Caution is necessary when investigating figures for the economic situation in Ireland. There are economic vested interests at work that benefit from spinning every scrap of positive news. The media fully assist this and try to manufacture a mood or belief that substantial progress is just around the corner. So as well as trying to identify perspectives, it is necessary to take up the arguments and the propaganda that is being put forward constantly.
The dual nature of the Irish economy between foreign owned and indigenous sectors means that figures relating to Foreign Direct Investment (FDI) can give a grossly distorted picture of the health of the economy and of trends. In fact a development or a shock to a part of the foreign owned sector can add or subtract percentage points off the nominal size of the economy and can at least technically turn growth into recession very quickly, or vice versa.
Increasingly, the conscious doctoring of economic data through “transfer pricing” and “profit shifting” by Multi National Corporations in order to avoid paying higher tax in the jurisdiction that economic activity actually took place in, is also becoming an important factor.
Recovery – now more sightings than Elvis
Recovery has been pronounced with certainty many times, only for the figures to be revised downwards at later dates with much less fanfare and publicity. This was the case in 2012 after recovery was heralded in 2011. To “recover” means to “to find or regain possession”. Limited growth from the current extremely low base is not a recovery, but neither is it what most people want or expect. The term ‘recovery’ tends to create an idea of getting back to economic wellbeing where people have choices. This can work for, but also against the capitalist establishment.
In its Medium-Term Review 2013-2020, the Economic and Social Research Institute (ESRI) is more sober. They cautioned that there would need to be at least two years of sustained recovery before it could be said that the recovery had really begun.
The underlying weakness in the global economy
Many people still hope that recovery can bring back Celtic Tiger living standards and real opportunities in the next years. Many economists believe that this can be achieved too. Instead of understanding the fundamental reasons why the crash happened, they project the idea that if financial imbalances are avoided, Ireland can return to strong and sustainable growth.
For many of them, it seems that capitalism doesn’t have any inherent contradictions or if it has, that these can be overcome relative easily with fine tuning. This idea is common and it’s nearly as if the actual experience of the last six years, one of the gravest crises ever for capitalism, hadn’t happened. The overall growth in the 1990s and the 2000s, an era of globalisation, was induced by the unprecedented extension of credit and asset bubbles. This shift to financial capitalism flowed from the general crisis and economic weakness of the mid 1970s and early 1980s where capitalist profits and investment declined. The inevitable bursting of this bubble a few years ago has once again revealed a global capitalist system that has underlying weakness and which is prone to stagnation, a depression.
This material should be read in conjunction with other material on perspectives for the global economy produced by the CWI, including the “Behind the stock market surge” from Socialism Today in March and “A way out of depression” the ST’s review of a Paul Krugman book from September 2012.
The crisis and arguments about what caused it have penetrated the minds of the broad mass of people. At the same time there has also been an understatement, at least officially and in the media, of its real severity and impact. There is no strong movement that advocates for working class people and their experiences and plight are not adequately featured and fought for. People are also reticent to speak about the financial burdens that they face. But just as the boom had a huge impact, so too has this unprecedented recession and we shouldn’t underestimate the depth of the well of anger it has created.
In the firing line
Current output per head is back to the levels of a decade ago. Between 2008 and 2010 GDP collapsed by 12% Unemployment soared from 4% officially to over 18% in 2012. On the basis of rigid criteria, official unemployment is now under 14%. However, in April this year the IMF estimated that the broad jobless rate was 23% and around the same time the ESRI said that using the broadest measure, unemployment was 25%. 235,000 people are either underemployed or on schemes. In 2007 the number of part time workers who wanted full time work was just 4,000; now it’s 149,000. At the end of September, if you added the 86,000 people on publicly funded “activation schemes” to the live register, it would have topped 500,000.
Essential to the drop in unemployment has been mass emigration, now at a level of 243 per day or 1,700 a week. In Quarter 1, 2008, there were 2,227,000 in the labour force and in Quarter 1, 2013, there were 1,855,700 in employment – a difference of 371,300.
House prices have fallen by over 50% and in most of the country prices are still falling. By 2012, 214,000 households were in negative equity – i.e. 37% of all mortgaged homes and 13% of all households. House building has collapsed by over 90% from its peak. Government austerity measures have cut consumption by 7%. Of all those who took out mortgages between 2005/2012 and who are in negative equity, 75% are households where the “head” is under 40. In the crisis on average households “led” by a person under 45 experienced a drop in real disposable income of 14%; their real consumption dropped by 25%, and if you exclude housing, it dropped by 32%.
Ireland has the highest number of jobless households in Europe, 22% in 2010. Visits to Merchant’s Quay needle exchange in Dublin increased by over 10% in 2011 and of the 3,634 people who used its services, 558 were new users. Focus Ireland says 7 people a day and 16 families a month, up from 8, are becoming homeless in Dublin. Unemployment for non Irish nationals was 18.5% in 2011.
