Friday, 29 January 2010

There are smarter ways to economic recovery

Stephen Kinsella: The smart economy is a nice idea, perhaps even a good idea. But like most nice ideas, when exposed to reality, the smart economy just breaks down. The smart economy as a concept takes no notice of the detail: who is looking for what type of job right now, and how long will it take those people to train for new ones? When confronted by the facts, we have to augment our industrial development strategy if we want to protect the real, on-the-ground, economy.

A smart economy is supposed to drive economic growth by bringing in or creating 'high value added' jobs for well-qualified people, who, because these jobs pay really well, make and spend lots of money locally, and pay lots of taxes, thus boosting the local and national economy. The smart economy idea has merit, but if we created the smart economy in full, no-holds-barred, tomorrow, if the smart economy succeeded beyond our policy makers' wildest dreams, it wouldn't help most of the people in the Mid West region who are unemployed for 3-5 years. This is because the idea of the smart economy is at variance with the facts of the type of unemployment in the Mid West right now.

The fact of the matter is that most of those newly unemployed come from construction and services, and will require significant and costly retraining, which may take years, to make them elligible for 'smart economy' jobs, even if those jobs were plentiful. The reserve of labour the Mid-West has right now, to be clear, is best helped by intensive retraining and retooling of a portion of the workforce, while providing state-stimulated projects to help workers and the local economy while retraining. Three infrastructural projects with long-run benefits to the region that are shovel-ready are the Links project, the expansion of Foynes port, and the Regeneration project, not to mention the 20+ recommendations of the Mid West Taskforce. Implementing large capital projects concurrent with up skilling, retraining, and business development programmes takes care of the time lags involved in training workers, boosts the local economy, and does not overly harm the debt: GDP ratio of a country running headlong into +100% debt: GDP territory in any case. The question to answer when thinking of borrowing for these types of projects is: does the long term social benefit exceed the long term social cost? If the benefits are a halt or reduction in the increase in unemployment, the creation of new capital and a reduction in social maladies like poor health and lawlessness, combined with an increase in local consumption and investment, coupled with the retraining of a large portion of the unemployed workforce, then, set against the cost of borrowing a fraction of the cost of NAMA's €54 billion to achieve those ends is, for me, worth it. I'd welcome any costings on such projects--if the long term benefits turn out to be less than the costs, I'll shut up.

You might ask why the MidWest is different, why it should receive special treatment ahead of other regions with similar, if not worse, problems. The answer is historical. The MidWest has underperformed economically relative to the rest of Ireland throughout the boom years. There are many reasons for the region's underperformance, but the fact remains. To focus exclusively on creating high-value added jobs is to disenfranchise tens of thousands of unemployed persons in the Mid West region, because they just won't get those jobs. The smart economy, rather than helping the newly unemployed, has hurt them, by diverting funds which could have helped them to other uses.

I'm not arguing for a return to the days of the construction boom: those days are gone, and good riddance to them. I'm asking that we look squarely at the data first, talk to people on the ground, and ask them what they need. Couple that to local and international expertise, and get something credible, accountable, and practical started inside of 6 weeks. Not 18 months. Not 24 months. Certainly not 3-5 years. Our unemployed can't wait that long.


Proposition Joe said...

To focus exclusively on creating high-value added jobs is to disenfranchise tens of thousands of unemployed persons in the Mid West region, because they just won't get those jobs.

But surely they'd be in with a shout for the knock-on service/retail/construction jobs generated by the consumption associated with those high-falutin' smart economy gigs?

Even if its just building another folly to massage Don Barry's ego ;)

Seriously though, isn't this trickle-down effect at the core of the smart economy strategy?

In fact, hasn't it been at the core of the FDI strategy since we realized that maybe Fruit of the Loom wasn't such a great idea after all.

Michael Taft said...

Stephen - very positive post. Tthe late Paul Tansey commented that if you want a 'smart economy' you should start with a 'smart society'. On this basis he argued that more gains could be made by investing into early and primary education. Smart people become smart entrepeneurs, smart innovators, smart public servants, etc. In this regard, retraining and upskilling is part of a smart way to create a smarter society / economy. Therefore, invest in people; the returns are good. Smart business.

Rory O'Farrell said...

To be honest I feel there is a slightly racist underpinning to the notion of the 'smart economy'.

