Tuesday, 17 November 2009

Where will the jobs come from?

Michael Taft: Such is the focus of the debate on deficits, borrowing and related fiscal issues, we are in danger of consigning the issues of recovery to some far distant place, or even to cliché. There is a sense that, if only we can put our public finances right, then investment and growth will follow (‘if you cut it, it will grow’). This is contestable.

Another generalised prescription is that we must return to ‘export-led’ growth. While, of course, a small open economy depends to a much larger extent on its export sector, and while there is no doubting that the economic boom was initially rooted in export-led foreign direct investment, there is little analysis of ‘how much’ and ‘to what benefit’. Here’s one small example.

Much emphasis is put on the future role of service exports or internationally trade services. Davy, for instance,is quite upbeat about the prospect of ITS growth:

‘Ireland is ideally placed in this area as a result of its ready supply of graduate-level labour. . Service exports have been quite resilient since the recession began . . . We expect services exports to recover in the next year as global recovery gains momentum, albeit that growth may not be quite as stellar as in the period 2002-2007. The expansion will initially be led by software/IT, business services, transport and tourism.’

Hopefully, this will be the case but can we extrapolate from past performance to see what this will mean for employment creation – for that is the ultimate bottom-line. For we may end up with export-led GDP growth, but if it has little job-creation content, we may end up ‘holding our position’ but otherwise enduring a joyless, jobless recovery.

The following is taken from Forfas’ agency-assisted statistics. The agency-assisted data doesn’t include the IFSC, tourism, transport and communication sectors. Still, the Forfas data captures nearly 60 percent of total service exports, covering computer and related activities, R&D, financial services, education and business services.

During the 1990s, employment in this area increased substantially. Between 1996 and 2000 employment increased from 25,000 to 63,000, reflecting the substantial influx of FDI on a small base. However, between 2000 and 2005, agency assisted employment increased by less than 8,000 in this sector. This is despite a strong export performance of a 30 percent increase.

Davy suggests that growth in this sector will not be as ‘stellar’ as the 2002-2007 period, which is a reasonable assumption since global demand will struggle to return to pre-recession growth rates. If so, what does this say for employment creation prospects in this sector? During part of this stellar period, 2000 to 2005, agency-assisted employment increased by less than 2,000 per year. Even counting down-stream job creation, we’re not look at heavy numbers for sectors that make up nearly 60 percent of total exports.

And this is the problem. When we examine export-led employment growth prospects for the future, we come up against limited numbers. This is not an argument for neglecting or abandoning this area; indeed, it is an argument for taking a closer look at the composition these sectors. One thing we come up against is that, like the goods sector, service exports are dominated by foreign-owned multi-nationals. Indigenous enterprise made up only 7 percent of export value.

Even more unnerving is that during the entire period 1995-2005 – capturing the substantial increase of the 1990s and Davy’s stellar period –indigenous enterprise only managed to create 16,000 jobs, or 1,600 per year. Again, even with spin-offs, we’re not talking substantial job creation.

The usual prescription is that, when global demand increases, our economy will start to take off (especially if we can knock off about 5 percent of our nominal wage bill – despite the fact that wages here already relatively low). That may well be the case, but it may not automatically translate into job creation if historical patterns are anything to go by.

What will be needed is more interventionist policies into our economic base – particularly, our indigenous sectors. Relying on ‘market-led’ growth will only take us so far and not very far at that.

But, more importantly, we will have to go beyond the reliance on export-led growth. This will certainly be part of the equation. But without the construction/property-led employment growth during the middle part of the decade, where are the jobs going to come from?

That’s a question we haven’t even started asking.


Michael Burke said...

How about:

1. Increasing govt. R&D spending so that it no longer fails to meet its own (deeply unambitious) target of 2.5% of GNP compared to the EU target of 3% of GDP

2. A programme of home insulation and micro-energy generation which gets unemployed builders off welfare benefits and back paying taxes, reduces the energy bill and meets carbon-redction commitments

3. Large-scale govt. investment in broadband capacity and availability for a significant boost to productivity, maybe training some of the mass of unemployed under-25s to do it?

I know, I know, we're broke, we don't have the money, were paying out €N bns a minute, we have large banks to bail out, etc.

But all these are revenue-producing measures; they will lower the deficit.

Not doing them is like not going to work so you can save your bus fare and lunch money.

Mack said...

@Michael Burke

WRT to #2, why aren't homeowners purchasing these from the market today (i.e. why is a demand-side subsidy necessary)?

Paul Hunt said...

No need to panic; Bord Gais is on the case and is investing more than €2.5 billion over the next 5 years with 2,000 construction jobs and 250 sustainable jobs in a household energy efficiency drive. Last year it invested more than €300 million and was able to finance this from cash flow and by dipping into its cash reserves while also paying off €60 million of debt. It's just a little unfortunate that most of this up-front cash financing is being, and has been, provided by consumers via the excessively high prices set and revenues awarded by the energy regulator.

And we wonder why the price level of household consumption is 20% above the average for the Eurozone.