But, it could have been worse – storing up problems
If it wasn’t for mass emigration, not only would official unemployment be in the 20% but there would have been a major increase in the costs of social welfare, provoking a deeper fiscal crisis for the Government and worse austerity cuts across the board in order to meet the Troika targets. On a capitalist basis, having been priced out of the financial markets in late 2010, if the EU hadn’t intervened to prop up European banks via the “Irish” bailout, the fiscal, financial and economic collapse here would have been much worse.
Many people don’t realise, that notwithstanding six years of austerity, Ireland is now deeper in debt than when it started. Austerity is only reducing the amounts the Government needs to borrow, but it is still borrowing and the consequence of that is problems are being stored up for tomorrow. The national debt has grown and now stands at 125% of GDP and is expected to increase to over 130% in the next couple of years.
Apart from the utter devastation that is being inflicted on the likes of the health service and the return of mass emigration after many thought it had been overcome forever, the legacy of the crash is a collapse in investment and huge indebtedness of people (average household debt is still over 200% of disposable income), the banks and the Government. These are very serious problems and obstacles that would need to be overcome before an economy has any chance of development.
The latest sighting of recovery – more credible?
In recent months, claims of recovery have intensified. The news that the labour market grew by 33,800 net new jobs in the year to the end of June, has been the source of major propaganda. In addition many surveys have been cited as indicating that consumer and business confidence is improving.
A recovery in the property market has also been reported, with claims that house prices in Dublin have increased by over 10% in the last year and also of a national increase.
There was 0.4% GDP growth in the second quarter, heralding that the economy is out of recession. Exports grew over the same time by 0.7%, and by 2.9% in 2012. Investment is also reported as being up, as a positive indicator of what is to come.
The fact that there is a huge amount of spin must not prevent us from accurately analysing and discussing the latest data. We are trying to analyse developments and trends so that we are as clear as possible, and so our perspectives and analysis can guide our action. For these reasons it is important that we don’t become growth or even recovery deniers.
After 2008 there was an unprecedented collapse in output. In the course of 2010 the rate of decline slowed and in 2011 and 2012 the economy flattened out, sometimes bobbing slightly above, other times below. However, clearly contained in this situation is that the economy and output could improve somewhat. That can be viewed as being significant by some; but it is clearly less significant because of the very low base it is coming from. It is also possible that there can be particular factors that give the economy a boost or act as a stimulant to certain sectors, only to peter out again.
The fact that 33,800 jobs were added to the labour market over the last year is not insignificant, even if it just matches exactly the number of jobs lost in the month of January 2009. This information comes from the National Household Quarterly Survey from the CSO and beyond the headlines, the additional information that the CSO reveals is also important.
It found that one third of the jobs were part time and that five out of fourteen economic sectors lost jobs in the last year. Just two sectors accounted for 26,000 of the 33,800 net new jobs. That means that over the year there was minimal development in the other sectors.
Agriculture, forestry and fishing accounted for 16,300 of the jobs and accommodation and food service activities (hospitality/tourism) accounted for 9,600.
It is questionable whether such a rate of growth in these two sectors will be maintained, or that such a rate of growth will spread to the other sectors. Undoubtedly the Gathering has added to tourist numbers which are up this year. Clearly that could continue somewhat, it depends on income levels and economic position of people elsewhere. However, as Minister Varadkar stated, you can’t have the Gathering every year.
Having lost productivity and declined over the 2000s, the situation in the agriculture sector improved after 2010. However, in its report the CSO twice gives warning about possible problems with the data. On the figures for jobs it says, “In the case of the Agriculture, forestry and fishing sector it can be noted that estimates of employment… have shown to be sensitive to sample to sample changes over time. Given the continued introduction of the sample based on the 2011 Census of Population as outlined in the note on the front…particular caution is warranted in the interpretation of the trend in this sector at this time.” Interestingly the new sample was introduced three quarters before.
The bulk of the reports about the rise in property prices were probably deliberately misleading. The growth in house prices in Dublin in reality was used to mask that in the rest of the country, excluding Dublin, house prices actually fell a further 2.6% over the year. And in Dublin itself the situation wasn’t as presented, as the sale of a smaller number of expensive properties distorted the overall figures, and in a number of areas in the city prices are still falling.
Far from there being a momentum or dynamic in Dublin, it is clear that the headlines are trying to create one. For now the upward pressure on prices in Dublin follows mainly from the limited supply of properties, not a strong demand as yet. The low vacancy rate in Dublin and the fact that the banks are not lending much for mortgages nor for house construction, are factors in falsely creating an upward pressure.
House completions declined 19% last year on the year before. They were less that 10% of the peak in the boom. According to some reports there are not a significant number of planning applications in or processed to allow for a quick turnaround in the situation, but it is possible that there could be an increase in construction soon.
There has been a marked increase in the numbers renting since the collapse. The numbers in privately rented accommodation jumped from 145,000 in 2006 to 305,000 in 2011. Rents are going up, as people who may have wanted to buy and had the resources waited while prices fell and so landlords benefited.
If the perception develops that in Dublin prices are on the way up, there is probably a cohort who could give a boost to housing demand in the city but the conditions aren’t the same in other areas. It’s likely that there will be growth in construction, but it could tail off again, when the initial demand is met. Negative equity also stifles the property market by limiting natural turnover of available properties as people can’t afford to move.
