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National Economic. Social Council NESC. Lessons Learned from Ireland’s Economic Leapfrog and Current Financial Crisis Workshop organised by the Reut Institute and TheMarker , 11 January 2011 Rory O’Donnell Director NESC [email protected]. NESC. The Irish story in outline. - PowerPoint PPT Presentation
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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
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