two years to find and develop a suitable target for new investment, so tax exemption for reinvested proceeds of business sale should be stretched out to cover 3 years. A reduced rate of CGT for reinvestment over 3 years window can help here.
• We need to empower entrepreneurs to incentivise their employees and key partners/advisers. Which means we should switch taxation of equity shares granted to employees and key contributors to new business from immediate tax liability on shares issuance to taxation at the point of shares disposal. When income arises, tax should arise. Until no income accrues, no tax should be levied.
• We need to steer more funding toward risk capital or equity, away from preferentially-treated debt. Which means we should have symmetric tax applying to both capital gains on equity and gains realised from holding debt instruments (bonds), including Government bonds. There is no financial or ethical justification for exempting Government bonds from taxation net.
• VAT threshold in Ireland is imposing too high of a burden on sole traders and self-employed. We should move this threshold to the levels found in the UK. Instead of EUR37,500, VAT should be levied from around EUR90,000. 

We also need to significantly reform our corporation tax policies. 

The headline rate is fine. But the loopholes are glaring and are damaging to our competitiveness through several channels:

1. Tax loopholes are costing us in international markets by creating a perception that Ireland is a corporate tax haven
2. Tax loopholes are funding the creation of a labour market that is severely skewed in favour of MNCs, inducing higher costs on SMEs and indigenous enterprise
3. Tax loopholes are steering economic activity into non-productive areas where we have little chances to capture international comparative advantage (STEM areas of R&D, whilst our human capital base is better suited to develop sales, marketing, copyright and soft-innovation expertise).

One key loophole that has been introduced recently is the so-called ‘Knowledge Development Box’ that suits primarily (and almost exclusively) a narrow segment of MNCs, while providing no benefit for domestic enterprises. Another key loophole is treatment of foreign revenues domiciled into Ireland.

Shut them down.

The issue of reforming taxation system also goes to the heart of the ongoing debate about wealth inequality.

Except, contrary to what many (especially in the media) think, this debate is a bit more complex than our papers’ and TV programmes allow.

Economists Bill Gale, Peter R. Orszag and Melissa Kearney at the Brookings Institution recently showed that even a big increase in the marginal tax rate for top earners would have shockingly little effect on after-tax inequality in the U.S.

This covered such scenarios as raising the top individual income tax rate to 50 percent from its current level of 39.6 percent. Take the Gini coefficient is an index that ranges from 0, if everyone has the same earnings, to 1, if a single person has all the earnings and everyone else has none. When the authors calculated the Gini coefficient for after-tax income before and after the simulated tax change, they found that under the current tax schedule, the after-tax Gini coefficient is 0.574; raising the top marginal tax rate to 50 percent would reduce that only to 0.571. This difference is smaller than the effect of enlarging the share of the population with a college degree. Income inequality doesn’t change materially even if the revenue raised from a high-income tax increase is redistributed to households in the bottom income quintile, or if high earners are assumed to respond to the higher tax rate by reducing their work effort and taxable income.

For Ireland, the same measure would probably be even less productive in reducing income inequality. Why?  Because of our residency basis of taxation as opposed to the American citizenship-based system. And because our top earners (excluding public sector employed ones) are more mobile internationally than their U.S. counterparts.

Instead, in my view, reducing wealth inequality requires increasing wealth (not spending) of households that are currently below the top 20 percent of earners. This can only be done by simultaneously:

• Increasing their after-tax incomes (to create savings surplus) by having lower tax burden at the upper margin of earnings, and
• Increasing their investments in productive capital (not property) - e.g. business equity and entrepreneurship via incentives and behavioural nudging (for example, auto enrolment into pensions etc).

Now, let’s talk about capital investment side. 

I have some signifcant reservations about the new proposed capital investment 2016-2021 framework. Here they are.

1) ‘Something for everyone’ spatial development plan is an investment model followed by Irish banks in pre-2008 period: hosing cash wide in hope of striking a random pot of gold. Instead, what is needed is an in-depth, costed and scrutinised assessment of potential returns on investment. Project by project. And a tie-in of investment plans to a broader regional development scheme.