Just under 9,000 houses were built last year. Demographics would indicate that there could be a household formation, or the desire for household formation of around 20,000 a year. That would indicate the potential for the property market and construction to grow to a level. However, it’s far from the 90,000 a year peak and whether there is the disposable income to back up 20,000 plus purchases or if loans from the bank will be forthcoming, is very debatable.
Another area where a new demand could also emerge and be satisfied and have some impact, is in exports from indigenous companies. If there is a development of even low growth in the EU in particular, some Irish companies who have reduced costs by wage cuts etc could have enough of an edge to make some gains for a time. Overall two thirds of exports from Ireland go to EU countries.
According to Darvas, across 24 EU states, the headline overall relative unit labour costs in Ireland declined by 18% from 2008 to 2011; when this was weighted the relative decline was revised as 14%. If there was some class of recovery in Britain and therefore an appreciation in Sterling that could also give a boost to the indigenous export sector as nearly 50% of their exports still go to Britain.
We also have to point out that for all the so-called positive news there are many examples of negative developments or information and facts that completely contradict those that have been heralded. A few examples, the pulling out of ACC and Danske Bank; while GDP grew in the second quarter, GNP, which is a more accurate measure of the Irish economy, declined by 0.4%; according to the Irish Exporters Association exports contracted by 2% in the first half of 2013; furthermore, gross fixed capital formation also declined in the first half of this year.
However, there are some indications that a point may have been reached where there is a basis for an improvement in a couple of sectors. This can have an effect but it will likely be a limited, rather than a general effect. The examples given, housing and indigenous export sector, are tentative rather than strong and could quite easily be knocked back. In general, the legacies of low investment and indebtedness are particular aspects of the Irish economic situation that will dampen economic activity.
The short-term prospects are not the crucial issue. We shouldn’t in any way be phased if there was an improvement over the next year or two. Its significance is inevitably diminished as it would be growth coming from a very low basis. Some growth can reflect certain specific cycles in the system but the economy is still operating within definite constraints. It’s not like if there is some growth that it is then inevitable that it will continue uninterrupted for fifteen years! In the era we are now in, we heard of double dips, triple dips, and there could be more. In fact if there was some improvement or growth it might lift the pressure and improve the confidence of the working class, which would be a good development.
The key questions are: What are medium and longer term perspectives for the Irish economy? And is there a possibility of the return of sustained, strong growth and a recovery to match the living standards and raised expectations of the recent past, as is being promised? If there is then that will be indicative of a new phase for the economy both here and internationally, and would pose a need for a reappraisal of the CWI characterisation of the period as one of crisis for capitalism, with elements of both revolution and counter revolution.
If such a recovery is not on the agenda, then on the basis of the very deep well of anger that exists in society, Ireland faces a new period of turmoil and social explosions ahead. Not including those who emigrated, there are 235,000 people either on activation programmes or underemployed. Together with the nearly 300,000 who are officially unemployed, this gives some indication of the scale of the economic turnaround that is necessary.
In the spring, the ESRI’s Medium-Term Review 2013-2020 put forward that it felt there were three fundamental scenarios facing Ireland – 1. Recovery Scenario; 2. Delayed Adjustment Scenario and 3. Stagnation Scenario.
Both number 1 and 3 nearly span the complete spectrum. In 1 the economy recovers to its 2007 level in 2017 and by the end, unemployment is back to 6% and such is the positive assessment of things, that net emigration is overcome before 2020. In number 3, unemployment remains as it is. There isn’t a recovery of the economy to its 2007 level and such is the state of the economy that the ESRI say it is likely Ireland would experience a financial collapse and bankruptcy.
Key issues identified by the ESRI which affect what will happen include if there will be an international economic recovery. Without this the ESRI does not see the possibility for an independent economic development in Ireland. They even say that international recovery is more important for Ireland than competitiveness. They also say it is crucial that the right policy choices are made, in particular relating to how to overcome the problems in the financial institutions.
These assumptions, that there will not be a need to recapitalise or bailout the Irish banks, are central for their Recovery Scenario. On that basis they are confident that there will be a further strengthening of exports, both via FDI and MNCs as well indigenous Irish exporters, and that this will filter through to the domestic economy. When the domestic economy recovers, jobs growth will accelerate as it is more labour intensive, and this will lead to a decisive overcoming of unemployment.
As well as the explicit assumptions mentioned regarding reasonable international growth and no new bailout for the banks, there are clearly other key pillars propping up the ESRI’s Recovery Scenario. These reflect the well-worn catch-phases of the establishment that FDI and the exports of the multi-national sector are the cornerstone of industrial policy, and furthermore that their exports will grow and inevitably filter through and affect indigenous industry and exporters. A reduction in unemployment to 6% clearly means that they also believe that the domestic economy will be an engine for hundreds of thousands of new jobs in much the same way that is was during the Celtic Tiger. Either that, or the jobs that they speak about, must be created in the foreign or indigenous export sectors themselves.
