The Irish ExperienceDavid O’Donovan

DirectorInvestment Promotion Agency Development

International Seminar, San SalvadorJanuary 10, 2011

www.communique.ie

Six Themes

I. Brief Facts

II. Irish Economic Transformation

III. Success Factors

IV. Current Irish Crisis

V. Public-Private Alliance

VI. Conclusion

Brief Facts – Republic of Ireland

• Small island on the western edge of Europe

• Area: 70,000 sq km (about 3 times size of El Salvador)

• Population: 4.24m • Capital: Dublin (1.5m)• 800 years of British rule• Independence: 1922• EU member since 1973

Irish Economic Transformation

From poor to rich in one generation:

• 1970 – one of the poorest countries in Europe with GDP per capita of US$3,000

• Today Ireland, despite current financial crisis, is still one of the richest countries in the world

• GDP: US$224 billion

• Per Capita: US$52,000

• Population has risen 50% to 4.24 million – from 2.8 million in 1961

Irish Economic Transformation

Irish Economic Transformation

Irish exports have changed dramatically:

1970

Primarily agricultural products

2010

High value added, high technology products and services

Ireland: Strategic Productive Transformation and Upgrading

Source: Devlin-Moguillasky (2009)

Success Factors

Major factors underpinning rapid growth:

• NATIONAL CONSENSUS/SOCIAL PARTNERSHIP • PPA BODIES FOR SPECIFIC FUNCTIONS• LOW TAXES• AGGRESSIVE CAMPAIGN FOR FDI• MASSIVE INVESTMENT IN EDUCATION

Current Irish Crisis

But what about the current severe economic crisis in Ireland which resulted in the recent ‘bailout’ by the IMF and EU in an €85 billion rescue package?…..

Current Irish Crisis

Partly, as a result of phenomenal growth:

• Ireland over-invested in construction and property development

• Fuelled by massive and cheap borrowing by Irish banks

• Huge property bubble burst in 2008

• Government bailed out Irish banks to prevent collapse

• Result is massive public debt

• Government forced to raise €15 billion over next 4 years in reduced

expenditure and increased taxes to reduce deficit

Current Irish Crisis

But also, institutional failure to anticipate crisis:

• Culture of ‘light-touch’ regulation meant Central Bank/Financial

Regulator failed to spot build-up of excessive borrowing by Irish banks

• Public-Private Alliance bodies failed to recognize shift from

investment/export led economy to property construction led economy

• Both the general public and policy makers ‘blinded’ by phenomenal

rises in incomes

Public-Private Alliance

Role played by Public-Private Alliance bodies…

Public-Private Alliance

Based on Public-Private Alliance at two levels:

1. National Level (Economic and Social Policy)

2. Sectoral/Thematic Level (Competitiveness and Industrial Policy)

Public-Private Alliance

Public policy model adapted by Ireland was that of a ‘networked development state’:

• Different from more bureaucratic and authoritarian

development models adapted by Asian ‘tiger’ economies

• As a small, liberal European democracy Ireland could not

adopt a centralized authority model like the Asian countries

• Irish state interventions operate through networks of public

agencies and advisory councils all with strong private sector

involvement

1. PPA at National Level (Economic and Social Policy)

•Policy failures from 1930’s led to state of national crisis by 1960’s

•Severity of crisis brought recognition of need for Public-Private Alliance and National Consensus

•New direction for economic and industrial policy agreed

•Evidence-based approach adopted

1. PPA at National Level (Economic and Social Policy)

New Direction Adopted (1970s onwards):

• Trade opening and expansion of market access

•Private sector investment-led growth, not government sector growth

•Private sector with strong state encouragement/support to be the engine of growth

1. PPA at National Level (Economic and Social Policy)

•Cornerstone underpinning rapid Irish economic growth

•Government, employers, labour, farmers, academia and NGO sectors – all had voice in developing strategies

•Under the umbrella of the National Economic and Social Council (NESC) since early 1970s

•Chaired by Head of Prime Minister’s Department

1. PPA at National Level (Economic and Social Policy)

• Representation within NESC:– Government – Secretaries General of 7 departments (ministries)– Private Sector – 5 from business associations– Labour – 5 from trades unions– Farmers – 5 from farmer organisations– Voluntary – 5 from NGO organisations– Other – 5 independent representatives, normally technical

experts or academics

• Term of Office is 3 years

1. PPA at National Level (Economic and Social Policy)

In the early days, and up to 2008, strong recognition of:

• Interdependence between social partners

• Tradeoffs both between and within interest groups

1. PPA at National Level (Economic and Social Policy)

• Trades unions included in policy making for first time• New deal with trades unions – wage moderation in

return for cuts in personal taxation and prospects for share in future growth

• Social cohesion was a fundamental component in the dialogue of the Alliance

.