2) To give you an example: is our public capital priority to provide yet another link to Dublin airport? Or should it be to provide direct, quality train access to Ireland’s third largest city - Limerick?.. I don’t know. But I see nothing in the new framework analysing this. Should new priority development involve improving infrastructure links in parts of Ireland - e.g. Kerry to Limerick-Galway-Shannon links - or to sustaining & expanding public subsidies for transport provision? The point of investment is not to ‘give something to everyone’ but to prioritise areas where ROI is highest (social, economic, financial).

3) Prioritising investment must be based on factual analysis & scrutiny - both of which are lacking in the proposed framework. Examples of the contrary approach are Poolbeg Incinerator & Irish Water. Again, I see no change in the new plan on past modus operandi.

4) Any investment plan, based on prior experiences, should explicitly commit to capping a maximum percentage of total allocated expenditure going to auxiliary activities, such as consultancy fees, planning etc. Given the horrific track record of our public sector in securing value for money in capital investment structuring, eliminating waste should be a priority.

5) Why are new PPP rules going to be announced in 2017 when investment plan covers 2016-2021? Much of the projects will be allocated in 2016-2017, with expenditures happening later, but committed to under the old rules. If current PPP frameworks is not fit for purpose, how can we commit multi-annual programme to run under it. If current PPP framework does fit its purpose, why is it necessary to revise it in 2017?

6) Current cap spend is ~E3.5-3.7bn/pa. New plan E4.5bn/pa. So over 6 years the entire net new funding is just about enough to cover Dublin Airport link.

Truth is, Ireland needs to stop talking about State investments and State-run investment funds as a panacea for our economic problems. We need more productive, better managed private investment, more productive, better managed, better funded and more empowered public services, and more productive and better managed domestic private sectors.

There is much more that can and needs to be done within the context of structural reforms in Ireland, and within the context of the Budget 2016. My presentation today was neither designed to address all important aspects of both, nor has achieved a comprehensive coverage of all issues we face. This is not to say that the omitted considerations (for example relating to improving access for those in need to basic public services, improving the quality of all public services and so on) are less important than considerations I discussed above. No speech or presentation can aim to be comprehensive or perfectly complete.

The key point, therefore, of what I was focusing on today, is the need for dramatic, deep reforms of our policy formation and deployment systems and the need for new policies aimed to put Ireland onto the track toward human capital-intensive growth. So far, sadly, both of these objectives are missing from the Government and the main parties’ analysis.

4/10/15: Secular Stagnation and the Promise of the Recovery

An unedited version of my recent requested guest contribution for News Max on the issue of secular stagnation (July-August 2015).

Secular Stagnation and the Promise of the Recovery

Recent evidence on economic growth dynamics presents a striking paradox. As traditional business cycles go, recovery period following a prolonged recession should follow certain historical regularities. Shortly after exiting a recession, growth in productivity, output, investment and demand accelerates and exceeds pre-crisis growth.

These stylized facts are absent from the data for the major advanced economies to-date, prompting three distinct responses from the economic growth analysts. On the one hand, there are proponents of two theories of secular stagnation – an idea that structurally, long-term growth in the advanced economies has come to a grinding halt either due to the demand side collapse, or due to the supply side exhausting drivers for growth. On the other hand, the recovery bulls continue to argue that the turnaround reflective of a traditional recovery is likely to materialize sometime soon.

In my opinion, neither one of the three views of the current economic cycle is correct or sufficient in explaining the lack of robust global recovery from the crises of 2007-2009 and 2011-2014. Instead, the complete view of today’s economy should integrate the ongoing secular stagnation thesis spanning both the supply and the demand sides of the global economy.