The essential questions therefore are 1. Will FDI investment grow and will it have a decisive impact on economic prospects? 2. Will the indigenous exporters and industrial sector grow substantially and, as it is more labour intensive, will it add considerable employment? 3. Will the domestic economy and market recover and be an engine for employment?
Myths & reality – Foreign Direct Investment & the role of the MNCs
Starting in the very late 1980s there was a massive year on year explosion in FDI coming into the country, as MNCs located a base in Europe via Ireland, before the Single European Market was established in 1992.
Not only was the amount of the FDI different than before, but its nature was different, in that, it was more committed to Ireland and less footloose as it was linked to strategic company positioning in the context of emerging trading blocs at the time.
The policy of relying on foreign direct investment to develop the industrial base in the country was initiated in the late 1950s and has become the cornerstone of industrial policy, as has low corporation tax to entice it. This demonstrates the weak and compliant nature of the capitalist class in this country. By the 1980s the policy was considered by many to be a failure as significant numbers of the MNCs that located here had just stayed for as long as the tax breaks lasted and then downsized or left altogether.
The FDI investment that flowed into the country right at the end of the 1980s to 2000 was different. It was overwhelmingly from the US; it was greater in volume terms and it represented a more stable investment in Ireland. In turn the character of a lot of the FDI that has come into Ireland since the late 1990s is different again. A large portion of it is not investment but initiatives in tax avoidance. Also since the early 2000s there hasn’t been the dramatic year on year growth, in fact it has levelled off.
What’s the real impact of FDI?
Clearly such large increases in investment in the likes of chemicals and electronics were going to also have a huge impact on the headline figures for output and growth. By 1993/4 the large growth in exports had translated into growth in GDP and GNP. After a sluggish start, the average growth rate for GDP through the 1990s was 7.9% per year.
But the real economy did not reflect the wealth that the MNC was producing. This was due to the repatriation of profits to the home base; the limited sourcing of their raw materials in Ireland and because the investments were more capital than labour intensive, so employment grew in this sector but it was actually quite limited. Between 1991 and 2000, raw materials sourced in Ireland by MNCs actually declined from 38% to 27%.
FDI, exports & job creation
The argument is repeated constantly that FDI is the way to rebuild the jobs market. If this were correct, it would be reasonable to expect that as exports from MNCs have grown hugely since the 1980s, even performing well during crises, that there would be evidence of significant jobs growth. This should be particularly evident in the two phases of the Celtic Tiger, the 1990s and between the years 2001 and 2008. In these phases, either side of the dot com bust, the world economy was growing at a significantly higher rate than it is now or what is projected for the immediate years ahead.
At its height in 2000 employment in the internationally tradable goods and services sectors – MNCs and indigenous exporters – was 320,000, with at 166,000, only slightly more in the foreign owned sector than the indigenous. Even the knock-on creation of indirect jobs from the MNCs was also limited, estimated in a number of developed studies to be 1 to 1.5 jobs for every direct job in a MNC during the Celtic Tiger. That would indicate that FDI and the MNCs made an important contribution and were responsible for 350,000 to 400,000 jobs in a labour market that reached over 2.2 million. That is clearly significant, but it also undermines the propaganda that FDI is the way to solve the jobs crisis. The principle gains that were made in the labour market in the past were not connected to FDI or the MNCs.
Since its high point, even though MNCs have increased their exports, they have shed jobs. In real terms total exports rose between 2000 and 2011 by 61%, however, employment in both foreign and indigenous exporting companies was lower in 2011 than it was in 2000. There were 144,000 employed in the foreign owned sector in 2011, down more than 20,000 from 2000.
Using data from Forfas and the IDA, total full time employment in the internationally tradable goods and services sectors in December 2011 was 282,000 compared to the 320,000 in 2000 and 292,000 in 1999.
The refrain over recent years has altered slightly, now it’s that service exports are the path to jobs and growth. As will be pointed out that’s not really the case regarding growth, and certainly not the case in relation to jobs.
The value of service exports increased by 322% between 2000 and 2011 and since 2012 they account for the majority of exports. Computer and business service exports, linked to the likes of Microsoft, Google and Facebook, rose from €9.6 billion in 2000 to €49.1 billion in 2010 – an astonishing increase of 411%. The figure drops to a 357% increase if aircraft leasing, for which Dublin is a hub, is removed. Forfas says, excluding financial services, the number of export service jobs in foreign firms in 2000 was 41,500 in 2000 and in 2010 it had increased to just 44,000. That is an increase of less than 3,000 jobs for a near quadrupling of such exports!
The MNC sector & domestic industry
As mentioned the linkages of the MNC sector to the domestic economy are limited as profits made and the value added by workers in Ireland is taken out of the country save for their wages. This is a huge loss of potential resources and capital that could be reinvested. Again, the inputs via raw materials are limited.
Instead of the MNC sector spawning new Irish companies, it was noted as a feature during the Celtic Tiger regarding computer and electronics developments that the small Irish software companies that were set up connected to this sector tended to be bought and integrated into the foreign sector, instead of the emergence of an independent, stronger indigenous industrial sector.
