Wednesday, 1 July 2009

The Dublin Consensus

Sli Eile: We recall the term ‘Washington Consensus’ as it was first coined in the 1980s. Dani Rodrik summed it up as:
Stablize, Privatise, Liberalise.

Part of the recipe was to get your ‘macro balances in order’
In Table 1 of his paper, Rodrik (a critic of same) lists the 10 Washington Consensus principles as:

1. Fiscal discipline
2. Reorientation of public expenditures
3. Tax reform
4. Financial liberalization
5. Unified and competitive exchange rates
6. Trade liberalization
7. Openness to DFI
8. Privatization
9. Deregulation
10. Secure Property Rights
Sounds familiar?
Rodrik outlines a supplementary list in the ‘Augmented Washington Consensus’ (sounds a bit less familiar) as follows:
11. Corporate governance
12. Anti-corruption
13. Flexible labor markets
14. WTO agreements
15. Financial codes and standards
16. “Prudent” capital-account opening
17. Non-intermediate exchange rate regimes
18. Independent central banks/inflation targeting
19. Social safety nets
20. Targeted poverty reduction

I suggest that there is, already, a real ‘Dublin Consensus’ and it goes as follows:

1. Sort out Banking through some form of toxic-containment (folks differ on the details)
2. Frontload big, immediate cuts in nominal wages in the private and especially the public sectors (real ‘plain vanilla’ cuts and not just voluntary contributions from the judiciary, contrived ‘pension’ levies and various stealth charges)
3. Frontload big, immediate cuts in public spending across the board from pay (see above) to social welfare (‘the highest in Europe’ false claim) to ‘wasteful’ capital projects to other items
4. Bring the low and middle-income groups back into the tax net
5. Downsize and reform the public sector

There are a few supplementaries like privitising some state assets – but the core of the Dublin Consensus is captured in the above five points. This is a real, audible and visible consensus from the pages of the Irish Times to learned articles and conference papers to ‘economics for the simple’ on the public airways – and of course many but not all the comments among our separated brethren on irisheconomy.ie.

By the way, I completely disagree with the view that the ‘left’ is in any way winning the economic argument.

The right is winning hands down and we are looking at, potentially, the most deflationary fiscal stance since at least the 1950s and further erosion in our already weak public and social infrastructure – relative to the standard of provision and living standards people have become accustomed to following the Celtic Tiger.

So, when journalist Sarah Carey
writing in today’s Irish Times argues that the ICTU should roll over and declare:
'Comrades, I have nothing to offer you but cuts and taxes. The deeper the pain now, the quicker all this will be over’
we have to ask:

Is there no other show in town?
Has the Dublin consensus won?

Should we fold up, go home and concede that the logic of market economics, international finances, a failed domestic banking model and an overwhelming media, economics and political consensus that the only path to recovery is through cuts, more cuts, unemployment and dramatic falls in living standards. Nobody likes to say it quite like this – but that is what most people are assuming – there is no other way – we have to price ourselves back into markets, we have to balance the public books fast and hold on until the tide comes back in on an international recovery.
The debate about jobs subsidies is a deflection.

Whether or not you think such subsidies will work is not the point. My original blog questioned the evidence that they would work and implied that other uses of this expenditure would be more effective. At this point in time it is hard to cast judgment since we have no details or analysis beyond a few media leaks. And there is no certainty on where different interests stand on the various issues. The point is that we need to move away from marginal debates about relatively marginal issues to confronting the real issues:

1. Domestic fiscal stimulus versus profound fiscal deflation for 2009-2012/13
2. Skills, innovation and growing the indigenous economy on world markets versus business as usual depending on FDI and a relatively protected and cosseted non-traded sector (as in price controls, costs and rigid work practices in the case of the public and civil service)
3. Corporate governance change versus cosmetic name change
4. Finding another way of dealing with banking rather than bleeding the whole country with a blanket cheque to recapitalise the failed (with the bail-out of Anglo-Irish ultimately costing more than an entire year’s education budget)

This is where the real debate needs to be reclaimed and the Dublin Consensus challenged. Self-proclaimed progressive and left folk including public sectors unions need to get serious about reform of the public service (which is one area where the Dublin Consensus is partially right) – how can we expect people to buy-into Scandinavian tax levels and redistribution policies unless we reform, root and branch, a slowing-moving, under-funded, under-staffed (yes I meant under-staffed) and inefficient public service operating in a very inefficient manner and subject to all sorts of political constraints and centralisation that is out of line with 21st Century public management.

(Glad that progressive economy trumps Grey’s Anatomy).

8 comments:

Anonymous said...

First, I don't know how you can say that point 1 of the 'Dublin consensus' is a point of consensus at all. There is huge division here between the academic economists and the government/DOF. Incidentally, many of the right-wing economists have found themselves on the same side as the Labour party (when it comes to nationalisation!).

The fact is on the banks both right and left are loosing the argument. The government and DOF mandarins are going their own way ( expensive bailouts). It's the Kildare Street - Merrion Street Complex (forgive my not-so-rhetorical flourish here).

Onto what you call the 'real issues'

Point 1 has been covered over at the irish economy blog. They (Karl Whelan and the comments in the thread) were quite specific about how difficult a domestic stimulus would be to implement and how it would not necessarily benefit us. What is your proposal for a domestic stimulus, the actual nuts and bolts now?

Points 2, 3, and 4 have been covered (superbly) on this blog and the Irish economy blog by many contributors. Once again, many fine suggestions here and elsewhere are just not making it into where it matters - government and policy-making circles. More public debate would be nice but influence over the policy-making process is what matters most.

Donagh said...

