National Economic

1. National Economic Social Council NESC Lessons Learned from Ireland’s Economic Leapfrog and Current Financial CrisisWorkshop organised by the Reut Institute and TheMarker, 11 January 2011Rory O’DonnellDirector NESCrory.odonnell@nesc.ie

2. NESC The Irish story in outline • De-industrialisation in 19th C • Protection 1932-65 • Opening & growth 1960-1977 • Fiscal & economic crisis 1979-86 • Stabilisation & leapfrog 1987-02 • Credit-driven growth 2004-08 • Crisis 2008-2011

3. From initial growth to crisis • Growth via FDI, trade, public investment but • 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

4. NESC 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

5. 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

6. 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.

7. Consistent Policy Framework Macroeconomic Distributional Supply-side

8. Consistent Policy Framework • European Monetary System leading to the euro • 2. Public finance correction, • focused on debt/GNP Macroeconomic Distributional Supply-side

9. Consistent Policy Framework Centralised wage settlement and negotiated approach to welfare and tax Macroeconomic Distributional Supply-side

10. 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… Macroeconomic Distributional Supply-side

11. 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

12. 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/GNP 1996: partnership & enterprise-level partnership 2002-5: Developmental Welfare State

13. Origin & nature of Ireland’s leapfrog Policy & institutional Export sector European Union Social change

14. Origin & nature of Ireland’s leapfrog 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 Social change

15. Origin & nature of Ireland’s leapfrog 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 Social change

16. Origin & nature of Ireland’s leapfrog • Internal market: • market access • regulatory & market-oriented reform • Structural Funds • Stable monetary environment Policy & institutional Export sector European Union Social change

17. Origin & nature of Ireland’s leapfrog Reversal of population decline & emigration Increased female participation Social mobility (absolute) Rising welfare, but inequality stable Liberalisation, secularisation, pluralisation & individualisation Entrepreneurial culture Policy & institutional Export sector European Union Social change

18. 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

19. 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

20. NESC & partnership in the crisis Agreed account Causes Manifestation of risks Disagreement

21. NESC & partnership in the crisis Ireland’s Five Part Crisis February 2009 Banking Fiscal Economic Social Reputational Agreed account Causes Manifestation of risks Disagreement

22. NESC & partnership in the crisis Competitiveness loss 2002-08 Fiscal reliance on property bubble Global financial crisis & reckless Irish banking Agreed account Causes Manifestation of risks Disagreement

23. NESC & partnership in the crisis Known risks inherent in our international position Risks not identified Risks exacerbated by national policy Agreed account Causes Manifestation of risks Disagreement

24. NESC & partnership in the crisis Wage reduction & real depreciation Fiscal policy Banking guarantees & resolution Job protection Agreed account Causes Manifestation of risks Disagreement

25. Banking supervision: negligent

26. Banking supervision: negligent Fiscal policy: technical issues uncertain • How much genuine regional expansion? • How much economic cycle? • An asset price bubble?

27. 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

28. Current policy discourse The “culprits” Bankers Builders Government

29. Current policy discourse The “culprits” Bankers Builders Government and Partnership & consensus

30. Current policy discourse The “culprits” Bankers Financial Regulator Builders Government and Partnership & consensus The “remedy” Centralisation for fiscal retrenchment Restore credibility & credit Export Including reforms Independent fiscal council Political reform

31. 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?

32. Overall ‘Market’ signals weakened Financial imbalances without exchange rate effects Fiscal errors without bond market (or electoral) cost Wage growth without employment effect

33. Overall ‘Market’ signals weakened Financial imbalances without exchange rate effects Fiscal errors without bond market (or electoral) cost Wage growth without employment effect Institutional substitute too fragmented Financial supervision Within partnership: • Industrial relations v policy • Private v public IR Political-business links NESC-Industrial policy agencies NESC-Central Bank-Dept of Finance EU coordination failure

34. Appendices

35. Appendix 1Irish Industrial Policy

36. Industrial Development Authority Autonomy Close to firms Constraints Upgrading

37. Industrial Development Authority Semi-autonomous agency Pursued industrial development & exports Set job-creation targets Monitor cases thoroughly Used Ireland’s tax advantage Autonomy Close to firms Constraints Upgrading

38. Industrial Development Authority 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 Upgrading

39. Industrial Development Authority • Identified successive constraints on business development: • Capital • Industrial sites • Skills • Telecom infrastructure • Regulatory • Mobilise other agencies • Ignored economic debates Autonomy Close to firms Constraints Upgrading

40. Industrial Development Authority • 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 Autonomy Close to firms Constraints Upgrading

41. 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

42. 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?

43. Forfas IDA Enterprise Ireland Nat. Training Agency N Compet. Council Sci. Foundation Irl. Government Depts. Agencies/firms for roads, elec, telecom NESC Partnership Steering Committee Partnership working groups Nat.Training Agency Government Depts. Labour Relations Commission Two wings of the PPA: Structure 2000-2009

44. Appendix 2Futures Ireland

45. FuturesIreland study 2008-9 Ireland at another turning point Two views

46. Ireland at another turning point – a pessimistic view Economy • On top of the current crisis • The basis of Ireland’s prosperity in jeopardy • New rivals for FDI & other threats to our special status Society Public policy

47. Ireland at another turning point – a pessimistic view Economy Success of last two decades based on social capital & values built over decades Eroded by the very growth they created Society Public policy

48. Ireland at another turning point – a pessimistic view Economy Positive combination of political strategy & social partnership which yielded consistent policy was an historical accident replaced by conflict & media-dominated politics Society Public policy

49. Ireland at another turning point – an alternative view Economy 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) Society Public policy

50. Ireland at another turning point – an alternative view Economy • Evidence of: • cross-fertilisation between wealth creation, society & public policy • problem solving • innovation • systematic review • What is scarce: institutional contexts that allow people to use their capabilities, mandate that they review & offer accountability Society Public policy