National Economic Social Council NESCNESC

Lessons Learned from Ireland’s Economic Leapfrog and Current Financial Crisis

Workshop organised by the Reut Institute and TheMarker, 11 January 2011

Rory O’DonnellDirector NESC

rory.odonnell@nesc.ie

NESCNESC

The Irish story in outline1. De-industrialisation in 19th C2. Protection 1932-653. Opening & growth 1960-19774. Fiscal & economic crisis

1979-865. Stabilisation & leapfrog 1987-

026. Credit-driven growth 2004-087. Crisis 2008-2011

From initial growth to crisis • Growth via FDI, trade, public

investmentbut

• Indigenous industry lost in free trade• Social need and expectations rose• Sterling context: inflation/instability• Industrial relations conflict• US FDI fell in 1980s• Stagnation with fiscal crisis 1979-86

From tri-partism to partnership

•Analysis of 1980s crisis in NESC

•Agreed NESC Strategy report 1986

•Negotiated 3-year programme

•8 partnership programmes between 1987 and 2008

NESCNESC

Orthodox economic view: fiscal and wage indiscipline undermined

business success

Decline of inward

investment and failure of indigenous business

Excessive spending,

public borrowing and wage growth

Institutional view: problems of stabilization, distribution and development are connected

Business damaged by

fiscal and labour

problems.Also reflect developmental challenge of a ‘regional’ economy.

Fiscal crisis has a

developmental element.

Macro pressures & debates also

crowd out supply-side

issues.

Macroeconomic

Distributional

Supply-side

Consistent Policy Framework

Macroeconomic

Distributional

Supply-side

Consistent Policy Framework

1.European Monetary System leading to the euro

2. Public finance correction,

focused on debt/GNP

Macroeconomic

Distributional

Supply-side

Consistent Policy Framework

Centralised wage

settlement

and

negotiated approach to

welfare and tax

Macroeconomic

Distributional

Supply-side

Consistent Policy Framework

Policies that enhance the quantity, quality and use of resources

•industrial policy•long-term unemployment•social exclusion•education•infrastructure•social services•etc…

Role of negotiated programmes

• articulate a shared understanding of key economic and social mechanisms

• align partners to consistent and competitive actions.

• provide framework for strategic government policy

NESC role & method • Joint observation of evidence• Beyond bargaining to deliberation• Re-framing to build shared

understanding• Places particular demands on analysts

Examples of reframing:1986-90: shift focus to debt/GNP1996: partnership & enterprise-level

partnership2002-5: Developmental Welfare State

Policy & institutional

Export sector

European Union

Origin & nature of Ireland’s leapfrog

Social change

Policy & institutional

Export sector

European Union

Origin & nature of Ireland’s leapfrog

Social change

Consistent

Competitiveness focus

Employment focus: as much a participation story as a productivity story

Institutional innovation

Experimental & problem solving

‘Networked Developmental State’

Policy & institutional

Export sector

European Union

Origin & nature of Ireland’s leapfrog

Social change

Expanded through FDI & indigenous upgrading

Competitiveness

Educated labour supply

Increasingly concentrated in high-value, high-growth, segments

Extensive as well as intensive growth of a ‘regional’ economy

Policy & institutional

Export sector

European Union

Origin & nature of Ireland’s leapfrog

Social change

Internal market:•market access•regulatory & market-oriented reform

Structural Funds

Stable monetary environment

Policy & institutional

Export sector

European Union

Origin & nature of Ireland’s leapfrog

Social change

Reversal of population decline & emigration

Increased female participation

Social mobility (absolute)

Rising welfare, but inequality stable

Liberalisation, secularisation, pluralisation & individualisation

Entrepreneurial culture

Significant developments 1999-2007

• Euro launched 1999• Step-increase in science spending• Further tax reductions• Pro-cyclical fiscal policy & property tax reliefs• Inflation exceeded euro area• Public pay ‘Benchmarking’ award: generous • Housing: increased need, demand, supply & price • Switch from BoP surplus to deficit• Large scale immigration with EU enlargement• Increased social spending & transfers• Pressure on labour standards & partnership

