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National Economic Social Council NESCNESC
Lessons Learned from Ireland’s Economic Leapfrog and Current Financial Crisis
Workshop organised by the Reut Institute and TheMarker, 11 January 2011
Rory O’DonnellDirector NESC
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NESCNESC
The Irish story in outline1. De-industrialisation in 19th C2. Protection 1932-653. Opening & growth 1960-19774. Fiscal & economic crisis
1979-865. Stabilisation & leapfrog 1987-
026. Credit-driven growth 2004-087. Crisis 2008-2011
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From initial growth to crisis • Growth via FDI, trade, public
investmentbut
• Indigenous industry lost in free trade• Social need and expectations rose• Sterling context: inflation/instability• Industrial relations conflict• US FDI fell in 1980s• Stagnation with fiscal crisis 1979-86
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From tri-partism to partnership
•Analysis of 1980s crisis in NESC
•Agreed NESC Strategy report 1986
•Negotiated 3-year programme
•8 partnership programmes between 1987 and 2008
NESCNESC
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Orthodox economic view: fiscal and wage indiscipline undermined
business success
Decline of inward
investment and failure of indigenous business
Excessive spending,
public borrowing and wage growth
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Institutional view: problems of stabilization, distribution and development are connected
Business damaged by
fiscal and labour
problems.Also reflect developmental challenge of a ‘regional’ economy.
Fiscal crisis has a
developmental element.
Macro pressures & debates also
crowd out supply-side
issues.
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Macroeconomic
Distributional
Supply-side
Consistent Policy Framework
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Macroeconomic
Distributional
Supply-side
Consistent Policy Framework
1.European Monetary System leading to the euro
2. Public finance correction,
focused on debt/GNP
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Macroeconomic
Distributional
Supply-side
Consistent Policy Framework
Centralised wage
settlement
and
negotiated approach to
welfare and tax
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Macroeconomic
Distributional
Supply-side
Consistent Policy Framework
Policies that enhance the quantity, quality and use of resources
•industrial policy•long-term unemployment•social exclusion•education•infrastructure•social services•etc…
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Role of negotiated programmes
• articulate a shared understanding of key economic and social mechanisms
• align partners to consistent and competitive actions.
• provide framework for strategic government policy
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NESC role & method • Joint observation of evidence• Beyond bargaining to deliberation• Re-framing to build shared
understanding• Places particular demands on analysts
Examples of reframing:1986-90: shift focus to debt/GNP1996: partnership & enterprise-level
partnership2002-5: Developmental Welfare State
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Policy & institutional
Export sector
European Union
Origin & nature of Ireland’s leapfrog
Social change
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Policy & institutional
Export sector
European Union
Origin & nature of Ireland’s leapfrog
Social change
Consistent
Competitiveness focus
Employment focus: as much a participation story as a productivity story
Institutional innovation
Experimental & problem solving
‘Networked Developmental State’
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Policy & institutional
Export sector
European Union
Origin & nature of Ireland’s leapfrog
Social change
Expanded through FDI & indigenous upgrading
Competitiveness
Educated labour supply
Increasingly concentrated in high-value, high-growth, segments
Extensive as well as intensive growth of a ‘regional’ economy
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Policy & institutional
Export sector
European Union
Origin & nature of Ireland’s leapfrog
Social change
Internal market:•market access•regulatory & market-oriented reform
Structural Funds
Stable monetary environment
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Policy & institutional
Export sector
European Union
Origin & nature of Ireland’s leapfrog
Social change
Reversal of population decline & emigration
Increased female participation
Social mobility (absolute)
Rising welfare, but inequality stable
Liberalisation, secularisation, pluralisation & individualisation
Entrepreneurial culture
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Significant developments 1999-2007
• Euro launched 1999• Step-increase in science spending• Further tax reductions• Pro-cyclical fiscal policy & property tax reliefs• Inflation exceeded euro area• Public pay ‘Benchmarking’ award: generous • Housing: increased need, demand, supply & price • Switch from BoP surplus to deficit• Large scale immigration with EU enlargement• Increased social spending & transfers• Pressure on labour standards & partnership
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The crisis in Ireland • sharp drop in output • bank crisis & guarantees Sept 2008• dramatic fall in tax revenue• efforts at partnership response failed• several rounds of fiscal
retrenchment• bank losses exceed expectations • eventual EU/IMF support
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Agreed account
Causes
Manifestation of risks
NESC & partnership in the crisis
Disagreement
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Agreed account
Causes
Manifestation of risks
NESC & partnership in the crisis
Disagreement
Ireland’s Five Part Crisis
February 2009
Banking
Fiscal
Economic
Social
Reputational
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Agreed account
Causes
Manifestation of risks
NESC & partnership in the crisis
Disagreement
Competitiveness loss 2002-08
Fiscal reliance on property bubble
Global financial crisis & reckless Irish banking
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Agreed account
Causes
Manifestation of risks
NESC & partnership in the crisis
Disagreement
Known risks inherent in our international position
Risks not identified
Risks exacerbated by national policy
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Agreed account
Causes
Manifestation of risks
NESC & partnership in the crisis
Disagreement
Wage reduction & real depreciation
Fiscal policy
Banking guarantees & resolution
Job protection
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Banking supervision: negligent
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Banking supervision: negligent
Fiscal policy: technical issues uncertain• How much genuine regional expansion?• How much economic cycle?• An asset price bubble?
