Sunday, 24 October 2010

'Smart economy' is crucial for future jobs growth

Proinnsias Breathnach: Recent calls for a shift in the focus of Irish economic policy from the promotion of a “smart” economy to the cultivation of conventional manufacturing have attracted considerable media interest. In an address to the Lemass International Forum, Seán O’Driscoll, Chief Executive of Glen Dimplex, maker of electric heating appliances, argued that, during the Celtic Tiger era, Ireland had neglected its manufacturing base – in effect, we had “stopped making things” – in pursuit of “financial engineering” and what he termed the “imaginary” Smart Economy.

Meanwhile, according to media reports, economist Colm McCarthy, Chairman of An Bord Snip Nua, told the Richard Cantillon School that Ireland needed to rebuild its light manufacturing capacity which, he argued, was the driver of the original Celtic Tiger boom. This, he said, offered far greater prospects of replacing jobs lost in construction, retailing and manufacturing than the kinds of jobs likely to ensue from the smart economy policy.

David Begg, General Secretary of the Irish Congress of Trade Unions, followed up with the view that, in recent years, the services sector has grown rapidly at the expense of manufacturing and that it is naïve to think that the “so-called” smart economy could solve our employment problems.

All three arguments are at odds with the facts, display ignorance of how economies function to create employment, and appear unaware of how the Irish economy has developed over the last 20 years.

For a start, the idea that manufacturing and the Smart Economy are mutually exclusive is simply not true. The government document, Building the Smart Economy, states quite clearly that “Manufacturing will continue to play a fundamental part in our economic future, with an increasing focus on securing competitive advantage through innovation, R&D and design”.

The idea that manufacturing and services are mutually exclusive is equally incorrect. A key feature of modern advanced economies is the increasing integration of manufacturing and services. Ireland’s leading services export, software, can only work on manufactured hardware. A large proportion of the business services which are our second most important services export are performed by manufacturing firms.

Thirdly, Seán O’Driscoll’s notion that “we had stopped making things” is patently invalid. Between 1991-2000 – the boom period of the “real” Celtic Tiger – Irish manufacturing output grew by 250% in value terms and 225% in volume terms, over twice the overall growth rate of the economy. In this period, manufacturing’s share of total value added in the economy rose from 15% to 23%.

In one of the main drivers of this growth – pharmaceuticals – the average salary in 2000 was two thirds higher than the average for all industry – hardly indicative of the “light manufacturing” which Colm McCarthy reckons was the main driver of growth in this period. While this term might apply to a lot of the work in the other main growth sector (office machines & computers), this sector also includes major high-tech employers such as Intel, HP and IBM where the bulk of workers have higher education qualifications.

After 2000, Irish manufacturing continued to grow strongly – by 43% in volume terms between 2000-2008 – with medical devices emerging as a new star performer. In 2009, manufacturing industry (including power generation) accounted for over one quarter of gross value added.

Seán O’Driscoll’s notion that Ireland’s export competitiveness has been undermined by excessive wage growth is entirely erroneous. According to OECD data, unit labour costs in Irish manufacturing fell by 10% between 2000-2008 compared with an 8% fall in the USA and an increase of 3% in the EU at large. Not that labour costs are a major factor in the total costs of Irish manufacturing in any case – wages and salaries accounted for just 10% of total input costs in the sector in 2007.
David Begg’s view that services have grown at the expense of manufacturing is clearly not true. Even then, the perception that services are in some way inferior to manufacturing as a source of economic and employment growth is to seriously misunderstand their role in the Celtic Tiger phenomenon. Services exports hardly existed in 1990, yet ten years later they accounted for one quarter of total exports and employed over 68,000 workers at average pay levels which were significantly above those in manufacturing.

Since 2000 export services have gone from strength to strength, accounting for almost one half of total exports in 2009 and more than doubling their share of global services exports between 2000-2008. Nor do these services simply involve “manipulating money”, as dismissively suggested by Seán O’Driscoll. In fact, only 28% of services exports are IFSC-related, and lag well behind the two main export categories, computer services (including software) and business services.

Colm McCarthy’s idea of converting unemployed construction and services workers into manufacturing workers is far-fetched. In Germany, one of the most industrially-oriented of the advanced economies, manufacturing accounts for less than one fifth of all workers while only about one third of manufacturing workers in export sectors are unskilled. Large-scale employment in unskilled manufacturing is simply not an option in advanced economies.

In a small open economy such as Ireland, broadly-based employment creation depends on establishing a foundation of exporting, high-value, activities and then maximising the extent to which the spin-offs from these activities (input purchases, consumer spending by workers in export sectors) are retained within the economy. The replacement of the unskilled foreign branch plants of the 1960s and 1970s with more sophisticated, high-salary, activities in the 1990s played a key role in the rapid growth in overall employment in that decade.

Further export growth in the 2000s, in both manufacturing and services, has continued to support employment expansion – even with the collapse of the construction sector and its knock-on effects, there are still 135,000 more people employed in 2010 than there were a decade previously. The current unemployment crisis is attributable almost entirely to the bursting of the construction bubble of the early 2000s. By March 2010, construction employment had fallen by 130,500 from its peak in 2007. Adding in spinoff employment, the total job loss came to about 235,000.i.e. over 90% of the total fall in employment in this period.

What this means is that around a quarter of a million jobs were created in this country on the back of what was an unsustainable construction bubble and were duly wiped out when the bubble burst. In essence, these jobs comprised an excess above and beyond what the real productive economy was capable of supporting. Given the current depressed state of global markets, it could take up to twenty years to clear this excess (much of which will probably emigrate or leave the labour force in the meantime, a process which is already apparent).

Special measures are needed to provide meaningful employment for this overhang of excess unemployment, and there has been little sign of creative action from the government on this front. What is certain is that any action designed to promote low-skill manufacturing will produce minimal results. In an address to the Royal Irish Academy last February, Craig Barrett, former Chairman of Intel (operators of Ireland’s largest manufacturing facility) called for an expansion of investment in education and R&D in order to create the “smart people” and “smart ideas” which were key to Ireland’s future competitiveness. Moves to restrict the growth of the high-tech, knowledge-intensive activities which the Smart Economy entails will prove disastrous for general employment creation in Ireland over the coming years.


Donagh said...

Great post Proinnsias, very glad to see this. There's more evidence that investing in information technology produces more growth in developed economies than investing in lower skilled "blue collar":

Michael Burke said...


Very good post, and very timely.

This analysis also highlights the fallacy of opposition to investment to boost the economy based on the idea of 'leakage' - the overwhelming bulk (90%)of Irish imports are inputs to which value is added in Ireland, creating jobs incomes and profits here.

That way lies autarky- which has been tried here and failed.