Monday, 31 October 2011

State Investment Bank

Sean O Riain: Michael O’Sullivan and I have an article in today’s Irish Times arguing for a state investment bank. Some links to supporting materials are below.

Allocation of bank lending by sector and poor investment record is discussed here

Role of the state and the weakness of private sector in providing ‘productive investment’ from 2000-8 is documented by Rossa White of Davys here

Patrick Honohan's QEC article on the limited role of finance in Ireland’s economic success of the 1990s is here

Research on the effectiveness of grant aid:
Manufacturing in the 1980s:
O’Malley, E., K.A. Kennedy, and R. O’Donnell. 1992. Report to the Industrial Policy Review Group on the Impact of the Industrial Development Agencies Dublin, Stationery Office (not available online)

Software in the 1990s:
Ó Riain, S. 2004. The Politics of High Tech Growth: Developmental Network States in the Global Economy (Structural Analysis in the Social Sciences 23) New York/ Cambridge: Cambridge University Press. (this link to the most relevant parts vis google books may work)

Manufacturing in the 1990s:
Girma, S., H. Gorg, E. Strobl, F. Walsh, 2008. “Creating jobs through public subsidies: An empirical analysis” Labour Economics 15, 6, 1179-1199

Already noted above, this piece provides data on how state funding stimulated private investment funding in the late 1990s and after the bubble.


Paul Hunt said...

There should be absolutely no consideration of a state investment bank until there is comprehensive restructuring, sensible regulation and efficient financing of the infrastructure and utility activities under the state’s control in the public and semi-state sectors. This would reduce excessive, unnecessary burdens on consumers and the economy and boost economic activity. It would also release resources to support efficient investment and financing of investment in other sectors.

Establishing an institution of this nature on top of the current policy and regulatory dysfunction would be a recipe for disaster.

Michael Taft said...

This is a timely and considered intervention. When the bank crisis broke out, we were told the purpose of the guarantee, the capitalisations and NAMA was to ensure that banks could quickly return to the business of providing credit to the productive economy. The more fundamental question was never asked - what has been the track record of the private banking system and private sector investment and does this record suggest optimism for investment in the future. The authors rightly suggest no - and Sean’s links to various studies in the post (Davy, Honohan, O’Riain) provide significant evidence to this effect.

A state investment bank has the potential to rectify this historical failure. It is certainly not new. It is instructive to read the Dail debates when the Industrial Credit Corporation was established to get a feel for the ongoing flaw in financing for domestic firms.

Even without the historical record, banks’ ability to boost investment into the productive economy during a period of substantial asset downsizing is questionable. And with the Government conceding that next year the economy will be mired in its 5th consecutive year of domestic demand recession suggests there is not much incentive for the private sector to commence investment.

All the more reason to expedite the establishment of a strategic investment bank with an exclusive mission to provide credit to productive activity whether in the private or public sector.