The end game for investors is that no traditional indexing or asset class approach to constructing investor portfolios will offer a harbor from the post-QE re-pricing of economic fundamentals. Instead, longer-term strategy for addressing these risks calls for investors targeting smaller clusters of opportunities in sectors that can be viewed as buffers against the secular stagnation trends. Along the same lines of reasoning, forward-looking economic policymaking should also focus on enhancing such clustered opportunities.

Investment-Savings Mismatch

The demand-based view of secular stagnation suggests that the global growth slowdown is linked to a structural decline in consumption and investment, reflected in a decades-long glut of aggregate savings over investment.

This theory, tracing back to the 1930s suggestion by Alvin Hansen, made its first return to the forefront of macroeconomic thinking back in the 1990s, in the context of Japan. By the early 1990s, Japan was suffering from a demographics-linked excess of savings relative to investment, and the associated massive contraction in labor productivity. During the 1980-1989 period, Japan's real GDP per worker averaged 3.2 percent per annum. Over the following two decades, the average was 0.81 percent. Meanwhile, Japan's investment as a percentage of GDP gradually fell from approximately 29-30 percent in the 1980s to just over 20 percent in 2010-2015.

The Great Recession replicated Japanese experience across the majority of advanced economies. Between 1980 and 2014, the gap between savings and investment as percentage of GDP has widened in North America and the Euro area. At the same time, labor productivity fell precipitously across all major advanced economies, despite a massive increase in unemployment.

Some opponents of the demand side secular stagnation thesis, most notably former Fed Chairman Ben Bernanke, argue that low interest rates create incentives for investment and reduced saving by lowering the cost of the former and increasing the opportunity cost of the latter.

However, this argument bears no connection to what is happening on the ground. Current zero rates policies appear to reinforce the savings-investment mismatch, not weaken it, rendering monetary policy impotent, if not outright damaging.

How can this be the case?

Today's pre-retirement generations are facing insufficient pensions coverage. For them, lower yields on retirement investments, tied to lower policy rates, are incentivizing more aggressive savings, further suppressing returns on investment. Meanwhile, middle age workers face severe pressures to deleverage their debts accumulated before the crisis, while supporting ageing parents and, simultaneously, increasing numbers of stay-at-home young adults.

To address the demand-side of secular stagnation in the short run, requires lifting the natural rate of return on investment, without increasing retail interest rates. This will be both tricky for policymakers and painful for a large number of investors, currently crowded into an over-bought debt markets.

The only way real natural rate of return to investment can rise in the environment of continued low policy and retail rates is by widening the margin between equity and debt returns for non-financial assets and reducing tax subsidies awarded to physical and financial capital accumulation. In other words, policymakers must rebalance taxation systems to support real enterprise formation, entrepreneurship and equity investment, while reducing incentives to invest in debt and financial assets.

Good examples of such policy tools deployment can be found in the areas of gas and oil infrastructure LLPs and property REITs used to fund long-term physical capital investments via tax optimized returns structures. Transforming these schemes to broader markets and to cover non-financial, technological and human capital investments, however, will be tricky.

From the investor perspective, the demand-side stagnation thesis implies that  longer-term investment opportunities will be found in allocations targeting entrepreneurs and companies with organic growth that are debt-light, technologically intensive (with a caveat explained below) and human capital-rich. There are no real examples of such companies currently in the major stock markets’ indices. Instead, the future growth plays are found in the high risk space of start ups and early stage development ventures in the sectors that bring technology directly to end-user engagement: biotech, nanotechnology, remote health, food sciences, wearables, bio-human interfaces and artificial intelligence.

Tech Sector: Value-Added  Miss

The caveat relating to technology investments briefly mentioned above is non-trivial.

Today, we have two distinct trends in technological innovation: technological research that leads to increased substitution of labor with technology and innovations that promise greater complementarity between labor and human capital and the machines.

The first type of innovation is what the financial markets are currently long. And it is also directly linked to the supply-side secular stagnation thesis formulated by Robert Gordon in the late 2000s. The thesis challenges the consensus view that the current technological revolution will continue to fuel a perpetual growth cycle.