Michael Burke said...

@ Mack

Maybe; falling incomes, fear of job losses, fear of the forthcoming Budget regarding both, lack of funds for capital outlays, low retirement incomes, low welfare incomes, low part-time or student incomes, high levels of personal debt, consideration that they might have to emigrate for work and consequent reluctance to purchase investment goods with a long pay-off, etc.,etc.

The usual consequences of recessions on private investment decisions.

Mack said...

@Michael -

Do the savings cover the costs? Would a loan-system run by Bord Gais or ESB be a feasible way of implementing someting like this?

Michael Burke said...

@ Mack

No, on their own, the savings wouldn't cover the direct costs. Or they might, but only over the very long-term (for insulation maybe 25 years, micro-energy maybe quicker, broadband probably quicker still).

However, the key factor is that the actual costs to the state (or, taken broadly, if the para-statal entities such as ESB or Bord Gais are included) are hugely diminished by the multiplier effects; reduced benefit payments, higher income tax receipts, VAT returns on most expenditure, and then the same effect again from all the areas in which the money is spent.

Once those are included, the deficit is reduced within 2 years by investment.

On energy consumption, a low-interest loan to the landlord can be a feasible way of running a system like this. Or it can be a lien or charge on the property, not the owner-occupier, which might otherwise introduce job immobility. The charge could be to the lender, with the government having provided the upgrade to the property, and the lender defraying the cost to the mortgagee over the life of the mortgage.

But these are only suggested areas. Michael Taft's challenge is to come up with loads more where the same logic applies. Investing to rescue the deficit and create jobs.

Mack said...

@Michael -

Well, here are some more -

#1 Build a proper metro system in Dublin

#2 Designate a special retail area along the border, build shopping malls, hotels, warehouses & business parks, ensure it is serviced by world class broadband infrastructure, and road / rail infrastructure. Within the Special Retail Area -- Set VAT at 5%, abolish VAT on all goods where zero VAT rates apply elsewhere in the EU or NAFTA, reduce commercial rates to zero, allow retailers to operate entirely in their choice of Sterling, Euros or Dollars. Use the area to reverse the flow of shoppers heading north & to attract Internet retailers (established or startup)

#3 Build a large theme park somewhere in Ireland, reduce the airport tax to zero, reduce taxes on goods purchased by tourists - in particular help pubs and restaurateurs reduce prices. We seem to have a problem of overcapacity in the hotel sector too..

#4 Scrap all property related tax relief schemes (incl. all mortgage interest rate relief, rent relief etc), introduce better tax relief schemes for Angel and Venture capital investment (FinFacts report Irish Venture capital investment levels a tiny fraction of genuinely innovative economies such as Israel)

#5 Large scale government investment in technology with a goal of increasing public service efficiency (e.g. software & web services that would enable departments to function, in the longer term, with less staff. Hardware / equipment that will have similar effects - on the Late Late Show a few months back, a machine was mentioned that helped paraplegics exercise - replacing the work of 3 Physiotherapists)

Proposition Joe said...

@Michael Taft

Are you and/or Forfás assuming that a high and _static_ proportion of new high-tech jobs are agency-assisted?

That's not quite how I assumed the model would work. Rather I'd expect a "seeding period" when a very high percentage of the new jobs created are agency-assisted, followed by a more mature phase when the managers and technologists who cut their teeth in the first wave of tech companies will independently go forth and multiply, using their skills and contacts to create a second wave of VC-supported startups.

In this maturity phase I'd expect to see a decline in the proportion of new jobs that are agency-assisted. Thus a static number of jobs born with Forfás acting as mid-wife doesn't necessarily imply a static total of new high-tech jobs.

Antoin O Lachtnain said...

What alternative possibilities, other than export-led growth are there? We might be able to increase internally focused service-oriented growth, but only if we cut the wages in the sector (we would have to make actual cuts, since devaluation is not open to us as an option).

It is true to say that we are not innovative enough and not developing a satisfactory export oriented economy. But is it realistic to think that government intervention can really make our country more innovative?

I think it is a great idea to make our public service more efficient and use less staff. We should aim to have the most efficient public service in the world. However, this won't create any new jobs, it will actually get rid of them. Improving efficiency through infrastructure projects will also have the same effect.

It is fine to talk about Israel, but a lot of their innovation is actual security and defence led. Irish voters seem reluctant to countenance going back to war with our nearest neighbour.

Mack said...

Antoin O Lachtnain -

However, this won't create any new jobs, it will actually get rid of them.

In the long term, yes. But, investing in that type of infrastructure now would create jobs today & in the future that could mean higher wages (due to higher productivity) in the public sector, coupled with less staff - which could mean lower taxes, which means more money available to be spent in the private economy. It's investment that would give a financial return to society.

It is fine to talk about Israel, but a lot of their innovation is actual security and defence led.

A hell of a lot of it is also in non-military software and Internet companies. See the list below of companies listed on the Nasdaq (which doesn't include the very many startups that get bought out - e.g. ICQ, Yedda etc)


antoin O Lachtnain said...