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Banking supervision: negligent
Fiscal policy: technical issues uncertain• How much genuine regional expansion?• How much economic cycle?• An asset price bubble?
Political economy issues unresolved
•Scale of public provision•Level & incidence of taxation•How to meet increased housing need•Public sector reform
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Current policy discourseThe “culprits”
BankersBuildersGovernment
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Current policy discourseThe “culprits”
BankersBuildersGovernment
and
Partnership & consensus
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Current policy discourseThe “culprits”
BankersFinancial RegulatorBuildersGovernment
andPartnership &
consensus
The “remedy”Centralisation for fiscal retrenchment
Restore credibility & credit
Export Including reformsIndependent fiscal
councilPolitical reform
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Ways NESC may have missed things
• Relative wages: legacy of the leapfrog?• Irish inflation ahead of euro area?• Fiscal & taxation?• Housing?• Migration?• Consistent policy framework: supply-side
focus?• The euro after 2000 • ‘Deliberative’ role too far from bargaining?
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Overall ‘Market’ signals
weakened
Financial imbalances without exchange rate effects
Fiscal errors without bond market (or electoral) cost
Wage growth without employment effect
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Overall ‘Market’ signals
weakenedFinancial imbalances
without exchange rate effects
Fiscal errors without bond market (or electoral) cost
Wage growth without employment effect
Institutional substitute too fragmented
Financial supervisionWithin partnership:• Industrial relations v
policy• Private v public IR
Political-business linksNESC-Industrial policy
agencies NESC-Central Bank-
Dept of FinanceEU coordination failure
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Appendices
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Appendix 1Irish
Industrial Policy
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Autonomy
Close to firms
Constraints
Industrial Development Authority
Upgrading
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AutonomyClose to firms
Constraints
Industrial Development Authority
Upgrading
Semi-autonomous agency
Pursued industrial development & exports
Set job-creation targets
Monitor cases thoroughly
Used Ireland’s tax advantage
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Autonomy
Close to firms
Constraints
Industrial Development Authority
Upgrading
Stay close to client firms
Both in Ireland and abroad
Tailor package of supports
‘Sectors are “picked” not through a magical crystal ball of superior state rationality but rather through international information-gathering and attempting to follow international trends as closely as possible’ (0 Riain)
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Autonomy
Close to firms
Constraints
Industrial Development Authority
Upgrading
Identified successive constraints on business development:
•Capital•Industrial sites•Skills•Telecom infrastructure•Regulatory
Mobilise other agencies
Ignored economic debates
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Autonomy
Close to firms
Constraints
Industrial Development Authority
Upgrading
Work with Irish managers in TNCs
Focus shifted:•From job numbers to value added•From capacity to capability
Moved early to software and other services
Network Irish engineers abroad
Now links firms to Irish S&T
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Refocused industrial policy & agencies
• Separated agencies for FDI & indigenous
• Prompt emergence of Irish software• Focus on ‘high-potential’ Irish firms• Increasing focus on S&T• Created Science Foundation Ireland
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Recent Innovation Policy• Science Foundation Ireland (2003)
• Much increased funding for S&T and R&D
Questions:• Will S&T link to firms?• Is there absorptive capacity?• Sufficient DUI mode?• How should it connect to welfare
reform?