Per Gordon, "The frontier established by the U.S. for output per capita, and the U. K. before it, … reached its fastest growth rate in the middle of the 20th century, and has slowed down since.  It is in the process of slowing down further." The reason for this is the exhaustion of economic returns to technological innovation.  Financial returns are yet to follow, but inevitably, with time, they will.

Gordon, and his followers, argue that a sequence of three industrial or technological revolutions explains the historically unprecedented pace of growth recorded since the mid-18^th century. "The first with its main inventions between 1750 and 1830 created steam engines, cotton spinning, and railroads. The second was the most important, with its three central inventions of electricity, the internal combustion engine, and running water with indoor plumbing, in the relatively short interval of 1870 to 1900.” However, after 1970 “productivity growth slowed markedly, most plausibly because the main ideas of [the second revolution] had by and large been implemented by then.” Thus, the computer and internet age – the ongoing third revolution – has reached its climax in the late 1990s and the productivity gains from the new computer technologies has been declining since around 2000.

Gordon’s argument is not about the levels of activity generated by the new technologies, but about the declining rate of growth in value added arising form them. This argument is supported by some of the top thinkers in the tech sector, notably the U.S. tech entrepreneur and investor, Peter Thiel.

The older generation of players in the tech sector attempted to challenge Gordon’s ideas, with little success to-date.

A recent study from IBM, titled "Insatiable Innovation: From sporadic to systemic", attempted to show that technological innovation is alive and well, pointing to evolving ‘smart’ tech, globalization of consumer markets, and universal customization of production as signs of potential growth capacity remaining in tech-focused sectors.

However, surprisingly, the study ends up confirming Gordon’s assertion. Tech industry today, by focusing on substituting technology for people in production, is struggling to deliver substantial enough push for growth acceleration. The promise of new technologies that can move companies toward more human capital-intensive modes of production remains the stuff of the future. Meanwhile, marginal returns on investment in today’s technology may be non-negligible from the point of view of individual enterprises, but they cannot deliver rapid rates of growth in economic value added over time and worldwide.

Disruptive Change Required

In my view, the reason for this failure rests with the nature of the modern economy, still anchored to physical capital investment, where technology is designed to replace labor. As I noted in a number of research papers and in my TED presentation a couple of years ago, long-term global growth cycles are sustained by pioneering innovation that moves economic production away from previously exhausted factors (e.g. agricultural land, physical trade routes, steam, internal combustion, electricity, and, most recently capital-enhancing tech) toward new factors.

Thus, the next global growth cycle can only arise from switching away from traditional forms of capital accumulation in favor of structurally new source of growth. The only factor remaining to be deployed in the economy is that of human capital.

Like it or not, to deliver the growth momentum necessary for sustaining the quality of life and improvements in social and economic environment expected by the ageing and currently productive generations will require some radical rethinking of the status quo economic development models.

The thrust of these changes will need to focus on attempting to reverse the decline in returns to human capital investment (education, training, creativity, ability to take and manage risks, entrepreneurship, etc) and on generating higher economic value added growth from technological innovation.

The former implies dramatic restructuring of modern systems of taxation and public services to increase incentives and supports for human capital investments and their deployment in the economy.  The latter requires an equally disruptive reform of the traditional institutions of entrepreneurship and enterprise formation and development.

From investor perspective, this means seeking opportunities to take equity positions in companies with more horizontal, less technocratic distributions of management and ownership. Cooperative, mutual, employees-owned larger ventures and firms offer some attractive longer term valuations in this context. Entrepreneurs who are not afraid to allocate wider ranges of managerial and strategic responsibilities to a broader group of their key employees are also interesting investment targets.

Within sectors, companies that offer more flexible platforms for research and development, product innovation, customer engagement and are design and knowledge-rich will likely outperform their more conservative and rigid counterparts over the long run.

The new world of structurally slower growth does not imply lack of opportunities for investors seeking long run returns. It simply requires a new approach to investment allocation across asset classes and individual investment targets. When both, supply and demand sides of the economic growth equation face headwinds, safe harbours of opportunities lie outside the immediate path of disruption, in the areas of tangible real equity closely linked to the potential drivers of future growth.