The crisis in Ireland • sharp drop in output • bank crisis & guarantees Sept 2008• dramatic fall in tax revenue• efforts at partnership response failed• several rounds of fiscal

retrenchment• bank losses exceed expectations • eventual EU/IMF support

Agreed account

Causes

Manifestation of risks

NESC & partnership in the crisis

Disagreement

Agreed account

Causes

Manifestation of risks

NESC & partnership in the crisis

Disagreement

Ireland’s Five Part Crisis

February 2009

Banking

Fiscal

Economic

Social

Reputational

Agreed account

Causes

Manifestation of risks

NESC & partnership in the crisis

Disagreement

Competitiveness loss 2002-08

Fiscal reliance on property bubble

Global financial crisis & reckless Irish banking

Agreed account

Causes

Manifestation of risks

NESC & partnership in the crisis

Disagreement

Known risks inherent in our international position

Risks not identified

Risks exacerbated by national policy

Agreed account

Causes

Manifestation of risks

NESC & partnership in the crisis

Disagreement

Wage reduction & real depreciation

Fiscal policy

Banking guarantees & resolution

Job protection

Banking supervision: negligent

Banking supervision: negligent

Fiscal policy: technical issues uncertain• How much genuine regional expansion?• How much economic cycle?• An asset price bubble?

Banking supervision: negligent

Fiscal policy: technical issues uncertain• How much genuine regional expansion?• How much economic cycle?• An asset price bubble?

Political economy issues unresolved

•Scale of public provision•Level & incidence of taxation•How to meet increased housing need•Public sector reform

Current policy discourseThe “culprits”

BankersBuildersGovernment

Current policy discourseThe “culprits”

BankersBuildersGovernment

and

Partnership & consensus

Current policy discourseThe “culprits”

BankersFinancial RegulatorBuildersGovernment

andPartnership &

consensus

The “remedy”Centralisation for fiscal retrenchment

Restore credibility & credit

Export Including reformsIndependent fiscal

councilPolitical reform

Ways NESC may have missed things

• Relative wages: legacy of the leapfrog?• Irish inflation ahead of euro area?• Fiscal & taxation?• Housing?• Migration?• Consistent policy framework: supply-side

focus?• The euro after 2000 • ‘Deliberative’ role too far from bargaining?

Overall ‘Market’ signals

weakened

Financial imbalances without exchange rate effects

Fiscal errors without bond market (or electoral) cost

Wage growth without employment effect

Overall ‘Market’ signals

weakenedFinancial imbalances

without exchange rate effects

Fiscal errors without bond market (or electoral) cost

Wage growth without employment effect

Institutional substitute too fragmented

Financial supervisionWithin partnership:• Industrial relations v

policy• Private v public IR

Political-business linksNESC-Industrial policy

agencies NESC-Central Bank-

Dept of FinanceEU coordination failure

Appendices

Appendix 1Irish

Industrial Policy

Autonomy

Close to firms

Constraints

Industrial Development Authority

Upgrading

AutonomyClose to firms

Constraints

Industrial Development Authority

Upgrading

Semi-autonomous agency

Pursued industrial development & exports

Set job-creation targets

Monitor cases thoroughly

Used Ireland’s tax advantage

Autonomy

Close to firms

Constraints

Industrial Development Authority

Upgrading

Stay close to client firms

Both in Ireland and abroad

Tailor package of supports

‘Sectors are “picked” not through a magical crystal ball of superior state rationality but rather through international information-gathering and attempting to follow international trends as closely as possible’ (0 Riain)

Autonomy

Close to firms

Constraints

Industrial Development Authority

Upgrading

Identified successive constraints on business development:

•Capital•Industrial sites•Skills•Telecom infrastructure•Regulatory

Mobilise other agencies

Ignored economic debates

Autonomy

Close to firms

Constraints

Industrial Development Authority

Upgrading

Work with Irish managers in TNCs

Focus shifted:•From job numbers to value added•From capacity to capability

Moved early to software and other services

Network Irish engineers abroad

Now links firms to Irish S&T

Refocused industrial policy & agencies

• Separated agencies for FDI & indigenous

• Prompt emergence of Irish software• Focus on ‘high-potential’ Irish firms• Increasing focus on S&T• Created Science Foundation Ireland

Recent Innovation Policy• Science Foundation Ireland (2003)

• Much increased funding for S&T and R&D

Questions:• Will S&T link to firms?• Is there absorptive capacity?• Sufficient DUI mode?• How should it connect to welfare

reform?