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Two wings of the PPA: Structure 2000-2009
ForfasIDA Enterprise IrelandNat. Training AgencyN Compet. CouncilSci. Foundation Irl. Government Depts.Agencies/firms forroads, elec, telecom
NESCPartnership Steering
CommitteePartnership working
groupsNat.Training AgencyGovernment Depts.Labour Relations
Commission
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Appendix 2Futures Ireland
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FuturesIreland study 2008-9Ireland at another turning
point
Two views
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Economy
Society
Public policy
Ireland at another turning point
– a pessimistic view On top of the current
crisis
The basis of Ireland’s prosperity in jeopardy
New rivals for FDI & other threats to our special status
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Economy
Society
Public policy
Ireland at another turning point
– a pessimistic view Success of last two decades based on social capital & values built over decades
Eroded by the very growth they created
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Economy
Society
Public policy
Ireland at another turning point
– a pessimistic view Positive combination of political strategy & social partnership
which yielded consistent policy
was an historical accident
replaced by conflict & media-dominated politics
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Economy
Society
Public policy
Ireland at another turning point
– an alternative view Technology, once a window of opportunity for Ireland, can become an enabler of diverse, segmented, business opportunities (Perez)
From ‘industrial information economy’ to ‘networked information economy’ (Benkler)
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Economy
Society
Public policy
Ireland at another turning point
– an alternative view Evidence of:•cross-fertilisation between wealth creation, society & public policy•problem solving•innovation•systematic reviewWhat is scarce: institutional contexts that allow people to use their capabilities, mandate that they review & offer accountability
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Economy
Society
Public policy
Ireland at another turning point
– an alternative view Public governance could yield a better combination of policy making, implementation and stakeholder involvement.
Innovation not confined to private or high-tech sectors.
Disciplined review provides basis for both innovation & accountability.
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Developmentalism
Reform
Use of authority
Dealing with crises & turning points
(1950s & 1980s) Resolution of crisis faced fiscal constraints
but focused on development, both economic and social
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Developmentalism
Reform
Use of authority
Dealing with crises & turning points
(1950s & 1980s) Decision to make the crisis a turning point marked by reform & creation of institutions
These given mandate to identify & address constraints on development
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Developmentalism
Reform
Use of authority
Dealing with crises & turning points
(1950s & 1980s) Concentration of authority
in order to liberate talent
rather than increase control
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What are the developmental challenges for Ireland now?
Making this crisis a turning point
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What are the developmental challenges for Ireland now?
What institutional reform & creation is now necessary to achieve fiscal correction, address constraints on development & limits on accountability?
Making this crisis a turning point
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What are the developmental challenges for Ireland now?
What institutional reform & creation is now necessary to achieve fiscal correction, address constraints on development and limits on accountability?What concentration of authority is necessary to achieve reform & liberate capabilities?
Making this crisis a turning point
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Appendix 3Developmental Welfare
State
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Ireland’s social debate• ‘Celtic Tiger’ v. society• Employment miracle v. poverty rate• Increased social spending v. social
deficits
Choose a European model of welfare:• Scandinavian universalism• Continental insurance• Liberal targeted• Legal/constitutional social rights
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Rethinking the Welfare StateIt has three elements…
How well do they:
address social disadvantage?
support participation and innovation?
identify and tackle un-met needs?
Services
Income supports
Innovative measure
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Developmental Welfare State
A way of reforming each of these three elements…
and linking them…
suited to Ireland’s particular economic and social situation
Services
Income supports
Innovative measures
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Developmental Welfare StateA radical
development of services is the most important route to improving social protection…
It has a triple logic, reflecting 3 social deficits…
social and economic
Services
Income supports
Innovative measures
EducationHealthChildcareEldercareHousingTransportTrainingEmploymentservices
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Beyond economic constraints and social
possibilities
The long-term strength of
the economy now depends on effective social policy
Social policies must share
responsibility for economic performance
and participation
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