This is an unedited version of my Sunday Times article from June 24th.
Since
the beginning of this crisis back in 2008, Irish Governments have been quick to
point to our exceptional and exemplary trade performance as the sole hope for
the recovery. As we know, five years into the crisis, that recovery is still
wanting. However, our exports have expanded significantly.
The latest Irish trade in goods statistics, released this
week by the CSO and covering the period through April 2012 come on foot of the
last week’s release of the more detailed trade statistics for Q1 2012. Both are
presenting an alarming picture.
April 2011 Stability Programme Update (SPU), the
official Government report card to the Troika, envisioned exports growth of
6.8% in 2011 and 5.7% in 2012. Budget 2012 revised 2011 exports growth estimate
to 4.6%. By April 2012 – the latest SPU publication – actual 2011 growth outrun
was 4.1%, down a massive 2.7 percentage points on a 9 months-ahead forecast
from April 2011. April 2012 SPU also revised 2012 projected exports growth to
3.3%. More realistic IMF is now projecting exports growth of 3.0% this year as
per its latest Article IV report on Ireland released last week.
As
poor as the above prospects might be, the reality is even more alarming. For trade in goods only, January-April 2012 period
total volume of imports was down 7.2% on the same period of 2011, while the
volume of exports was down 0.9%, not up 3.3% as forecast in the Budget and the
latest SPU. So far, average rate of growth in exports in the first four months
of 2012 is -0.6%, down from the same period 2011 average growth rate of 7.4%.
Our trade surplus in goods is up 7.7%, but that is due to the
fall-off in imports, especially in Machinery and Transport Equipment and in
Chemicals and Related Products categories. The decline in imports, while
boosting temporarily our trade balance, can mean only two possible things:
either imports will accelerate much faster than exports in months ahead as MNCs
rebuild their diminishing stocks of inputs, or MNCs will cut back their exports
output even further. Either way, there will be new pressure coming from the
external trade side.
The latest decreases in exports are driven by
the rapid shrinking of two sub-sectors.
In the first four months of 2012, Medical and Pharmaceutical
Products exports have fallen to €7.93 billion from €9.01 billion a year ago – a
decline of almost 12%. And this trend is accelerating with 21% drop in April
2012 compare to 12 months ago. The patent cliff, or in common terms, production
cuts as drugs go off patent, is now biting hard with blockbuster drugs, such as
Lipitor and Viagra either going or scheduled to go soon into competition with
generics.
Organic Chemicals have also shrunk in April compare to a year
ago, although the first four months of the year exports are still up on 2011.
These two sectors are the giants of Irish exports. In 2010,
exports of Medical and Pharmaceutical Products and Organic Chemicals accounted
for 49% of our total shipments of goods abroad. By 2011 this number rose to 50%.
At the same time, in 2010 and 2011 the two sectors trade surplus (the
difference between the value of exports and imports) was close to 88% of our
total trade surplus in goods. So far, in the first 4 months of 2012, the same
holds, with two sectors contribution to trade surplus now reaching above 95%.
Given the on-going contraction in the sectors activity
revealed in April data, and given steady, even rising, share of their
contribution to our overall trade in goods, one has to ask a question as to why
other sectors of exporting activity are not taking up the slack created by
declining pharma sales?
The answer is, unfortunately, as worrying as the stats above.
Since about 2007, when the effects of the upcoming patent
cliff started to feed into the decision makers’ diaries, Irish trade
development and FDI policy has shifted in the direction of promoting
bio-pharmaceutical and biotechnology investment and trade. Much hope was placed
on these two sectors stepping up to the plate to replace revenues that were
expected to be lost in the pharma sector.
These are yet to bear fruit and, given the accelerating
competition worldwide for biotech business and investment, our time maybe
running out. The main obstacles to the bio-pharma and biotech sectors
development here in Ireland are regulatory, policy and institutional.
