17/5/2014: Are Markets Punishing Russia?.. or the Emerging Markets?

An interesting analysis from the BBVA Research on capital flows to EMs… while much can be discussed, one thing is of interest from my point of view (not covered by the BBVA): Russian inflows.

We've heard about alleged markets punishment and investors flight from Russia. And there has been some for sure. Except, the theory that this flight is tied to naughty kremlin behaviour in Ukraine is a little… how shall we put it… a stretch may be?

Ok, let's look at how net capital flows look in the EMs: 

Emerging markets are some 14% below trend - big outflows starting with non-Ukraine Fed tapering:

So Asia is even worse off than the general EMs... And Asia is Ukraine-free and Fed-tied.

Yes, Russia is down… 24% below trend by estimates of the BBVA

And guess what: decline started in the same 'tapering-on' period and well before Ukraine and accelerated similarly to the rest of EMs. 

And worse… look at what happened in Brazil:

Brazil's 'troubles with Ukraine' started earlier on than rest of EMs, but accelerate with Fed tapering.

Heard of Indonesia? It seems also to be in a conflict with Ukraine:

So how about that thesis alleging that Russia is being punished for Ukraine crisis by those investors? 

17/5/2014: Long-term unemployment: Sticky & Alarming

Things are pretty bad on the long-term unemployment front in Ireland. I covered this earlier here: http://trueeconomics.blogspot.ie/2014/05/1552014-innovation-employment-growth.html and here: http://trueeconomics.blogspot.ie/2014/05/1552014-jobs-employment-lot-done-more.html

But another look shows some truly dire comparatives.

Take long-term unemployed as proportion of all unemployed - you get two insights:

1. The proportion is rising. In Q3 2013 it was 58.4% and in Q4 2013 it rose to 61.4%. That's right, more than 6 out of 10 unemployed have been jobless more than a year, continuously. We do not know those who have been jobless more than 6 months (the cut-off point beyond which some research starts showing long-term deterioration in skills and aptitude).
2. The proportion is sticky in the long run - it has been above 50% since Q3 2010 and above 56% since Q4 2010. Un-yielding. 

The second bit relates to the proportion of long-term recipients of LR supports - this too yields two conclusions:

1. It is rising as well: up from 45.4% in Q4 2013 to 45.8% in Q1 2014.
2. And it is on a rising trend over time.

But here's a damning thingy: all this long-term unemployment sustains our 'productivity' gains and competitiveness 'improvements': http://trueeconomics.blogspot.ie/2014/05/1652014-competitive-sports-of.html

17/5/2014: Central Bank Annual Report 2013: Not Much to Report, Much to Promote

This is an unedited version of my Sunday Times article from May 4, 2014.


This week, the Irish Central Bank published its annual report for 2013.

In the opening statement, Governor Patrick Honohan said: "The Bank’s key priorities included the ongoing repair of the banking system and achieving progress in the delivery of sustainable solutions for distressed borrowers. Significant progress was achieved on these fronts, though many tasks still remain to be completed."

This was not a great moment to stake such a claim.

In recent days, the state-controlled Ptsb, announced a substantial hike in variable rate charges on mortgages. Bank of Ireland, faced criticism for using a 'blunt force approach' with distressed borrowers.

Central Bank data, highlighted in the annual report, shows that in 2013 lending to non-financial corporations in Ireland posted its steepest year on year decline since the start of the crisis, down 6 percent. Credit to households fell at the second fastest annual rate, down 4.1 percent on 2012. Mortgages arrears, including the IBRC mortgages sold to the external investment funds, as percentage of all house loans outstanding, were virtually unchanged year on year at the end of 2013.

Reading through the Central Bank own financial accounts also reveals some significant insights into the inner workings of our financial system and its watchdog.

In the last three years, Irish Exchequer reliance on income from the Dame Street has gone up exponentially. In 2009-2013, the Central Bank paid EUR4.73 billion in total dividends to the State. Of this, 50 percent came from its operations in 2012-2013. This makes the CBI the largest net contributor to the State coffers of all public and semi-state organisations.

The bulk of the Central Bank earnings come from interest on assets it holds. Last year marked the second year of declines in this income. Back in 2010, the Central Bank collected EUR3.67 billion worth of interest. As the scope of the emergency lending to Irish banks fell, the interest income also declined, reaching EUR2.6 billion in 2012 and EUR2.02 billion in 2013.

