Wednesday, 20 July 2011

Enclave-led recovery

Michael Taft:The Enterprise Minister was extremely upbeat about the recent CSO report that the trade surplus had grown. Mind you, it was not due to rising exports – in value terms they fell back slightly over the previous month; rather, it was the reduced imports which could indicate depressed domestic activity (machinery and transport made up approximately 50 percent of the fall in imports). Still, with the growth in service exports in the first quarter, the Minister believes we are back on the path of export-led recovery. Let’s examine the first quarter numbers and see what this growth is likely to mean for the economy.

When we combine two different CSO reports (not always the most satisfactory) we find that combined goods and service exports increased by €3.4 billion in the first quarter this year over the first quarter in 2010 – a healthy 9 percent. For a small open economy this is good news. However, this good news is somewhat tempered when we go into the details.

On the goods side, the Chemical/Pharmaceutical sector was the main driver of exports. It increased by €1.7 billion out of a total goods increase of €1.8 billion. There were still other sectors that gained – notably the Food sector – with the main decline coming from ‘unclassified commodities’. The point is that the multi-national dominated Chemical sector was responsible for most of the growth.

It is commonly accepted that export growth in this sector will have little impact on the domestic economy. There is the benefit of high-skilled, well-paying jobs – and continued growth will help. However, this sector imports nearly all its inputs – the goods and services it needs to produce their products. And the direct employment gain will be minimal – according to Forfas, Chemical exports increased by 69 percent between 2000 and 2008. However, there was no direct employment increase. This is not surprising – it is a highly capital-intensive sector. So we shouldn’t expect much of a knock-on benefit to the domestic economy – nor a tax gain, given our ultra-low corporate tax rates.

On the services side, growth is less concentrated. Nonetheless, the computer services sector, which grew by 14 percent, accounted for 56 percent of all service export growth. The computer services sector is a key service export sector – making up 40 percent of all service exports. So how connected is this sector with the domestic economy?

First, among Forfas-clients, computer services exports are dominated by multi-nationals – over 97 percent. In the period of 2000-2008, total exports from this sector grew by 62 percent, or €14.6 billion. However, employment – in both the foreign and Irish sector – actually fell by 4,800 or 9 percent. This was due to substantially increased productivity – as measured by employees per sales.

Second, the amount of inputs sourced from Ireland is falling in both nominal and percentage terms. In 2000, Irish companies supplied over half (52 percent), providing €9.2 billion in goods and services. By 2008, this had fallen to a third, falling to €7.6 billion. More and more of the inputs into the computer services sector are being imported.

So we have a problem: as our export sector increases their sales, we may not expect either a direct employment gain in the medium-term (though there may be a short-term post-recession increase) or increased activity from downstream Irish companies supplying these export companies. Our GDP will rise, of course; but the increase in exports may, ironically, increase employment in other countries – from companies that are supplying ‘our’ export sector.

This is not to dismiss the value of growing our export sector. But just as every industrial/enterprise strategy report has highlighted – since the Telesis report in the early 1980s: if it is not rooted in the indigenous sector, the gains to the domestic economy will be limited.

Just take one example: for the service export sector as a whole, Irish firms purchased 65.3 percent of their inputs domestically; multi-nationals purchase only 30.1 percent. And while this percentage has remained the same for Irish firms since 2000, foreign firms used to purchase over 50 percent of their inputs domestically in 2000.

This is not to dismiss the role of multi-nationals – their size alone dwarfs the Irish sector and, so, while the percentage is smaller, the total amount is much higher. We need the IDA and other public agencies to succeed in bringing multi-nationals to Ireland, of only because there’s not much happening domestically.

However, we should appreciate that we get a bigger employment and domestic benefit from indigenous companies. This where the real gains can be made but promoting indigenous start-ups and expansion requires considerably more work and will take much longer to bring on stream.

If we’re not careful, we’ll be wondering why export growth is not translating into an equivalent amount jobs and domestic activity. And the last thing you’ll get from official sources is the reality – that instead of export-led growth, what we’re mostly getting is, as described by the IMF, enclave-led growth.

[For an incisive historical survey of our distorted industrial and enterprise strategy, read Conor McCabe’s recently published ‘Sins of the Father’. If we repeat the past, we shouldn’t be surprised that the future is no different.]

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