Basically the logic of the 'smart economy' requires highly educated and intelligent people to work in IT and other 'smart' sectors. The notion is that developing countries will not be able to compete in these areas, so we will not have to compete on wages. However there are two main problems with this.

1) 'Knowledge' has extremely low transportation costs. If I have a problem with my computer someone from India can often fix the problem. If I need some accounts done or legal advice it does not really matter if the person sending me the email sends it from Dublin or Dehli.

2) (the slightly racist reason) Why can people from India not be highly educated? I accept that Ireland has a good education system, though we are weak on maths, science, and languages. However, even if only 10% of Indians got a decent education it is still 100 million people who will compete directly with Irish workers. Also subjects that are at the core of the 'smart economy', such as maths are relatively cheap to teach.

I am 100% in favour of promoting higher technical education, but lets not fool ourselves that this part of the economy will somehow be elevated above the rest.

Proposition Joe said...


Basically the logic of the 'smart economy' requires highly educated and intelligent people to work in IT and other 'smart' sectors.

Yes it does.

But the key point you miss is that no-one ever said those smart people must be ethnically Irish. We only ask that they work and innovate and pay taxes in Ireland.

Look around any IT firm in Dublin and you'll find as many called Sergey or Suresh as there are named Cian or Aoife. In fact, I'd venture that IT would compete with the health sector as the most ethnically diverse professional-grade occupation in the country.

Stephen Kinsella said...

@ prop joe,

I've never been convinced by the logic of trickle down economics--the same people who espouse the view also talk about us having a fiscal multiplier of, at most, 0.4, according to Perotti et al from CEPR in 2009. Also, most of the models I've seen where these effects get taken care of seriously don't work in 'real' time, meaning the 'trickle' when it comes, might come after a generation or two, not much help to those unemployed right now.

I'm pretty sure there's a substitution cost I'm trying to pick out here, in funding one type of productive activity above another-of course there should be, and must be, an overlap between training for future competencies, and specialised service provision now (like Links, regeneration, etc), but refocusing efforts on really helping the people who are unemployed right now, who I speak to, rather than repeatedly chanting 'smart economy, smart economy'.

It's funny that you mentioned Fruit of the Loom--the first example around 2004 that textiles were never going to be the same again. As for who gets the smart jobs when they come, I don't care to be honest. If those jobs are in Ireland, or better yet, if those companies are Irish, it's all good--that's a trickle I'd believe in :)

Antoin O Lachtnain said...

The Fruit of the Loom story is actually more nuanced than is sometimes stated. I hasten to say that I have not evaluated this in detail or listened to all sides, but having spoken to people in the company on the HR side, I have heard that FOTL could have had a future in Ireland. The reason was that the company had already sunken so much money into the plant, and there was a fair amount of automation in the operation.

I would say that the big problem that FOTL faced was competition in the labour marketplace with the building industry. There were alternative jobs available with better wages or conditions. The version I heard from this particular person was that it was difficult to arrange weekend shifts (which were required to allow the manufacturing process to run continuously. The process involved a furnace, and for maximum economy, the furnace had to run seven days a week)

Buncrana and Campsie had particular advantages for this type of operation as well as the sunken investment. I am certainly not saying that it would be viable to open a textiles factory from scratch now.

Antoin O Lachtnain said...

I also have to say that there is an important point here. We have to find jobs for all these unemployed people in areas like the mid west. This is not a focus of government policy, and it should be. So far, unions are not very interested in job creation either.

I think that this should be done by making it more economically attractive to establish and grow businesses in these places. I do not think that starting up big building projects which are not really justified by medium-term demand is the way to do this. I do not know anything about the Links project. However, I do know that traffic from Dublin Port is way down, which indicates to me that there is little domestic demand for developing another port at Fownes.

One thing about smart economy jobs - they depend on quality of life. A lot of our cities do not have good enough quality of life to attract the most skilled workers from abroad. It makes sense to spend the money we get in tax from multinationals in improving quality of life for those who work for them. But a lot of that is simple incremental development like having fast, efficient bus and other road transport services and coherent planning, rather than complicated, major 'big-dig' style projects.

Rory O'Farrell said...

@ Prop Joe

But why do these workers come to Ireland? Would it not be cheaper to establish an IT cluster in India. I just feel that a lot of smart economy talk is hype.

We should not neglect traditional sectors of the economy just because they are boring. The food sector is the meat and two veg of the economy after all.