I think you make an excellent point when you say that it is difficult to cast judgement when there are so few details available apart from media leaks. It means that most of what can be said is guess work, and in the case of the banking crisis there was such a drip feed of information, and inching forward in terms of decision making that criticism has to be guarded, and opinions offered with the usual caveats. That is unless you are Sarah Carey, in which case you can use the Irish Times to say whatever the heck you like.

Proposition Joe said...

Our public services may well be both under-funded and under-staffed, but the individual service providers are also vastly over-paid by any measure.

Unless and until that particular nettle has been grasped, there is no chance that frontline staffing levels can be increased as required nor of a consensus being built for Scandinavian levels of taxation.

Brian Woods said...

Let me get this straight. Our state is insolvent, our financial system is insolvent, many private citizens are barely able to afford necessaries, the FIRE economy has provided approx 20 yrs of Faux Growth, we have had a heroic residential and commercial property bubble, the majority of direct construction jobs are gone - never to be resurrected, together with the service jobs associated with property, energy supplies are at a tipping point, wealth is being destroyed any you guys on this blogsite and the irisheconomy believe that your ideological gibberish and claptrap will assist. You have a bloody cheek, both of ye. If ye cannot analyse the situation for what it is, (a very nasty, permanent, economic declension), ye should all recuse yourselves immediately. We, the citizens of this state, need economic ideologues like we need the pox!

Ireland can be competitive only if we have East Asian wages and service costs. If you do not understand this - God help us. Ireland is 9x% dependent on imported energy. This is a truly disasterous situation. Do you know anything about the Export Land Model of Fossil Fuels? If you do not, the go over to theOildrum and read through their archives. Very sobering.

Finally, you might enlighten your readers by explaining to them that credit begets debt, this debt increases either exponentially, or geometrically (depends how you calculate it), so you need an income stream which increases at a rate slightly IN EXCESS of the compounding debt - else you are F****d!

Growth: What is this? You do appreciate that we live in a finite biosphere, with finite resources - like land, fresh water, energy. Growth MUST stop sometime - yes? So maybe now is that time.

If I sound mad, it is because I am. Ireland does not have a Right-Left Political Cleavage. We do have variants of Right-wing groups who distinguish themselves by wearing specific coloured jerseys - remove the jerseys. Ye are all the same!

Brian P

Slí Eile said...

Brian
Thank you for your fortright comments. The challenge now is to find positive solutions and ways forward to save jobs, grow jobs. I am afraid that seeking to compete with low-wage economies on wages will not work. We can only compete on high skills, flexibility, innovation and cooperation.
I agree with you that a key challenge is to progress in a sustainable way and that economic growth without purpose or without regard to resources cannot work.
What do you think?

Fungus FitzJuggler III said...

Increasing taxes need not lead to Scandinavian levels. They will also need to be properly enforced. The golden circle have been offered amnesty after amnesty. Take off the gloves, guys!

I like what Brian P said about the permanent decline and I agree with him. Getting angry is natural and healthy, Brian!

Given the germ ridden status of our hospitals perhaps hotels could be used for convalescence? Schools might be reduced in number, if appropriate on line schooling is developed, but please do not offer the contract to develop this to any accountancy firm! To compete without descending to sweat-shop wages, we need to change!
Change at the top first!

Brian Woods said...

Sli, Just got back to the keyboard - have a mass of reading to get through!

Thanks for your reply and comment. The principle problem we face is we cannot compete with East Asian economies (EA), their wage and cost bases are much lower than ours. The EAs have a truly massive oversupply of labour, and the resources (plant and capital) to utilize this labour in a productive (and competitive manner). Teeny little problem - natural resources. The faster the EAs expand, the more resources they consume - less for us!!! For each increment the EAs grow, we decline!! Simple maths and physics - hence my comment about the minimal level of wages. I have no ideological axe to sharpen - at least none I can recognise. I am a scientist by profession: I have been interested in finance, economics and energy for the last few years.

We're broke: in debt up to our eyeballs. This debt has to be defaulted - we simply do not have, not will we achieve, the means of production to pay down this debt in a manageable time-interval.

No one relishes the prospect of going from wealthy to poor. Bad career move! However, this is where we are headed. It is a brave or foolish person who recognizes this and speaks out.

We need courageous political leadership(as opposed to strong). The citizens must be told the truth: spinning untruths and lies is politically and socially disastrous. You always get caught out in a lie - you cannot be caught out by telling the truth!

Some suggestions for people to think about:

A Debt Jubilee - very unpleasant
Article 43.2.2 of Bunreacht Na hEireann - private property
Cancel all Credit Cards - use Debit
Build a rail network from Wicklow to Drogheda - around the coast of the island - avoid Dublin completely - also a link from Derry to Cork (straight-line!)
Transfer 50% of population from Eastern Corridor to underpopulated areas (provided the land has the carrying capacity)
Plant thousands of hectares of broadleaf and fruit bearing trees
Clean up our fresh water sources
Cull 95% of the beef herd - more tillage
Set a min income - pay it to all citizens, tax all subsequent incomes at 15% - no reliefs or breaks, subsidies, allowances - exiles shall pay this tax also or they surrender their passport
Change status of Army - to a Corps of Engineers - any person on welfare can be drafted to work on infrastructure projects (as mentioned above) - ditto for public services - you get paid your welfare + a free travel pass (seriously!)

I have lots more ideas (I know many are sheer madness) - but THINK them through. You never know what might pop up. As I said - we're broke! - and 30% of something is preferable to 100% of nothing.

Brian P

Tom S said...

I want to hear the rest of Brian's ideas. None of those seem far-out to me...There's a growing minority who understand how completely boned we are, without a substantial shift...this isn't just a business cycle to manoeuvre through.