5/2/15: Maan... it's like... Structural Reforms, like... maaan!

You know that slightly odd person who sits on a park bench repeating to anyone who bothers to ask him the same story over and over again? Well, now try imagining one that is doing so unburdened by a request.

And you have ECB...

At least Frankfurt did not mention its (and IMF's) favourite made up dream: the labour market reforms... presumably because in China, labour markets are already 'efficient' enough, why with all the factory dorms and campuses and the rest.

H/T for the ECB blurb to @LorcanRK.

9/10/2014: IMF Lagarde: We Are Out of Ideas, You Are Out of Convictions

In several recent posts, I have highlighted the fact that the IMF - that stalwart of global 'structural' reforms - has now effectively exhausted its toolkit of ideas as to how we can get global growth back on track. And the governments around the advanced economies world are now equally out of conviction to deploy the IMF's old toolkit.

This is evident across the board: from the Fund latest World Economic Outlook update which keeps endlessly banging on about the need for

• Accommodative monetary policies and, simultaneously, de-risking of the financial economy (the two tasks that actually contradict each other, as IMF own GFSR report admits);
• Structural markets reforms (which in the IMFspeak means preciously little more than more reforms of the labour markets, or in distilled terms: more 'activation' efforts to bring the unemployed to still inexistent jobs and push welfare recipients off the dole into still inexistent jobs);
• Credit supply restoration in the economy amidst continued banks deleveraging (which basically means that the banks need to get rid of old - presumably bad risk - loans while increasing their stock of new - presumably better risk - loans);
• Creation of better, more robust risk management frameworks in banking while increasing banking sector concentration (the outcome of the deleveraging process) and increasing risks concentrations by creating more centralised controls and supervision (e.g. the European Banking Union); and so on.

All of the above 'reforms' are clearly self-contradictory in so far as achieving one side of the objective implies undermining the other side.

And with today's release, we have a veritable Map to the Middle-Earth from the Fund's own Christine Lagarde. In today's "The Managing Director's Global Policy Agenda" Ms. Lagarde is navel gazing over 14 pages of text, charts and slides under the sub-heading of "Aiming Higher, Trying Harder". You get the sense of frustration of the Fund stuff with the intransigent Governments unwilling to deploy all of the medicines prescribed to them by the Fund, but you also get a feeling for the out-of-touch banality of the IMF's approach to the crisis.

Take the preamble. "Bold and resolutely executed policies are needed to prevent growth from settling into a “new mediocre,” with unacceptably low job creation and inclusion. Measures should emphasize":