One key focus of biotechnology sector research pipeline
worldwide is on stem-cell research – the area restricted in Ireland by the lack
international (rather than national) standards. The same applies to a number of
other areas of R&D intensive sector. Analysis by Pfizer, published two
years ago, spelled exactly why Ireland is not at the races when it comes to
clinical research, an area that covers huge R&D related spends of major
pharmaceutical and biotech companies. We lack competitiveness in terms of
providing unified and transparent research infrastructure, absence of a
systemic ‘knowledge-sourcing’ opportunities, protracted and unpredictable research approval and
trial processes, high cost of sourcing patients for trials, cost and bureaucratic
burden relating to regulatory inspections and compliance, and lack of PR and
communications platforms that can be used outside Ireland.
Back in 2010, the Research Prioritization
Steering Group was set up to review priorities for Ireland’s research funding.
Published this March, the Group report marks a significant departure from the
previous funding approach for bio-medical sciences, re-focusing funding toward
commercialization and jobs creation, away from ‘pure’ science and early stage
research. This shift in the approach is both radical and reflective of the
realities in the biotechnology and other core high technology sectors to-date.
During the previous decade, the state spent €7.3 billion on R&D supports
under Government Budget Appropriations or Outlays on R&D, helping to
employ some 340 PhDs and 171 non-PhD researchers in the state sector alone in
2010 (down from 431 and 197, respectively in 2008). Yet there is preciously
little in terms of exports generation that came from these programmes, and
today Ireland has no serious indigenous or FDI-supported start-ups culture in
bio-pharma or modern medicine and healthcare.
As competition for
the sector investment heats up, and as MNCs-led pharma exports continue to
shrink, Ireland needs to move fast to create institutional and regulatory
systems that can make us attractive to biotech firms. One simple step would be
to reinstate a national bioethics council and integrate organizational systems
relating to biotech R&D. The role of the Government’s Science Advisor
should become more assertive, outputs-focused and linked directly to providing
better information to the Government and policymakers on both the strategic
aspects of R&D policies and actual outcomes. Alongside, we need to put in
place systems for better assessment of returns on investment in R&D as well
as processes that would allow us to act on such evaluations. If entrepreneurship
and jobs creation were to become core objectives for R&D backing, we should
consider merging commercialization functions of the Science Foundation Ireland
with exports development capabilities of the Enterprise Ireland. This should
leave SFI dealing solely with pure research, reducing duplication in the system
of commercialization supports.
The latest trade
figures, taken on their own, should sound an alarm bell in the corridors of
power.
Box-out:
In an economy that
is importing pretty much everything it uses for capital investment, having an
investment ‘stimulus’ is equivalent to taking each euro of Government spending
and sending over a half of it abroad – in aid of imports manufacturers in
Germany, France, the UK and further afield. The end result of such a
transaction would be a gross gain to the economy from employing lower-skilled domestic
workers installing imported capital, minus the value of imports, plus the
returns to the installed capital. Given the low value-added of low skilled
labour, the net result would most likely be a loss to the economy due to
close-to-zero returns on the above transaction and high cost of financing such
a stimulus in the current funding conditions. In Ireland, the above negative
return is likely to be increased further by the politicized nature of our
public ‘investments’. Thus, in my view, the ESRI is correct in its assessment,
published this week, of the undesirability of a fiscal stimulus in the current
conditions. Minister Howlin, in his response to the ESRI arguments claimed that
“…the
social imperative of getting people back to work is … a far more important
[priority] in the current climate.” His statement betrays disdain for evidence
and economic illiteracy of frightening proportions. The Government should not
and can not be in the business of wasting people’s resources, including the
resources of the unemployed taxpayers, on feel-good ‘policies’. Yet Minister
Howlin disagrees, even when the wastefulness of his own belief is factually
evidenced by research. The Government should have economically sensible
programmes for dealing with the curse of long-term unemployment. These,
however, should not come at the expense of creating apparent waste.