Central Bank’s highest-paying assets today cover Irish Government Floating Rate Notes, NAMA bonds, and a Irish 2025 bond. All in, the money paid by the Government and NAMA to the Central Bank is being recycled back to the Exchequer at a hefty cost margin.

In a sign of continued improvement in the Irish banks funding situation, marginal refinancing operations and long-term refinancing operations (MROs and LTROs), representing lending to credit institutions from the Eurosystem fell to EUR39.1 billion in 2013, down from EUR70.9 billion in 2012. At their peak in 2010, these lines of credit amounted to EUR132 billion.

Central Bank’s staff-related expenses rose from EUR106.3mln in 2012 to over EUR121.4mln in 2013. These increases were down primarily to salaries, allowances and pensions, as staff numbers employed stayed relatively unchanged between 2011 and 2013. Per employee staff expenses are now up 15 percent on 2012 levels.

Other operating expenses were up from EUR57.5 million to EUR70.3 million. The largest hikes incurred were in Professional fees, which rose by a quarter to EUR27.1 million. Only in 2011, at the height of banks’ recapitalisation, did the Central Bank manage to spend more on external consultants. So far, the banking crisis has been a bonanza for the Central Bank advisers who were paid EUR98.3 million in fees since 2009.

In return for the rise in expenses, the Bank marginally expanded some of its enforcement and supervisory functions. There was a rise in prudential supervision activity, but a decline in authorisations and revocations of regulated entities. The number of investigations also fell, from 216 in 2012 to 184 in 2013. However, the Central Bank oversaw 1,004 regulatory actions taken in 2013, up on 2012, but down on 2011.

Overall, the Annual Report paints a picture of the Central Bank continuing to engage in active enforcement and supervision, amidst overall declining need for banking sector supports.

17/5/2014: ESRI on Education & Training in Ireland

ESRI released "Further Education and Training in Ireland: Past, Present and  Future" (http://www.esri.ie/publications/latest_publications/view/index.xml?id=3943)

Lots of sharp and interesting findings, including:

1. Provision within the sector appears to have grown and national policy does not appear to have played any central role in determining the level, distribution or composition of Irish FET provision. In other words it is free-for-all.
 
2. As a result, there is a substantial amount of variation in terms of …the relative emphasis on meeting labour market needs and countering social exclusion across the sector. In other words, the programmes are not really delivering on skills shortages.
 
3. A substantial proportion of provision within the FET sector does not lead to any formal accreditation.  The lack of accreditation is more typical in programmes with a strong community or social inclusion ethos. Which might not be a problem, if real skills are delivered. Alas, this is not the case.
 
4. The distribution of major awards across field of study does not appear to reflect strongly the structure of the vocational labour market. This is evident in the fact that the majority of key stakeholders, interviewed for the study, feel that current FET provision is only aligned ‘to some extent’ with labour market needs.
 
5. From an international perspective, compared to the German, Dutch and Australian systems, Irish FET is much more fragmented and is much less focused around vocational labour market demand.  In terms of its composition and focus, Irish FET sector bears close similarities to provision in Scotland.  
 
6. Data provision on Irish FET is extremely poor by international standards.
7. The reform of provision will require that SOLAS implement a funding model that ensures that poorly performing programmes are no longer financed, with available resources directed towards areas identified as being of significant value on the basis of emerging national or regional information.  

The irony of this is that ESRI report comes out some weeks after I wrote about the deficiencies in our training programmes in the Sunday Times http://trueeconomics.blogspot.ie/2014/05/1552014-jobs-employment-lot-done-more.html and months after the OECD report covering the same.

You can read more on the topic of skills, unemployment and training here: http://trueeconomics.blogspot.ie/2014/05/1552014-innovation-employment-growth.html

17/5/2014: Foreign Affairs on the rise of Ukrainian ultra-nationalism

These days, it is rare to see any seriously argued articles about the role of ultra-nationalism on the Kiev-side of the Ukrainian civil war (that's right - it is now a full-blown civil war). But here is a very good article on the subject published in highly reputable and usually highly critical of Russia Foreign Affairs: http://www.foreignaffairs.com/articles/141405/alina-polyakova/on-the-march?sp_mid=45902074

It is objective, in my view, and it is factual. It does not assert that ultra-nationalism has a broad support in public opinion, but it does show that it is gaining ground and is one of the stronger forces behind the political leadership in modern 'Western' Ukraine.