An enormous proportion of those are military, in particular, an awful lot of the networking/communications ones. Very many also have a lot of military trained personnel. I am not saying that we can't do it, but we have to be realistic about how the technology industry is structured. The military sector is a major customer. We have to find an alternative sector to understand and target.

Less staff in the civil service means less jobs. It will also mean the overall pay bill for the public sector will cost less as a result of greater productivity. It will result in more labour available in the economy generally, and unless we find an export market, this extra labour will drive down wages generally. If civil servants don't have as much money to spend, that will take money out of the private economy, all other things being equal.

If you want to improve productivity in this way in the public service, why wait, why not start to do it now? Outsource large swathes of the administration to the private sector. The private sector would then take the risk of all the various IT and organizational change projects, rather than the taxpayers. The State has not had much success in managing risky IT projects in the past. (The private sector is not that much better, but it is a bit better.)

The state could actually attract an immediate payment if it were to outsource in this way

This is something that could be done in months or years if the political will were there.

In order to invest in infrastructure or technology projects today, we will have to make savings in other areas, since we cannot borrow any more money. That essentially means cutting back wages and closing services.

Martin O'Dea said...

Need a little help. Two questions. 1. If our health spend, education spend and welfare spend can all be seen as rating below average as a proportion of gdp where do we spend heavily. 2. Com McCarthy on tv last night taken from oireacthas committee. Regarding a huge number of the arguments put in this website, he said of stimulus etc. @Idon't believe in Santa Claus, or the tooth fairy or fiscal stimulus packages...

This gentleman and many others feel that the theory that you do not now cut, but try to raise the income side of the balance is simply delusional.
How do I explain this to myself.

Colm McCarthy is a pathological Liar?
Colm McCarthy deluded himself by an extended period of groupthink?
The thrust of your arguements which I support so strongly are wrong/simplistic/naivee etc.?

Further question - can you take the counter position and as an exercise try to argue for it - just to loosen up any tendency towards groupthink here.
Directed really at Micheal(s) Burke and Taft; or anyone else that feels they have an answer

Michel Burke said...

@ Mack

1. Is much easier to answer. Except for one area Ireland doesn't spend beyond the EU average in any area. Consequently the aggregate spending is also way below average. (The exception is on the bank bailout, where measures to date are equivalent to 232% of GDP, more than the 4 next worse EU countries put together).

2. I cannot speak for individuals at all and certainly wouldn't impute any base motives.

The views you report are, as you know, very widespread in Ireland. The same is not the case in the rest of the EU, where they are very much a minority view. As pointed out previously, a host of EU members are engaged in efforts to fiscally stimulate their economy, including Germany, France, Spain, Sweden, etc.

I couldn't say whether Mrs Merkel believes in the tooth fairy, or whether Pres. Sarkozy believes in Santy. But they don't strike me as the type.

Proposition Joe said...

But both Merkel and Sarkozy have significantly less open economies to play with.

Cash for clunkers makes sense if you've confidence that a bunch of locally-made Beemers and Opals wil be bought.

Investing in infrastructure like high speed rail makes a lot more sense if the technology is developed within your borders.

... etc., etc.

Michael Taft said...

Proposition Joe - a considerable proportion of our industry and ITS are agency assisted. This ssistance is not just for start-ups or developmental (though Enterrpise Ireland has special programmes for them). They also include a range of services such as export markets, domestic supplies, trade fairs, legal/tax advice, etc. Much of this is low-level, especially for established companies. But it means that our agencies are connected with a large section of companies. The IDA alone list 807 companies in its databse but that wouldn't be the complete list of agency assisted. These would be the big hitters in terms of exports, value-added, employment, etc.

As to why others take up a different position - well, it would be unusual if otherwise. However, the problem is that the debate is 'shaped' in such a way, that counter-arguments struggle hard to get heard - and usually fail through no fault of their own. If it was a real debate, then those who are opposed to stimulus and, generally, greate intervention by the public realm, would have to justify their arguments on the basis of facts. Instead of now, where assertion and unsubstantiated dismissal reign

Martin O'Dea said...

Michaels, Do you get how difficult it is fro me to agree with you and I agree with you?

If that is the case then the level of consensus, the certainty with which people dismiss other arguements is terrifying. This is Nazi economics. If the land really lays as you describe, even mostly, we have that terrifying environment where disagreement is not countenanced and certainty in a particular path (considering having any certain path is the wrong path) has got us to a point where we can unbeknowns to ourselves make some really big mistakes.
If what you say about the economics of NAMA, is even partially true then we are in the middle of making that mistake.
It is then, surely, getting to the point where observation is becoming futile.
If there is a strong possibility that we are sailing to an iceberg discussing the temperature and the likelihood of the continuing damage on our journey etc. is not enough when we have sighted the iceberg. Some politician is going to have to stand up and scream stop!!
I am not sure that this is available anywhere right now - even the labour party.
In a nostalagic step, any FF or Green politician passing by this bit of blogosphere like to set us straight