1. PPA at National Level (Economic and Social Policy)

• Private setting to facilitate frank discussion

• Representative but manageable number of private participants (25)

• Political relevance by meeting once a month for half day or more and presence of PM office

• Dialogue oriented to fact-based problem solving with support of neutral technical secretariat

• Representatives exclude themselves when discussion is on a topic where there may be a conflict of interest

• 3-year public report of Alliance conclusions and periodic publishing of Secretariat studies

1. PPA at National Level (Economic and Social Policy)

• Led to industrial peace, wage moderation and low inflation with strong ‘buy-in’ from Trades Unions

Source: ILO (International Labor Organization)

1. PPA at National Level (Economic and Social Policy)

But, unfortunately:• Current financial crisis has put intolerable strain on

public-private alliance model• Government implementing major cutbacks in

expenditure and increases in taxation• Public service staff reductions and pay-freeze for 4

years• Trades Unions strongly objecting to plans• Result – collapse of PPA at National Level in area of

economic and social policy

Public-Private Alliance

2. Public-Private Alliance at Sectoral/Thematic Level (Competitiveness and Industrial Policy)….

• Combination of government departments, state agencies and advisory councils

• Each with its own specialist function

• All well funded by government with focused operational budgets

2.PPA at Sectoral/Thematic LevelCompetitiveness and Industrial Policy

• Boards contain both public and private members

• Cross-board memberships for CEOs to help co-ordinate industrial policy support programs

• Professional, permanent public staff who do not change with changes of government

• High degree of operational autonomy for public executing agencies

2.PPA at Sectoral/Thematic LevelCompetitiveness and Industrial Policy

2.PPA at Sectoral/Thematic LevelCompetitiveness and Industrial Policy

2.PPA Sectoral/Thematic LevelCompetitiveness and Industrial Policy

National Competitiveness Council (NCC) has 16 Members:

• Government 4• Private Sector 8• Trades Unions 2• Academia 2

2.PPA Sectoral/Thematic LevelCompetitiveness and Industrial Policy

• Secretariat and professional research facilities provided by Forfas, the State Strategic Planning Agency for Ministry of Enterprise, Trade and Employment

• Reports directly to Prime Minister of the day

Strengths

At National Level (Economic and Social Policy)

• NESC represented all the social partners and its reports were

highly influential

• NESC argued for a ‘developmental welfare state’

• Good economic development and better social development not

opposed to each other but not guaranteed to occur together

• Argued successfully for better coordination between economic and

social policy

Strengths

At National Level (Economic and Social Policy)

• Led to eight national wage agreements over two decades

• Facilitated Ireland’s long term development strategy – heavy

investment in education, attraction of inward investment and

full European integration

Strengths

At Sectoral/Thematic Level (Competitiveness and Industrial Policy)

• National Competitive Council (NCC) reports also highly influential in

setting the agenda for improvements in Ireland’s competitiveness

• Forfas (strategic planning agency for DETE) reports focused

effectively on institutional capacity for the drive for inward investment

(IDA), building indigenous industry (Enterprise Ireland) and research

capability (Science Foundation Ireland)

• These bodies operate with a high degree of specialization and are well

connected and coordinated with each other

Weaknesses

• PPA bodies at National Level (NESC) and

Sectoral/Thematic Level (Forfas and NCC)

developed parallel but weakly connected analyses

and policy recommendations

• Crisis of 2008-2010 exposed significant weaknesses

in Ireland’s overall policy approach

Weaknesses

Major weaknesses seen to be:• Political

• Institutional

• Regulatory

Weaknesses

Political:• Divergence between political decision making and policy analysis in

the institutons

• Led to policy capture by influential actors from construction and

banking closely aligned to governing party

• Won excessive tax incentives for construction further boosting a boom

already under way and created illusion – mistaking asset inflation for

real wealth creation

• Led to loss of previous developmental focus

Weaknesses

Institutional:

• Trades Unions saw the creation of the National Competitiveness

Council as favouring the business agenda

• Regarded it as giving employers a separate and stronger institutional

channel of policy influence with the Government

• Probably was a mistake to create the NCC outside the institutional

structure of the NESC as it “balkanized” the social dialogue

• Major divergence between wage bargaining in the public sector (highly

centralized) and private sector (localized)

Weaknesses

Regulatory:

• Complete failure of the Irish Central Bank and Financial

Regulator to see the build-up of massive and excessive

borrowing by Irish banks that fuelled the property boom

• Tragedy is that complacency at the macro/financial level and in

the Alliance created a crisis that undermined a very successful

strategic industrial policy for productive transformation at the

sectoral level

Conclusion

• Ireland enjoyed phenomenal growth and success in the period

1970 to 2008

• Some lessons can be learned from that – what made it work so

well

• But our success blinded us to problems building up which

resulted in the current economic crisis

• Lessons can be learned from that too

• Nevertheless the economy still exhibits many sectoral strengths

in manufacturing, particularly high tech

Conclusion

• The debate about the causes of the crisis and our

future development rages on in Ireland

• For those interested some interesting websites

containing these debates are:

• www.progressive-economy.ie

• www.irisheconomy.ie

THANK YOU!