And further:

Read the whole article!

17/5/2014: Growth Forecasts: What Matters and What Doesn't

This is an unedited version of my Sunday Times article from April 20, 2014.



Nothing sums up frustrations of the policymakers and general public with economics as well as the famous quote from the US President, Harry S. Truman: “Give me a one-handed economist, all my economists say is ‘on the one hand …and on the other hand…”

Quips aside, human choices and activities - the fundamental forces driving all economics - are unpredictable and painfully complex to model and measure. But beyond behavioural intricacies, complex nature of modern economic systems implies that data we use in analysis is often rendered non-representative of the realities on the ground.

Take for example the concept of the national income. Economists define this as a sum of personal expenditure on consumer goods and services, net expenditure by Government on current goods and services, domestic fixed capital formation, changes in stocks and net exports of goods and services. Combined these form Gross Domestic Product or GDP. Adding Net Factor Income from the Rest of the World (profits and dividends flowing from foreign destinations into Ireland, less payments of similar outflows from Ireland) gives us Gross National Product or GNP.



All of this seems rather straightforward when it comes to an average country analysis. By and large the overall changes GDP and GNP are closely linked to other economic performance indicators, such as inflation, investment, employment and household incomes.

Alas, this is not the case for a tiny number of small open economies with significant share of international activities in their total output, such as Ireland. In such economies, both GDP and GNP can be severely skewed by tax optimisation and global rent-seeking strategies of multinational enterprises. Faced with large share of domestic accounts distorted by tax arbitrage, economists are left to deal with high degrees of uncertainty when forecasting national output and employment. Even past data becomes hard to interpret.

In recent months, various analysts published a wide range of forecasts and predictions for Irish economy for 2014-2015. Consider just three sources of such forecasts: Department of Finance, the ESRI and the IMF.

Budget 2014 projections, forming the basis of our fiscal policy predicted average annual real GDP growth of 2.15 percent, with underlying real GNP growth of 1.7 percent. These projections were based on the assumed annual growth of 1.5 percent in personal consumption, and 6.35 percent growth in investment. These projections were also in-line with IMF forecasts.

Around the same time, ESRI was forecasting GDP growth of 2.6 percent for 2014 and GNP growth of 2.7 percent, well ahead of the Department of Finance outlook. ESRI forecasts were much more skewed in favour of domestic investment and personal consumption.

Fast-forward six months to today. In its latest analysis, IMF lowered its forecast for our GDP growth to 1.7 percent for 2014, leaving unchanged their outlook for 2015. The Fund forecast for GNP growth remained unchanged for 2014 and was raised for 2015.

ESRI has shifted decidedly into even more optimistic territory. The Institute's latest predictions are for GDP expansion of 3.05 percent on average in 2014-2015. GNP growth forecast is now at 3.6 percent. ESRI's rosy projections are based on expectations of a massive 10 percent growth in investment, with private consumption expectations also ahead of previous projections.

Finally, this week, Department of Finance upgraded its own forecasts, lifting expected 2014-2015 growth to 2.4 percent for GDP and 2.5 percent for GNP. Domestic demand growth is now expected to average 2.4 percent through 2015, and investment growth is expected to run at a head-spinning rate of 13.9 percent.

Everyone, save the IMF, is getting increasingly bullish on Irish domestic economy, which, in return, spells good news for employment and household finances.



The problem is that all of these forecasts give little comfort to anyone seriously concerned with the impact of economic growth on the ground, in the real economy.

Even the ESRI now admits that we cannot forecast this economy with any degree of precision. More significantly, the Institute recognises that our GDP figures are no longer meaningful when it comes to measuring actual economic performance. Instead, the ESRI claims that GNP is a better gauge of the real state of the Irish economy.

In truth, the proverbial rabbit hole does not end there: Irish GNP itself is still heavily skewed by the very same distortions that render our GDP nearly useless.

The ongoing changes in our exports and imports composition are throwing thick fog of obscurity over our net exports, which account for 22.6 percent of our GDP and 26.7 percent of our GNP – not a small share.

Since 2012, expiration of international patents in the pharmaceutical sector, triggered billions in lost exports revenues and shrinking trade surplus. In colloquial terms, Irish economy is now running weak on expired Viagra.