According to Forfas, foreign owned firms account for 90% of tradable exports and 95% of service exports. In 2009 less than 2% of workers (in pharmaceuticals and organic chemicals) produced 61% of exports in value terms. In 2011 around 9,500 workers (Aviation, Google, Microsoft, Apple, Dell, Oracle and Facebook) were responsible for 73% of all service exports. In reality the hope that positives from the multi-national sector would cross over and have a decisive effect in modernising indigenous industry and exporters and their performance hasn’t happened.
When the term Irish exports is used, it should qualified. Is it exports that come from the country of Ireland or are they exports that come from Irish exporters? Obviously we are not reflecting a nationalist sentiment here, but rather it’s a point of accuracy and analysis. Exports from Irish companies have more of an impact in the real economy precisely because of where they are rooted, compared to exports from MNCs. The lack of a strong export performance by Irish capitalism is a defining feature of its weakness. This is illustrated by the fact they account for just 10% of “Irish” exports.
The nature of the new FDI & the service exporters
Earlier it was mentioned that there was a near quadrupling of service exports over a decade but a very small increase in the number of workers involved. Figures from the US Bureau for Economic Analysis show that in 2000, profit per employee at US firms in Ireland was $144,400, but jumped to $616,700 by 2009. A similar rise was recorded in the Netherlands but data for Germany and Britain show profit per employee was $56,018 and $19,721 respectively.
Workers in Ireland could be more productive than their European counterparts, but they are not that much more productive. As recent high profile cases have clearly illustrated, major US corporations in particular are setting up global headquarters in Ireland to fanfare from Government politicians. They locate their companies or major parts of them in Ireland in order to pay lower tax on economic activity that has actually taken place elsewhere. This doctoring of the books is called “profit shifting” and certain countries are open for business, Ireland being one and the Netherlands being another, and both are in the company of Bermuda, ironically enough.
There has always been an element of “transfer pricing” where MNCs have overstated the value added in the manufacturing process in Ireland to avail of lower tax. But in the latter part of the 1990s there has been a similar but new development of a practice of “profit shifting”, particularly involving service exporters.
Apart from exposing as hollow the grandiose heralding of such FDI, the net result of this activity is that the actual figures that are touted around about the export boom and of how well we are doing are hollow. It is estimated that up to last year up to 30% of service exports were in reality fake, they didn’t exist except as a book keeping exercise in an office in Dublin.
Last year, service exports for the first time outstripped goods exports. But that isn’t the true picture. Profit sharing has seen Microsoft’s pre tax profits booked overseas triple from 2006 and 2011. Google has booked 45% of its global revenues through Ireland, though a majority of its activity doesn’t happen here.
Clearly “profit sharing” can massively distort the figures for exports but therefore also for growth and this literally means that a stroke of a pen could technically designate Ireland as being in boom or recession. Of course there are some gains from this practice, like the tax received and some employment from such redomiciling, but ultimately it is a damning indictment on Irish capitalism that its playing a game of “let’s pretend economic development”, like a rentier form of capitalism or capitalist surrogacy.
In 2002 a report on this problem in 1990 in four industries indicated that if the inflated figures were discounted, and the average figures for productivity and profit per employee in other countries were used, the real worth of the economic activity undertaken, that GDP would have been 15% lower, exports would have been 27% lower and that industrial production would have been 52% lower. One of the authors of this report was Patrick Honohan, the current Governor of the Central Bank.
In its Medium-Term Review the ESRI has raised that there could be moves to implement changes in tax polices globally which could adversely affect these practices and the Irish economy. Constantine Gurgdiev has also written that this issue was discussed at the G8 meeting in the north. He has pointed out that there already exists a mechanism the Common Consolidated Corporate Tax Base (CCCTB) that could cut across this policy without forcing a harmonisation of tax rates across the EU.
EU commission analysis claims that the CCCTB could enhance tax revenues by 8% across the EU. The CCCTB is a complex mechanism that matches sales to locations of production. Its implementation would reflect a move by bigger countries to claw back tax revenue which is leaking to other countries, in a twist to competition between capitalist countries.
This issue is clearly being discussed. It is not guaranteed that moves will be made but it certainly can’t be ruled out, particularly if certain states begin to face tighter fiscal situations. Such a policy could have a serious impact on the figures for growth here but also the continued attractiveness of Ireland as a location for FDI.
As profit shifting significantly distorts the figures for the size of the economy and for growth, it inflates further the difference between the multi-national and the domestic sector – the dual nature of the Irish economy.
GNP is probably still a more accurate figure for the actual situation in the economy than GDP, but its accuracy is undermined by profit shifting because, in that instance, companies redomicile themselves in Ireland and so GNP will now be inflated. The dual nature of the Irish economy, the antics of MNCs and the Irish Government undermines the potential accuracy of economic data, and could become a problem when Ireland is back in the international financial markets. They will pay closer attention to the real economic situation and potential here as their investments depend on it.
Indigenous industry
Even if account is taking for the fake element in the export from the foreign owned export sector, indigenous companies would still only account for approximately 20% of all exports.
The numbers employed in the domestic industrial sector has tended vary from 130,000 to 150,000, similar to those directly employed in MNCs. While it is more labour intensive than the foreign sector, it has hardly been prolific in terms of jobs creation even in times of global growth.