• "Lifting growth. Decisive structural reforms are needed to bolster confidence and lift today’s actual and tomorrow’s potential growth and break the pattern of persistent underperformance and insufficient job-creation. Accommodative monetary policies should continue to support demand and provide breathing space as these reforms are implemented. But it is essential that they are accompanied by macro-critical reforms that remove deep-seated distortions in labor and product markets; improve credit flows to productive sectors; strengthen growth-friendly fiscal frameworks; and eliminate infrastructure gaps." You get a sense that this has been said before, argued many times over and offers nothing new. In effect, the IMF is saying: spend more, cut spending more, re-spend more; and fund it all by printing presses, while making sure the rag-tag of the real economy (SMEs and households) don't get their hands on the printed cash.
• "Building resilience. Easy money continues to increase market and liquidity risks, especially in the shadow banking sector, potentially compromising financial stability. Appropriate regulation and vigilant financial sector supervision, including developing and deploying macro-prudential tools, can help limit excessive financial risk-taking. Preparations for less benign financial conditions also need to be stepped-up. As monetary policy normalization approaches in some major economies, stronger policy frameworks, institutions, and economic fundamentals can mitigate potentially adverse spillovers." But, dear IMF, who creates this 'easy money'? And for who the money is 'easy'? The answer is in the first point above: printing presses do create 'easy money' and Governments and larger banks get 'easy money'. So de facto, IMF advice 1 and 2, taken together mean that creating growth + building resilience to risk = growing the share of Government and big banks in the economy. That should really keep troubles at bay, especially since the current crisis is caused by… yep, you've guessed it, rising role of Governments and big banks in the economy. Apparently, what can't kill you makes you stronger.
• And then there is IMF advice that IMF should learn to follow itself: "Achieving coherence. International cooperation is needed to amplify the benefits from these bold policies and to avoid exacerbating existing distortions, particularly regarding financial stability and global imbalances. Dialogue and policy cooperation can help smoothly rebalance global demand; minimize adverse spillovers and spillbacks from asynchronous monetary unwinding; ensure consistent financial regulation; and maintain an adequate global financial safety net. Fresh momentum must be injected into the global trade dialogue." Where did we hear that? Ah, yes, right - we've heard in Greece (when the IMF quietly stood by as the EU rained chaos onto Greek and Cypriot financial systems and Exchequers by refusing to get Public Sector Participation - or restructuring - going); and we heard it in Ireland (where the IMF stood idly by as the Irish Governments and European partners loaded some EUR70 billion-plus worth of banks debts onto the real economy and then destroyed entire sectors of the economy in the name of Nama-lution); and in Italy (where IMF is still refusing to acknowledge the need for sovereign debt restructuring).

Do not forget that the IMF team has run out of Athens this week in a hissy - the most heavily 'repaired' economy in the world seems to be going off-the-rails again.

Here is the road map for advanced economies as traced by the IMF:

As we have it: in Euro Area the achievements were: 1) 'good progress' on monetary easing (the printing press) but more to be done; 2) 'some progress' on consolidating the banking system eggs in one regulatory basket (and more to be done); 3) basically no fiscal reforms; and 4) no reforms on taxation, no improvement in competition across both labour and product markets (not to mention decline in competition in financial economy).

Are we still talking, Ms Lagarde? Oh yes…

Let's take a look at the first pillar of IMF 'wisdom': the printing press. Here's Fund own assessments of the outcomes: "Despite massive and welcome monetary support in major advanced economies and slowing fiscal consolidation, the recovery remains uneven and sluggish. Growth, and hence policy advice, are increasingly divergent across countries. Inflation is still below target in many advanced economies and is a growing concern in the euro area, while unemployment has stayed high. … The envisaged acceleration in economic activity has again failed to materialize."

So just as with Krugmanomics, the IMFology calls for more printing, cause previous rounds weren't enough: "Growth prospects in advanced economies are expected to remain uneven across regions. The strongest growth rebound is expected in the United States, while growth in Japan will remain modest. The crisis legacy brakes (including high private and public debt) are expected to only gradually ease in the euro area, while inflation expectations continue to drift down and deflationary risks are rising. Growth elsewhere, including other Asian advanced economies, Canada, and the United Kingdom, is projected to be solid."

And with all of those 'structural reforms' - do we have an uplift in at least potential (if not actual) output? Nope: "Growth potential may be lower than earlier assumed… Increasing evidence suggests that potential growth started to decline in advanced economies even before the onset of the crisis—which may be affecting the current pace of recovery. The recent slowdown in EMEs also has a large structural component, raising questions about the sustainability of growth rates achieved prior to the crisis and during the 2010–11 rebound."

So here are two road maps side by side: one for Spring 2014 and another for Fall 2014… and, save for gentle re-phrasing of the same, the two are largely identical when it comes to the advanced economies.

So spend more on infrastructure as opposed to reduce debt overhang... and that will be funded by what? Pears and apples?

Out of new ideas. QED.

27/10/2013: Financial Repression, Economic Suppression & Budget 2014

This is an unedited version of my Sunday Times article for October 20, 2013.