Just how much the patent cliff depresses our GDP and GNP is a mater of dispute, but we do know that pharma accounts for about one quarter of our total exports and one eighth of the gross value added in economy despite employing very few workers here. The patent cliff was responsible for a massive 1.25 percent drop in our labour productivity across the entire economy last year. But, as ESRI analysis previously shown, the overall effect of patents expirations on our GDP (and by corollary on GNP) is extremely sensitive to the assumptions relating to where pharma companies book their final profits. Profits booked in Ireland yield significant adverse impact. Profits channeled through Ireland to offshore destinations have negligible impact.



Which brings us to the second force contributing to rendering both GDP and GNP growth largely irrelevant as measures of our economic wellbeing.

Based on data through Q4 2013, since the bottom of the Great Recession in 2010, our net exports of goods and services rose EUR10.6 billion, driven by EUR14.4 billion in new exports of services offset by the decline of EUR3.05 billion in exports of goods. Ireland’s exports-led recovery was associated with a massive shift toward ICT exports.

Much of this trade was associated with little real activity on the ground.

Consider for example tax revenues. In 2010-2013, for each euro in added net exports, the Exchequer revenues increased by less than 3.3 cents. Back in 2000-2002 period the same relationship was more than six times higher. Of course back then both the MNCs and domestic companies were in rude health or on steroids of cheap credit and patents protection, depending on how a two-handed economist might look at the numbers. Still, the core composition of our exports was more directly connected to real production and value creation taking place in this country.

This can be directly witnessed by looking at other metrics of current activity, such as Purchasing Manager Indices published by Markit and Investec Ireland. Since Q1 2010, both Services and Manufacturing PMIs have been consistently signaling a booming economy. Meanwhile, GDP posted an average annual rate of growth of just 0.22 percent. Employment in industry ex-construction is down 21 percent on pre-crisis peak, employment in professional, scientific and technical activities is down 4.3 percent and employment in information and communication sector is down 1.1 percent.

The new crop of multinational corporations driving growth of GDP and GNP in Ireland is much more aggressive at tax optimisation than their predecessors. Which means that they also tend to use fewer domestic resources to deliver real value added on the ground.



All of which suggests that gauging true extent of economic growth in Ireland is no longer a simple matter of looking at either GDP or GNP figures. Instead, we are left with other aggregate measures of the real economy, such as: non-agricultural employment and the final domestic demand – a sum of private and public consumption and gross fixed capital formation.

By the latter metric, this economy has managed to deliver 6 consecutive years of uninterrupted annual declines in activity. In 2013, inflation-adjusted domestic demand fell by some EUR366 million on previous year. Cumulated losses since 2008 now stand at EUR32 billion or almost 20 percent of our GDP. Good news is that the rate of declines has been de-accelerating every year since 2009. And in H2 2013 demand rose 1.75 percent year on year. Bad news is that in real terms, our final domestic demand is currently running at the levels just above those recorded in 2003. In other words, we are now into the eleventh year of the ‘lost decade’.  At H2 2013 rate of growth, it will take Ireland until 2026-2027 to regain pre-crisis levels of domestic economic activity.

Meanwhile, employment figures are painting a slightly more optimistic picture, albeit these figures too are not free of methodological problems. In Q4 2013, non-agricultural employment in Ireland stood at 1,793,000, with H2 figures on average up 1.91 percent or 33,550 on the same period of 2012. To-date, non-agricultural employment numbers are down 13 percent or 266,550 on pre-crisis levels. However, when one considers total population changes in Ireland since the onset of the crisis, the ratio of non-agricultural employment to total population is currently at 39 percent, which is the level below those recorded in Q4 2000.


To the chagrin of the Irish policymakers and general public, our economy is, like an average economist, two-handed. On the one hand, our employment and total demand figures show an economy anemically bouncing close to the bottom. On the other hand, a handful of MNCs are pushing our GDP and GNP stats up with profits from their operations in far flung places retired here. Harry Truman really had it easy compared to Enda Kenny.

Box-out

The latest data from the Central Bank covering retail interest rates confirms two key trends previously highlighted in this column.

The first one is the rising cost of borrowing compared to the underlying European Central Bank policy rate. In January-February 2014, average retail rates on new loans for house purchases were priced 3.32 percent higher than the ECB rate. A year ago the same margin was 2.89 percent. For non-financial corporations, average margin rose from 4.58 percent to 5.03 percent for loans under EUR1 million, and from 2.42 percent to 3.1 percent for new loans over EUR1 million. Lending margins over the ECB rate in January-February 2014, averaged two to three times the margins charged in the same period of 2007 at the peak of credit bubble.