The inability of Ireland to develop an industrial base that developed products and was competitive in internationally tradable goods and services condemned it to be one of the weaker and poor capitalist states, as it could only really fight for the crumbs from the table, instead of taking a big bite from the world trade pie.
Within this comparatively weak state and at the low level it operates, there have been times when it has been able to benefit from the overall growth of world trade, or times when it has gotten an edge on its competitors. This was the case in the late 1980s when the crisis conditions allowed bosses squeeze more out of workers for less. That competitive edge was further sharpened when the punt was devalued by 10% in the early 1990s.
Figures would indicate that the loss of competitiveness that developed over the Celtic Tiger for domestic industries has been clawed back but by exactly how much is not clear as figures for unit labour costs are for all industry and therefore are distorted by the more productive MNC sector. However, as the figures quoted earlier indicate, there have definitely been improvements. In the IMD World Competitiveness Yearbook, Ireland has gone from 20 to 17, a definite improvement, but not earth shattering.
The gains in unit labour costs here in part relate to the fact that wages levels or costs have increased in other countries more, whereas here there have been very limited increases, or declines in some sectors. As the indigenous sector is labour intensive, wages is a key issue in terms of competitiveness and undoubtedly there have been wage cuts in much of this sector. As it can be quickly affected by changes in wages or currency values in competitor’s countries, the increased exploitation of workers in the form of attacks on wages, conditions or speed ups will be a key mechanism for trying to remain competitive – internal devaluation.
As indicated the British market and therefore the value of sterling are very important and changes there can have quite immediate positive or negative effects here.
While the situation in terms of competiveness has improved, the significance of success for the indigenous sector shouldn’t be overstated. Success is very significant for the bosses whose profits increase and undoubtedly, as that’s what the system is about, such will be trumpeted.
But the real issue is not whether the profits for Irish bosses increase, it’s about whether indigenous industry can be the basis to lift the entire population, particularly the unemployed and the underemployed, out of this crisis. That would necessitate a level of development that has never been achieved before, and is beyond their capabilities or even their focus.
The development of the type of industrial base that could have such a generalised effect is very difficult to achieve, particularly in the context of a depressed global market. Even at the best of times it can’t be achieved on the basis of competition based on low wages. That can only go so far but can’t create the circumstances for decisive breakthroughs into the markets of well established competitors. That is only achievable on the basis of innovation and the development of new products and ideas and a strategy that places huge emphasis and resources into investment in research and development.
Average EU spending on R&D in 2011 was 1.26% of GDP. In Finland it was 2.67%. In Ireland it was just 1.17%. This was dominated by MNCs and as GDP values are inflated, it’s less in real terms than is indicated. Just three US companies – Seagate Technology 15%; Covidien 23.9% and Accenture 31.2% – account for 68% of “Ireland’s” expenditure on research and development. Last December the EU produced a ranking list of the top 1,000 R&D corporate spenders in the EU. 15 are listed as Irish companies, 48 are Finnish.
Applications from Irish residents to the patent office in 2011 were the lowest since 1982 and it has been commented that there is a low level of “early stage entrepreneurship” in Ireland. In the EU there are 40 small companies per 1,000 of the population, whereas in Ireland it is just 20. This doesn’t indicate a space for definitive development, more an indication of the weak basis of domestic capitalism.
As mentioned, it certainly isn’t ruled out that the position of indigenous industry and exports could improve in certain areas, but the indications are that this will be limited. However, if there is a deterioration in global markets, or specifically Britain, that would likely hit this sector badly. One of the key areas pinpointed as a potential crucial arena for development for Irish exporters has been the BRIC countries, but according to the IEA, sales from Ireland to China, Brazil and India have been declining in recent years.
The agricultural and food export sector is important and is perhaps one area where there could be development as Ireland has certain comparative benefits. We should look at this in more detail, but again it is more likely that gains, while they could be significant, in terms of the overall economy or population, won’t make a decisive difference.
One factor that can have an important negative impact on this sector is the state of the banks and their lack of lending. Irish companies are dependent on Irish banks for credit and there was a decline of over 4% in lending to businesses over the last year. A recent survey found that an increasing number of Small to Medium Enterprises (SMEs), 24%, said that credit constraints were the main issue affecting their business now.
This could either reflect that getting customers is easier than it was or that getting money from the banks is getting harder. Many of these companies will not be exporters but it is still indicative of a real problem. The barrier that the dysfunctional Irish banking system is to a chance of a significant recovery in domestic industry and in the domestic economy is emphasised by countless economists.
It seems there is a catch 22 situation. There is a need for functioning banks in order to have any chance to grow; growth in turn is the only way the problem of indebtedness can be overcome; but the banks aren’t loaning because they in debt.
The domestic market
The foreign and indigenous industrial and exporting sectors grew in terms of employment over the Celtic Tiger boom, but not exponentially. The high point was around 2000 and then they suffered a decline. There has been a certain improvement over the last couple of years.