With fanfare of media appearances and fireworks of Dail statements, Budget 2014 was pushed off the dry dock and into the turbulent waters of reality. Full of political sparkle on the outside, overloaded with hidden taxes and charges and yet-to-be-fully-detailed painful cuts on the inside, it sailed off into the future. It will take at least 9-12 months from now to see what adjustments will have to be made in 2015 to compensate for the 'savings' on cuts delivered this week. It will take us longer to find out if the Budget 2014 will have a positive or negative effect on our ability to fund our deficits in the markets.

Yet, one thing is beyond the doubt: Budget 2014 was a significant gamble by the Government that could have done better by avoiding taking any gambles at all. Minister Noonan has decided to buy some political capital in the Budget. This capital came in the form of reduced rate of overall budgetary adjustment, compensated for by the hope-based increases in public sector efficiencies, plus some symbolic handouts to middle class families. Majority, such as the free GP visits for children under the age of 5, were poorly targeted and economically inefficient – extending scarce resources not to where they are needed most (such as, for example, long-term care provision or means-tested provision of health services) but to where political expediency leads. Many fail the core Budget objectives of making our fiscal policies more robust to adverse shocks that may occur in the near-term future.

In the end, Budget 2014 delivered virtually no real departures from the past Budgets. Predictably, there were no 'new' taxes. Instead the Budget put forward a list of new 'revenue raising measures'. The State will claw out of the banks EUR150 million in levies. Given that our banking sector is being reduced to a Three Pillars oligopoly, the levies will come straight from charging customers more for the same services. Pensions funds levy - a form of expropriation of private property - is to raise additional EUR135 million. This is a tax on present income, and in the case of pensions funds levy a tax on current wealth, plus a tax on future incomes foregone due to reduced levels of pensions funds. EUR140 million will be pumped out of the banks’ customers by taxing interest on savings. All in – financial sector will take a hit of EUR425 million on a full year basis, reducing its ability to lend, invest in the economy and to deal with mortgages distress. The measures will also weaken the quality of Irish banks' deposits base by reducing incentives to save. Carmen Reinhart and Kenneth Rogoff aptly termed such measures ‘financial repression’. De facto, we are bailing in ordinary banks customers and savers to pay for the past sins of the banks. Cyprus redux, anyone?

Cuts side of the Budget was also predictable. At the aggregate level, departmental expenditure as the share of GDP continues to run above 1990-2007 average. Instead of real cost reductions in Health we got some EUR250-300 million worth of new charges to be levied on services to insurance holders. And reduced insurance deductibility on the revenues side should do even more to reduce insurance coverage in the market. Net effect will most likely be falling transfers from private patients to public services, and higher demand for public health.

From businesses perspective, whatever the State added on one side of the budgetary equation, the state took out on the other. Thus, for all incentives for construction and building trade, overall capital spending by the Government in 2014 is projected to fall by some EUR100 million. As we stand, in 2013, capital spending by the Government barely covers amortization and depreciation of the total stock of public capital. Next year, things are going to get worse.

Much of the business stimulus schemes are geared toward supports for the property markets, including the incentives for foreign investors to put money into Irish REITs. Aside from the property-related measures, other business stimulus polices are either extensions of the already existent ones or more promise of doing something in the future. One example is the issue of Trade Finance supports. We are now five years into talking about the need to help smaller exporters with the cost of and access to trade insurance and credit.  Still, there is no tangible delivery on this.


However, the real question, left unanswered by Budget 2014 is: what's next for Ireland? The Government is rhetorically focused on our 'exit' from the Troika-led funding programme. This objective is a policy epicycle designed to ease public attention off the realities of bad domestic governance during the crisis. Exit from the bailout, financially, fiscally and economically, means a public recognition that Ireland has run out of funds we can borrow from the IMF and the EU. It also puts forward a commitment that, unlike Greece, we will not be asking for another bailout. Being not Greece does not make us Iceland, however, since Iceland repaid its bailout loans. In contrast, we will be carrying our debts to Troika for years to come.