The second trend relates to the spread between rates paid by the banks on deposits and interest charged on loans. Since October 2011, Irish households consistently faced deposit rates that are by some 2 percentage points lower than the average annual cost of new loans for house purchases. In January-February 2014 this gap widened by some 0.27 percent compared to the same period of 2013. The spread is now running at double the rate recorded at the peak of the pre-crisis credit boom. The same holds for interest rates differential between loans and deposits for non-financial corporations which is now at the second largest levels since January 2003 when the data reporting started.

In short, credit today is historically more expensive, while deposits are cheaper. Irish banking sector continues to extract emergency rents out of the real economy with no easing in sight.

17/5/2014: The Banking Inquiry Shopping List...

This is an unedited version from my Sunday Times article from May 4, 2014.


This week, the Government announced the establishment of a banking inquiry.
The idea is to take a definitive, conclusive and final shot at identifying the events and the actions that have led to the historically and internationally unprecedented financial crisis that has ravaged our economy, society and the lives of millions of our citizens.

Some would say this was long in coming. But, in reality, we have been here before.


Between 2010 and 2011 we had the Nyberg Report, the Honohan Report and the Regling-Watson Report. All were full of generalist discourse about technical and systemic failures, but contained few specifics. In July 2012 we had the PAC report into the crisis. This set out the framework for the current inquiry, but also fell far short of bringing the matter to a closure.

All of these reports and inquiries suffered from similar problems. They were limited in scope, restricted in terms, covered only sub sets of the crisis history and virtually nothing in terms of the crisis fallout, and were disempowered to deliver conclusions in excess of anodyne academism. None of the reports to-date delivered final definitive answers, named names and specific actions by actual players.

This nation, told to pay for the banks and other domestic and foreign actors’ reckless practices, was never given a chance at establishing impartially and substantively the truth about the causes and the drivers of the crisis.

The Anglo Three trial, concluded this week, served as a logical denouement of the aforementioned processes of obfuscation of the causes of the crisis. It loomed large in public minds as a possible source of closure. Excessively technical in nature, restricted in scope and legalistic in terms of discovery, it naturally fell short of achieving that closure. With this failure, public trust in core institutions of this state has been stretched too thin. Even our public representatives now see the urgent need for some sort of a broadly based, non-partisan and open inquiry.


To be effective, the inquiry must mark a clear-cut departure from the past.

It has to be open and broad. Its remit must cover years prior to the crisis, preferably starting from the regulatory, monetary and market foundations laid out in the late 1990s, reaching beyond the night of the 2008 Guarantee, all the way to today.

The inquiry must cover not only the actions of the banks, but also those of our regulators, supervisors, the Department of Finance, the Department of Taoiseach, the roles played by the IFSC-based institutions and the Social Partners. It must deal with technical issues, such as, amongst others, liquidity rules breaches, macro prudential risks build-up and transmission of risks from Government policies to the banking sector and property lending, investment practices violations, and funding risks.

The inquiry must dig deep into the underlying culture, strategic choices and decision-making in our banking system, broader financial services, and economy and policymaking at large.

It must name key names. It must place responsibility on the shoulders of individuals involved - those still serving and since retired. The inquiry must distinguish and allocate legal, regulatory, professional and ethical responsibilities, identifying not just potential violations of the law and regulations, but also systemic weaknesses in competencies, incentives and performance.

The inquiry must achieve clarity as to the role played by banks auditors, consultants, advisory committees and boards, as well as by banks executives, including mid-ranked professionals, such as economists, risk analysts, and lending managers.

We need to know and understand the roles played by European and potentially US policymakers, organisations and investors in fuelling the credit bubble here in Ireland and in structuring the disastrous fallout from the credit bust.

Ireland paid some 40 percent of the overall cost of the euro area financial crisis. The inquiry at least should tell us, who benefited from these payments and who owes us a refund.

Above all, the inquiry must be robust, open, and reflective of the public appetite for closure. It must leave behind evidential record of errors made, strategies adopted, actions taken, regulatory breaches unaddressed and expert opinions supplied. In other words, it will have to break an entirely new ground in terms of all past inquiries ever conducted in the history of this state.