Operating off the figure of 320,000 mentioned earlier, even if you erred on the generous side and allowed that the indirect jobs supported by the industrial or wealth producing sector brought the overall figure close to 1 million jobs, which means that the domestic market generated a huge amount of jobs during the fifteen years of boom. Obviously – with 12.6% of the workforce directly involved in construction at one point and when related employment is factored, more than 300,000 – and property bubble was the source of significant growth, but that still means the domestic market was a certain engine for service jobs growth. This feature may not be to the forefront in people awareness or be the focus of much research as the propaganda bangs on about FDI, but it does exist somewhere in people’s consciousness and serves to give weight to hope that maybe there could be a recovery.
The numbers at work increased from 1,088,000 in 1989 increased to 1,220,000 in 1994; to 1,340,000 in 1997; to 1.670,000 in 2000. Labour market employment expanded 450,000 and at its high point in Q2 2008 it 2,120,800.
Clearly a huge amount of the jobs added in the 2000s related to construction and property and in a more normal situation they wouldn’t have been created or couldn’t be sustained. But in the earlier phases above, the level of jobs growth between 1997 and 2000 is nearly three times that of the earlier periods.
In the later part of the 1990s and then into 2000s a number of factors came together which in effect constituted a significant and exceptional domestic stimulus and resulted in this extensive growth of jobs. But a precondition for this situation was the previous years of growth.
The gains in employment as a result of the growth in the industrial sector as well as its indirect knock-ons in employment, boosted consumer spending. With a momentum behind jobs and with economic growth continuing for several years consecutively, an important psychological barrier was overcome just after the middle of the decade which gave an important impetus to the economy – i.e. the reluctance of people in Ireland to use credit.
Attitudes changed as people felt they had the security of stable jobs and wages underneath them. Credit is part of economics and there was nothing wrong when people here began to use credit in the way that people in other countries had been for years, but it did have an impact on the domestic market.
However, even by the middle of the 1990s, the rate of house price increases was already indicating bubble aspects in property and construction. What had a basis at the start, relatively quickly went beyond that and credit began to be used quite extensively. This increased spending built a momentum which progressively resulted in a substantial mushrooming of new service jobs in the domestic economy.
Such a domestic boom, by its nature tends to be jobs intensive, but increasingly it was fuelled not by income from the wealth producing or value adding parts of the economy, but by spending and consumption fuelled by credit. In the short to medium term the momentum can be maintained and has a real impact on real people. The continued growth in property prices added to people’s paper wealth and assets which they could borrow on, and also added to the sense of economic momentum.
Tax revenues began to increase significantly, some from the industrial sector but particularly from sales. Notwithstanding the neo-liberal nature of the administration, politically and economically, public spending had to be increased to a degree due to public pressure on issues like health and education, but also because business interests demanded improvements in infrastructure. In this way, the state acted as a positive stimulant for the economy.
Development funds from the EU also clearly contributed. In the context of this momentum, the growing population, and in particular the growth of immigration of adults after the accession of a number of eastern European states in 2004, also gave an economic boost. Between 1996 and 2006, the population grew from 3.6 million to 4.23 million.
Every new job created meant a person could not only spend new wages, but they could also access new credit. At a certain point, particularly after 2001, the bubble or fictitious aspects of the economy came to dominate outright, but it wasn’t until the turn of 2007 into 2008, that the bubble aspects finally burst when the price of housing had become manifestly unaffordable and people pulled back from the market.
The participation rate of workers in the labour market began to approach or match those in other developed EU states. This indicates that Ireland experienced a catch up but did not achieve a new or historic advance in capitalist terms.
Crucially, the fact that this “convergence” was achieved by a coming together of a number of factors, and could only happen after a number of years of boom in Ireland and globally, and was largely based on spending and consumption paid for by credit, rather than wealth, re-enforces its exceptional character. The fact that the labour market experienced a dramatic collapse after 2008 is indicative of this.
While FDI and exports were important, they were not the decisive factors that created the bulk of employment over the 15 years of boom, which transformed people’s lives and perceptions. They helped create the environment, but the bulk of employment came from the domestic market and was inextricably connected to the development of credit.
The fact that this happened before does not mean it will happen again. However, in reality the ESRI’s Recovery Scenario is based on the likelihood that such a development will happen again. The reality is that the global and domestic circumstances now are fundamentally different and a repeat is highly unlikely. The population may still be rising, but all of the other factors are now decisively in the negative in comparison.
The global markets are weak and FDI has tailed off and its nature has diminished. Instead of a population discovering credit, people are sinking in a sea of debt. The state is also drowning in debt and isn’t going to operate as a stimulator, the exact opposite in fact as clearly austerity will continue for many years. Neither is the EU a net contributor to Ireland anymore. The mechanism or pusher of that credit, the Irish financial system, is broke and while at the moment interest rates are low, progressively the cost of money for Irish people and institutions is likely to rise over the next years. Who would risk funding another bubble in Ireland? In any case, such a development would quickly enough would hit the wall of reality.
The banks & mortgages
In recent months there has been much talk of moving to resolve the mortgage crisis, while at the same time, the latest figures indicate that that crisis is getting considerably worse. The official figures will tend to understate the problem, for obvious reasons. And the withdrawal of the Dutch owned ACC Bank and the Danish Danske Bank from the Irish market is an indication of a lack of confidence in the banking sector and the wider economy in Ireland, and also in the rest of the EU.