The Government is promising that once we exit the bailout, we will regain our control over fiscal policies. This is a gross over-exaggeration. Having ratified the Fiscal Compact, Ireland is now subjected to heavy EU oversight as long as our fiscal performance falls short of the targets set in the treaty. It will be long time before we meet all of the conditions.

The scrutiny of our targets will increase, while our performance will remain under serious pressures arising from the crisis. Most recent IMF forecasts assume full EUR5.6 billion adjustments taken over 2014-2015 period, and economic growth averaging over 2.1 percent per annum (almost 6 times the average growth in 2012-2013 period). These forecasts imply that in 2014-2015 Ireland will still face the third highest cumulative deficits in the euro area ‘periphery’. And the debt levels of Irish state are set to continue rising. In 2013, the Department of Finance projects the level of Irish Government debt to be at EUR205.9 billion. By 2018 this is projected to rise to EUR211.6 billion.

And here's another kicker. The Fiscal Compact sets the target for long-term structural deficits (in other words deficits that would prevail were the economy running at its long run sustainable growth potential) at 0.5 percent of GDP. IMF projections out through 2018 put Irish structural deficits declining from 5.1 percent of potential GDP in 2013 to 2.0 percent in 2018. In other words, in 2018 Ireland is expected to be the worst performing 'peripheral' state in terms of structural deficits and operate well outside the criteria set in the Fiscal Compact.

Worse, comes December 15, we will lose a strong supporter of our efforts to restructure legacy banking debts and the only member of the Troika that promotes structurally more important economic and markets reforms.

On foot of our weak fiscal position, the politicisation of the Irish economy is already building up, driven primarily by our European partners and – until December 15 – resisted by the IMF.

The pressure is rising on Ireland's corporate taxation regime. The Government admitted as much by promising to close the loophole that allows some MNCs to nearly completely avoid paying Irish corporate taxes.

The pressure is also growing on blocking Ireland’s chances to restructure legacy banks debts. Germany, the ECB and the Eurogroup are angling to block Ireland's potential access to the European funds set up to deal with the future banking crises.

We are going into 2014 self-funding mode with all the costs of the bailout in place, including the Dvoika (Troika less one) oversight and substantial deficit and debt overhangs. It now appears that there will be no credit line to cover any increases in the cost of borrowing that might arise in the future. There will be no precautionary fund to cushion against any risk to market demand for Irish Government bonds. There will be no system in place to deal with any future banking problems or with the legacy debts should such arise. The ECB, the IMF and our forecasters are all warning us that we still face potentially significant downside risks to growth and banks stability. The IMF has been for months raising the issues of the SMEs insolvencies and poor quality of banks capital.

In other words, we are boxing ourselves into a high-risk game with little to show for this in terms of a positive return from our 'exit' from the bailout.

History suggests that prudence, not pride should be our guide. Back in 2010 we pre-borrowed aggressively in the markets prior to the state finances collapsing under the poorly structured banks bailouts. Now, we are gunning for the 'exit' without having secured any support from our 'partners' once again. The hope is that this time it will be different: the markets will lend us at decreasing costs, while growth lifts the entire domestic economy out of stagnation. This might not be an equivalent of playing Russian roulette, but it is certainly a game of chance with high stakes on the losses side and little tabled on the potential winnings side.

Box-out:
The latest OECD research on basic skills across the advanced economies puts to a serious test our claims to having a highly educated workforce. Ireland ranked eighth in terms of the proportion of younger adults with tertiary education. In terms of problem solving proficiency, both our college graduates and adults with only secondary education rank below their respective OECD averages. In problem solving in a technology-rich environment – a proxy for skills related to internationally-traded services, the sole driver of our economy today – Ireland ranks 18th in the OECD. Our younger workers score below their OECD peers in basic literacy and in numeracy. When it comes to introduction of new processes and technologies in the workplace Ireland is ranked between such premier divisions of the global innovation league as Cyprus and Belgium. Given our poor performance in digital economy-specific skills, exposed in October 2012 report by the OECD and covered in these pages before, it is high time for us to get serious about reforming our education and training systems.