15/5/2014: Innovation, Employment & Growth: Ireland's Human Capital Dilemma

This is an unedited version of my article for Sunday Times, April 06.


From jobs programmes aiming to boost employment creation to entrepreneurship strategies and to solemn promises to unlock credit supply and investment for indigenous innovation-based enterprises, Irish SMEs have been basked in the public policy sunshine.

Much of this attention is cross-linked to another public policy fad, Ireland’s long-running obsession with innovation and R&D. In 2013, amidst continued borrowing for day-to-day operations from the Troika, Irish State spent EUR773 million on supporting research and development activities in academia and industry. Of this, a good portion was targeted to fund R&D and other innovation activities linked to Irish indigenous SMEs.

There are three basic problems with all this policies activism. One, we have no idea as to what sort of financial returns this public investment generates to the taxpayers. Two, we have virtually no coherent and independently verified evidence that the innovation-focused SMEs are delivering any serious economic returns in terms of real jobs creation and income generation. Three, we have no proof the state-funded innovation is a right model for SMEs growth generation in the first place.


Enterprise innovation is a weak spot for Ireland. Indigenous patent applications reported in July last year by the Patents Office and covering full year 2012 stand at decades low. Monthly data from the New Morning IP – an Irish consultancy dealing with issues of intellectual property – shows that in 2013 indigenous patents applications fell even further, down by almost 3 percent year on year.

Back in 2006, the national strategy for science set 2013 as the target date to deliver a 'world class knowledge economy'. Since then, numbers of indigenous patents filed under the Cooperation Treaty and to the European Patent Office have declined.

And the problem reaches beyond our SMEs. For example, per IDA own figures, only 28 percent of agency clients have spent more than EUR100,000 per annum on R&D. In other words, nearly three out of four MNCs had, de facto, nil research activity here.

The university sector is the cornerstone of Irish Government's vision for delivering an innovation-focused SMEs culture. Sadly, our best universities are barely visible on the radar of international rankings. Ireland’s top university currently ranks only 61st in the QS Top University league table and 129th in the Times Higher Education (THE) rankings. Trinity ranks 55th in Arts & Humanities – an area that receives absolutely zero attention from the likes of IDA and Enterprise Ireland and is firmly placed outside our economic development policy umbrella. TCD ranks 81st in engineering and technology, 83rd in life sciences and medicine and 136th in natural sciences. All of these areas are focal points for R&D spending and feed into state enterprise supports systems. UCD is no better: ranked 139th in the world under QS criteria and 161st by the THE rankings.

By pretty much every possible metric, our innovation engines are not firing.


Meanwhile, enterprise formation, an area that should be a core priority for the Government that is allegedly focusing on entrepreneurship and jobs creation, is lagging. Irish start-ups rates, relative to the economy size, are low today and have been low even in the days prior to the Great Recession.

Based on the OECD statistics, despite years of booming ICT services and substantial growth in the IFSC, Ireland today shows relatively static number of enterprises trading in market services, and declines in the number of enterprises working in manufacturing and industries, excluding the construction sector.

Late last year, OECD published its Economic Survey of Ireland. The document recommended empirically founded approach to enterprise and innovation supports. OECD noted that over-proliferation of funding agencies and programmes is yet to be scaled back. Per OECD, Ireland has over 170 "separate budget lines… and 11 major funding agencies involved in disbursing the Science Budget". Meanwhile, the Government continues to add new ones, seemingly with little regard for their effectiveness. Not surprisingly, there is no evidence on systematic and independent evaluation of these programmes effectiveness. And there are no continuously reported return metrics relating to state investments in enterprise development and innovation.

Instead of real statistics, often misleading and highly aggregate numbers are being put forward as markers of success. Jobs commitments and gross jobs additions are presented as signifiers of major breakthroughs, without independent audits. Companies’ registrations rates are reported as being equivalent to start up rates and no central data reporting is provided for actual enterprise formation. Take for example a jump reported in new companies registrations in Q1 2014 when 10,741 new companies were entered into the register, marking a 6% rise year on year. This number included 3,989 limited companies - the third highest rate of new limited companies registrations for the first quarter over the last 10 years.

Sadly, these headline statistics tell us preciously little about the underlying dynamics of companies formation. For example, how many business restructurings completed in 2012-2013 are now leading to companies re-registrations? How many of the businesses launched in previous years survive? How many of businesses launched are actively trading in the real economy? We simply do not know.

