Has recession in Ireland been caused by bad luck or by bad management? Bad Luck says the Government, citing the problem with US sub-prime mortgage lending, which in turn sparked a global credit crisis and recession in the US. Bad Management retorts Fine Gael, pointing to a scale and type of Government spending which depended on a housing boom and now must accommodate to a housing bust. When political heavyweights wrestle, mere economists must have a care not to get trampled underfoot. The classic even-handed economist would suggest that bad luck and bad management both contributed to the present recession, without offering an opinion on their relative contribution. Such prudent timidity may pass for sound judgement when looking at the recent past, but it offers little guidance to the crucial question in relation to the future viz. when Ireland's luck turns (i.e. when the US recession ends), will Ireland's GNP resume growing at 3 - 4% p.a.?

Past Tiger growth

Celtic Tiger growth had two phases, from 1994 - 2000 and from 2001 - 2007. Francis Ruane, director of the ESRI, characterises the first period as one in which world Foreign Direct Investment (FDI) rose, FDI into Europe as a share of world FDI rose and Ireland's share of FDI into the EU rose: "we got an increasing share of an increasing share of economic activity". In addition, domestic costs rose moderately, sharply increasing competitiveness. This in turn caused a virtuous circle of increasing employment and increasing economic growth. After the dotcom bust in 2000, FDI into Ireland and exports from Ireland stagnated. Growth continued through domestic sources - mainly new housing and consumer spending, funded by borrowing. With borrowing costs low and with labour markets reaching full employment for the first time ever in Ireland's history, both consumers and Government came to believe that the Celtic Tiger possessed, as the ESRI put it, "an aura of invincibility". The problem was that this growth in internal resources was accompanied by a sharp deterioration in Irish competitiveness in external markets. From 1995 - 2000 the Central Bank's usual measure of external competitiveness showed an improvement of over 8%. From 2001 - May 2008 competitiveness deteriorated by over 33%, with most of the fall happening in the past 18 months. 

Competitiveness

Almost four years ago, Joe Macri of Microsoft commissioned Paul Tansey - who had not yet abandoned the commanding heights of economic consultancy for journalism - to undertake a study on competitiveness. Tansey showed that sustainable incomes and wealth in a small, open economy such as Ireland's, can only be achieved by selling more to foreigners, rather than (as in the case of housing) by selling more to one another. He recommended that growth in the productivity of public and private services (where most of the increase in employment had occurred) be significantly accelerated. This did not happen. Ireland has no option but to make it happen now. The political debate should move on from arguing that elements of the 1980's are returning to dog us, towards considering how our present inwardly-focussed, weakly-competitive economy can be moved back towards the outwardly-focussed, strongly-competitive economy of the late 1990's. It can be done. If Ireland could move in the past from being the economic basket-case of Europe to its leading economy within a decade, it should also be capable of putting in place a three year programme to roll back half the recent deterioration in competitiveness. Without such a programme to make Ireland moderately competitive, I honestly cannot see how we can return to 3 - 4% p.a. growth, even with an upturn in the world economy. 

Restoring Moderate Competitiveness

Target setting is easy. To achieve a 12 - 15% improvement in competitiveness over three years, Ireland needs to have much better productivity gains and much lower cost increases than its trading partners. Achieving such targets will be difficult. It will require leadership from Government and a common purpose from the other social partners similar to that displayed in the late 80's and early 90's. In framing and implementing a programme to restore moderate competitiveness, the findings of the National Competitiveness Council, which have been ignored in recent years, must be brought centre stage. In the space available, it is possible to make suggestions for improvement in only a few areas.

Government must go beyond merely restraining current public spending and implementing the main infrastructure projects of the NDP. It must lead a radical programme to restore competitiveness.

The unions must be persuaded to keep Irish wage increases below the rate of increase in EU prices, as German unions did in the years after re-unification. To make this less unpalatable, the profit side of the economy must share the pain. Income tax exemptions for individuals should be capped at €20,000 p.a. Some years ago Charlie McCreevy set a maximum figure for mortgage interest relief and neither the sky nor the housing market fell in as a result. As with the US, if an Irish citizen does not pay taxes to support the Commonwealth, she should not be forced to bear the burden of Irish citizenship. The present scandal where tax exiles pay a small portion of their foregone taxes to fund the Special Olympics or the purchase of football jerseys, must cease. Finally, any attempt by the banks - whose importunate lending has caused the high level of private debt - to persuade Government to accept some mortgage liabilities onto the public balance sheet, should be given short shrift.

High Irish energy costs oppress both industrial firms and poor households. The proposal to run the Dublin - Tyrone interconnector underground would add 3.9% to electricity costs, and must be junked. And the recent practice by Government of not directly injecting capital into the balance sheets of the public energy utilities, but instead allowing them to increase prices, must cease.