Antoin O Lachtnain said...

There is also an issue of cultural 'fit' and sensitivity. For example, the Dublin office of a well known international IT firm managed a major pensions-and-benefits project for a large European country. The Indian programmers, particularly those based in India had a hard time grasping the idea of the welfare state to put it mildly. In India if you stop working, you don't get any money.

Cultural fit in the European and American context is an important strength of Ireland.

Food as the core of the economy? I don't think the figures bear that out, either as an employer, a contributor to GDP or to tax. Our wages are very high for sustaining agriculture in particular. There is very little growth to be had in the food area. What growth there is will come from the 'smart' (that awful word again) components - marketing, positioning, traceability and so on.

Rory O'Farrell said...

@ Antoin O Lachtnain

Regarding food, are you including food processing? I think the problem with our food sector is that it is over dependent on the UK. We should focus more on the continental market. Though I don't often agree with Jim Power, the last chapter of his book is interesting. He details, far better than I can, the potential of the boring sectors such as food and tourism. I agree we can make the food sector 'smarter' with traceability and so on.

Regarding India, I suppose there are some areas where we have a 'cultural' comparative advantage. Is this enough? Maybe some smart Indian programmers will come to Ireland, learn these 'cultural' aspects and establish his own company in India.

I do think we should put resources into IT and science, however this will be a global market with low/zero transport costs and fierce competition. I feel we need to be more focused on what our niché will be, a niché that matches with our comparative advantage in some area. Perhaps applying IT skills to agriculture, such as selling our traceability technology internationally.

Antoin O Lachtnain said... - it's only 10 percent of employment incuding food processing, although as a proportion of net foreign earnings it's 25 percent. It's hardly the meat and veg. It would require very big export growth to add any signficant number of jobs.

What advantages do we have viz agriculture? Our labour costs and our energy costs just seem too high for it. Ownership of the land is very fragmented. Food is actually a much more globalized commodity than IT services. There is a lot of talk about food miles but the reality is that shipping by sea between continents is quite cheap compared to the cost of shipping by road or rail locally. Food is really cheap in Asia.

For sure it is important, but you wouldn't want to be depending on it to make a lot of jobs.

Rory O'Farrell said...

@ Antoin O Lachtnain

Food sector - meat and two veg of the economy.

It was a pun. Like saying apples are at the core of the economy.

My point is simply that food is important, and also 'smart' sectors of the economy. We have an natural advantage in fresh dairy products that can be improved. You mention some areas where it can improve.

I feel the 'smart' economy is a vague term used by politicians. Now if they said we want to build an international reputation in a specific sector of the 'smart' economy I might be more convinced of its benefits.

Proposition Joe said...


But why do these workers come to Ireland?

To earn more and get better experience.

Possibly even seeking a better life for their families (though in that case they'd be best advised to keep on trucking and take a rain check on our little under-developed part of the world).

Would it not be cheaper to establish an IT cluster in India.

Yep. Darned globalization!

So we must play on our advantages as best we can. Closer linguistic and cultural affinity with the US and a more convenient timezone. Not to mention a decade head-start in building up an innovation ecosystem. Though we've thrown much of the latter advantage away, by allowing our pipeline of high-quality tech grads go to pot in the early to mid noughties.

But I must say I find your original point on racism just a tad bizarre. Seems to me its like saying we shouldn't play Nigeria at football, because believing we're better than their team is bordering on racism. Competing to win and believing we've the potential to be better than another country is not in the least racist, regardless of the racial make-up of our competitors.

Rory O'Farrell said...

@ Proposition Joe

Re: racism thing

The word racist was probably a bit too strong. However some people I have spoken to on this issue are underestimating the potential competition from India. They feel that Ireland is somehow sheltered from such competition.

So basically we have three advantages that can be used for IT. Culture (which I think is a bit wishy-washy, but if you work in the industry and think it is important, fair enough), a head start (though we are behind on broadband) and time-zone. We share our timezone with some African countries, so maybe I should stop worrying about India and start worrying about Cape Town.

Your soccer analogy is interesting. We have a potential to 'win', and we should compete in this sector. Of course any victory in soccer is fleeting. Also I wouldn't want we put all our hopes on soccer, and neglect hurling, Gaelic Football, Rugby, cycling etc., which people not good at soccer (or the smart economy) have aptitudes for.