Focus on top-line reporting metrics, such as aggregate numbers of companies registered, VC funds disbursed, R&D budgets spent, obscures the woeful lack of coherent policies supporting indigenous enterprises formation and growth. As the result, beyond the areas of ICT services, biotech and medical devices, we neither foster formation of micro enterprises nor help smaller companies to reach 'medium' size. And, via tax and compliance measures, we actively penalize self-employment – the source of much of the early-stage entrepreneurship.


Promoting real innovation and enterprise cultures requires supporting investment ecosystem and entrepreneurial risk-taking. These goals can only be achieved by lower taxation, especially via lower CGT and income tax, and a benign and highly efficient personal and business insolvency regime. These are not priority areas for the Government.

However, tax policies mix is a necessary, but not a sufficient condition for success. To further promote real enterprise growth, we need to stop fetishising scientific R&D-driven enterprises and ICT and refocus public funding toward more evidence-based enterprise development projects.

International research shows that ordinary and traditional sectors SMEs drive growth in jobs and income. Where traditional sectors are put onto exporting paths, these SMEs can drive exports growth as well. In contrast, high performance start-ups in ICT services, usually focused directly on exports markets, are less employment and income-intensive. ICT does contribute strongly to productivity growth and is a nice niche business to have on offer for investors, but as McKinsey recent research pointed out, tech innovation business is unlikely to fulfill the economy-wide hunger for jobs, especially jobs for the indigenous workforce.

Focusing on active training for entrepreneurship and mentoring of new companies is another necessary addition to the policies mix that is currently being sidelined in favour of populist drive for state investment and R&D funding. One key area where we are lacking in supports is access for entrepreneurs to legal, tax and financial advice. Costs of tax and legal compliance and structuring are unbearably high for younger companies and for smaller enterprises considering growth strategies. These costs crowd out funding available to companies to finance further development, hiring, as well as cap companies growth potential.

On investment side, we have a thriving culture of VCs chasing the 'next Facebook'. Over 90 percent of all VC funding extended in Ireland goes to finance ICT start-ups, with more than two-thirds of this going to ICT services companies, as opposed to physical technologies.  We also have over 75 incubators and accelerators, with the vast majority of these being state-owned and/or state-funded. These too focus almost exclusively on companies working in ICT, biotech and other lab-linked innovation sectors.

But we have no idea as to the effectiveness of this strategy. Numbers employed in core ‘knowledge economy’ sectors have grown by about 4,900 from the onset of the crisis through 2013. All of this growth was down solely to ICT jobs which added 9,125 new employees, while professional, scientific, and technical activities employment, excluding education sector, is down 4,225 on 2008. Adding up jobs creation reported by the MNCs from 2008 through present, it is highly likely that indigenous employment in professional, scientific, technical, and information and communication sectors has probably shrunk.

Looking at the overall landscape of enterprise formation here, we do know that with exception of Ryanair, CRH, Paddy Power and a handful of other flagship companies, no Irish SME has grown beyond the 'medium' level threshold. The magic target of exceeding EUR20 million in annual sales - set in the Enterprise Ireland 2005-2007 strategy plan has vanished, unmet.

Put simply, Irish indigenous companies are not getting smarter with billions of public funds invested in SMEs-targeting R&D activities and ventures over the years. At the same time, Irish SMEs are not growing in size either. Micro enterprises show some progression toward becoming small firms, but small firms show little dynamism upward and medium-sized companies are stuck with no capacity to break into the big firms league. The system is broken and incremental policy adjustments are not holding a promise of a solution. We need to go back to the drawing table on enterprise policy in Ireland.

Box-out: 

Recent research from the US, published by the National Bureau for Economic Research looked into sell-side equity analysts' ability to predict equity prices and the impact their predictions have on market valuations over the period of 1983-2011. Controlling for a wide variety of factors that routinely influence forecast errors, the study has found that at the times of the crises sell-side analysts forecasting accuracy deteriorates by up to 50 percent relative to normal. And just as analysts’ errors explode, their influence rises as well. In particular, forecasts that upgrade outlook for companies amidst the falling market tend to carry the greatest weight of public attention. Optimism pays, even if only for analysts’ employers. Which, of course, creates a powerful incentive for sell-siders to ‘talk up’ equities just around the time of the worst bear market. Lastly, the study found that at the time of financial crises, marketing efforts by sell-side analysts tend to increase, in part due to greater pressure on them to perform, in part due to expanded opportunities for being ‘heard’ by investors.