Two wings of the PPA: Structure 2000-2009

ForfasIDA Enterprise IrelandNat. Training AgencyN Compet. CouncilSci. Foundation Irl. Government Depts.Agencies/firms forroads, elec, telecom

NESCPartnership Steering

CommitteePartnership working

groupsNat.Training AgencyGovernment Depts.Labour Relations

Commission

Appendix 2Futures Ireland

FuturesIreland study 2008-9Ireland at another turning

point

Two views

Economy

Society

Public policy

Ireland at another turning point

– a pessimistic view On top of the current

crisis

The basis of Ireland’s prosperity in jeopardy

New rivals for FDI & other threats to our special status

Economy

Society

Public policy

Ireland at another turning point

– a pessimistic view Success of last two decades based on social capital & values built over decades

Eroded by the very growth they created

Economy

Society

Public policy

Ireland at another turning point

– a pessimistic view Positive combination of political strategy & social partnership

which yielded consistent policy

was an historical accident

replaced by conflict & media-dominated politics

Economy

Society

Public policy

Ireland at another turning point

– an alternative view Technology, once a window of opportunity for Ireland, can become an enabler of diverse, segmented, business opportunities (Perez)

From ‘industrial information economy’ to ‘networked information economy’ (Benkler)

Economy

Society

Public policy

Ireland at another turning point

– an alternative view Evidence of:•cross-fertilisation between wealth creation, society & public policy•problem solving•innovation•systematic reviewWhat is scarce: institutional contexts that allow people to use their capabilities, mandate that they review & offer accountability

Economy

Society

Public policy

Ireland at another turning point

– an alternative view Public governance could yield a better combination of policy making, implementation and stakeholder involvement.

Innovation not confined to private or high-tech sectors.

Disciplined review provides basis for both innovation & accountability.

Developmentalism

Reform

Use of authority

Dealing with crises & turning points

(1950s & 1980s) Resolution of crisis faced fiscal constraints

but focused on development, both economic and social

Developmentalism

Reform

Use of authority

Dealing with crises & turning points

(1950s & 1980s) Decision to make the crisis a turning point marked by reform & creation of institutions

These given mandate to identify & address constraints on development

Developmentalism

Reform

Use of authority

Dealing with crises & turning points

(1950s & 1980s) Concentration of authority

in order to liberate talent

rather than increase control

What are the developmental challenges for Ireland now?

Making this crisis a turning point

What are the developmental challenges for Ireland now?

What institutional reform & creation is now necessary to achieve fiscal correction, address constraints on development & limits on accountability?

Making this crisis a turning point

What are the developmental challenges for Ireland now?

What institutional reform & creation is now necessary to achieve fiscal correction, address constraints on development and limits on accountability?What concentration of authority is necessary to achieve reform & liberate capabilities?

Making this crisis a turning point

Appendix 3Developmental Welfare

State

Ireland’s social debate• ‘Celtic Tiger’ v. society• Employment miracle v. poverty rate• Increased social spending v. social

deficits

Choose a European model of welfare:• Scandinavian universalism• Continental insurance• Liberal targeted• Legal/constitutional social rights

Rethinking the Welfare StateIt has three elements…

How well do they:

address social disadvantage?

support participation and innovation?

identify and tackle un-met needs?

Services

Income supports

Innovative measure

Developmental Welfare State

A way of reforming each of these three elements…

and linking them…

suited to Ireland’s particular economic and social situation

Services

Income supports

Innovative measures

Developmental Welfare StateA radical

development of services is the most important route to improving social protection…

It has a triple logic, reflecting 3 social deficits…

social and economic

Services

Income supports

Innovative measures

EducationHealthChildcareEldercareHousingTransportTrainingEmploymentservices

Beyond economic constraints and social

possibilities

The long-term strength of

the economy now depends on effective social policy

Social policies must share

responsibility for economic performance

and participation