John Kenneth Galbraith thought that "The conventional view serves to protect us from the painful job of thinking." In the case of sell-side analysts musings on the crises, that might be not a bad alternative.

16/5/2014: Summary of euro area 'peripherals' risk ratings

A neat summary of sovereign risk ratings by the majors and Euromoney Credit Risk:

Rankings on the left reflect country position in risk league tables per ECR (lower rank, better performance) and in the brackets give changes on ranks since 2013 (so, for example, Ireland improved its risk position by 5 places to 38th out of 186 countries covered by ECR). ECR score is a risk score (higher score, lower risk) and ECR tier is a tier of risk that groups of countries cluster into (lower tier, closer the tier to top performing lowest risk countries).

The lesson, probably, is:

• Greece is due no upgrades
• Cyprus is due no upgrades
• Portugal is due an upgrade on Fitch to BBB+, Moody's to Baa2 or Baa3; and S&P to BBB
• Italy is due no upgrades
• Spain is due no upgrades
• Ireland is due no upgrades post Baa3 upgraded to Baa1 (+positive outlook) by Moody's today

One way or the other, things are starting to move more positively on ECR scores side, but ratings agencies are still lagging. But that is not new - exactly the same lags took place on the downside of trade back in 2008-2012.

16/5/2014: Three Points on Irish Universities Performance

Three slides on Irish Higher Education state of play from my presentation yesterday at the Cork IT (many thanks to the CIT for their hospitality):

16/5/2014: Competitive Sports of Competitiveness Gains

Yesterday I posted my Sunday Times article on unemployment and skills: http://trueeconomics.blogspot.ie/2014/05/1552014-jobs-employment-lot-done-more.html

Here is an interesting chart via BBVA Research on labour costs competitiveness gains across the euro 'periphery' and other euro states:

BBVA Research chart above is plotting changes in unit labour costs 2009-2013 and decomposing these gains in 'competitiveness' into productivity growth and earnings/wages cuts. Here Ireland is a shining exemplar of improved competitiveness.

Alas, there are some problems with this. Wages/earnings destruction is hardly a good way for regaining competitiveness, especially when this process is associated with sticky prices (real value of income declines). In Ireland's case, we had on top of the said reductions of the purchasing power of income, also higher taxation and extraction of rents by the public sectors and by the banks. All of this 'improved competitiveness' is, therefore, a wee-bit of pyrrhic victory for Ireland. 

And then, of course we have our fabled increases in productivity. What happened here? Have we suddenly discovered major technological breakthrough that allow us to produce more using fewer resources? Err… not really. We took down construction and retail and domestic services sectors and reduced them to ashes. Highly labour-intensive, these sectors employed many producing lower value added than other sectors where few produce huge value added (much of it of course is superficial and accruing to the MNCs, but who cares in this land of magic competitiveness?). When we destroyed domestic sectors, we ended up with an economy producing less, but with even fewer people working. All the social welfare rolls swelling also fuelled our productivity. Of course, were we to fire everyone and just leave around one tax arbitrage P.O. Box in IFSC open, we will have miraculously higher productivity than anyone else in the world.

So where are we, really, if we take out all these superficial and even potentially self-destructive 'efficiency gains'? Probably closer to Portugal - a net gain in competitiveness of around 3-4%. Not bad, but not as wonderful as our heroic 9.5% gain.

15/5/2014: Flapping at the zero line: euro area GDP growth Q1 2014

Flash estimates of euro area GDP growth for Q1 2014 were out today. Here are few charts (via Markit Economics) of the disaster:

Yep: Netherlands down 1.4%, Portugal down 0.7%, Italy down 0.1%, France flat. Overall euro area at +0.2% which you might as well call 'flat as a pancake'...

The hope or rather 'expectation' was for 0.4% growth. I covered that earlier: http://trueeconomics.blogspot.ie/2014/05/752014-eurocoin-leading-indicator-april.html

Surprise to the downside is huge. It seems that all the hopium injections into expectations - based primarily on firm financial markets and business and consumer sentiment readings, and not on firm actual data have put a bit of bender into the blender... PMIs booming, GDP flapping powerlessly on the zero line.

One would be embarrassed, if one wasn't working in Financial Services...