The mortgage crisis is getting worse because, instead of a recovery in people’s financial position, living standards are being squeezed on the wages, taxes, prices and employment/unemployment fronts. According to the Central Bank there are 97,874 mortgages in arrears of 90 days or more, and these mortgages have a value of €18.6 billion. The number of mortgages in such arrears has increased by 12% in the year up to the end of June. Crucially, 186,202 mortgages on primary residences are in default or at risk of default, that is 20.3% of such normal mortgages.
Ahead of Central Bank and ECB stress tests next year, pressure is being put on the banks to tackle this mounting crisis. But the banks are very slow to move, clearly hoping that with some economic pickup, customers would be in a position to get on top of their arrears. The alternative, making arrangements and deals, is a dangerous option for the banks as it inevitably means realising bad debts and weakens their financial position.
However, it is untenable for the banks to remain sitting on non-performing loans indefinitely or continue to refuse to loan money in the economy as they are expected to. Blatantly ignoring the targets now being pursued by the Central Bank for deals regarding mortgage arrears, would itself provoke a crisis and make an issue of their financial position. And with the number of mortgage defaulters increasing, the pressure to move will increase.
Split mortgages, interest only, term extensions, limited write downs or repossession and resale represent unjust and bad outcomes for ordinary people in mortgage distress and shouldn’t be accepted. Such deals also cause problems for the banks. The pressure to implement split mortgages with no interest on the part of the mortgage that is warehoused, would involve, de facto, quite considerable write downs of assets. Even though the banks will try to limit the damage to their portfolios and move as slowly as they can get away with, it seems there is a slide towards realising at least some of their bad debts.
The talk that serious numbers of people are engaging in strategic defaults is self serving for the banks and is a way of talking down the problem. However, it couldn’t be ruled out that if the banks are forced to do a lot of deals, some who are hard pressed and struggling to pay, may step into non-payment in lieu of a deal being struck, which could bring the crisis in the banks to a head.
In reality there is a black hole in the banks which is in the process of being revealed. When this will happen and what the scale of it will be, is impossible to say exactly. If the CB and ECB stress tests are rigorous, the underlying crisis in the Irish banks could even emerge not long after Ireland has withdrawn from the Troika programme and is out in the international financial markets. That could bring down serious pressure from the markets for a major recapitalisation of the banks, as well as pushing up the cost of Ireland’s new credit lines and creating real instability.
Such a scenario is likely but it could take some time to break out, and in the meantime the banks fudge along zombie like. But a zombie banking system seriously dampens any potential that may emerge in the economic situation; it’s a lose-lose situation for the economy.
It is the failure to emerge in a definite way out of the recession that has brought the banking crisis here, but also in Europe, back on the agenda and the repercussions are enormous.
While there is open talk about the possibility of a new bailout for the banks, if it happens it will be a major blow. In some ways it could be worse if it was delayed a while as Ireland would have been cycling “alone”, albeit with EU stabilisers, only then to crash, demonstrating definitely that the country and its banks can’t not operate independently on the international markets.
Of course any bailout will come up with new additional austerity conditions, just when people were hoping austerity would ease. The bigger the bailout, the worse the conditions attached would be. If they dare understate the funds necessary they run the risk of having to go back again, in a scenario that’s likely to coincide with the obliteration of all market credibility and confidence in the state politically and economically.
The crucial point is that any class of bailout will weaken the economy further by increasing costs of credit and undermining potential investment and, as it will ratchet up the national debt, it is a step towards financial insolvency and bankruptcy. Cleary the EU is prepared for a second bailout, but are they prepared to provide a third, or even a fourth? The same factors pushing Ireland in this direction are also pushing other, more economically significant EU states towards financial crisis. The reality is that EU funds could run out and political considerations could change, and Ireland may be pushed towards the door marked exit.
Conclusion
The above section on the banking crisis mentions a couple of very important and interconnected issues, namely the economic and political relationship between countries and the EU and the sovereign debt crisis. We need to put the potential developments in Ireland in the context of the continuing crisis of world and European capitalism in particular. Economic, social and political events here can be superseded, and decisively affected, by developments in other European countries or involving the EU itself.
The seizing of bank deposits in Cyprus last year was a reminder that events which can change the conditions throughout Europe, can happen very quickly. There will be more such events as in reality neither the economic crisis nor the contradiction between a closer tying up economics in the EU and the existence of separate, and increasing rival capitalist classes, have been overcome.
As in Ireland, central issues for the rest of Europe and the EU include the interconnection between managing the debt crisis and the banking crisis, both in the EU overall and in a whole series of countries. While there is agreement on a certain level on the need for a banking union, there is not agreement on ultimately who will bear the responsibility in the event of more bailouts or defaults and bankruptcies.
The debt crisis in Europe can’t be overcome on the basis of limited growth, and in reality there are still a whole series of fault lines where earthquakes could rock. In fact there is, in outline a serious crisis in the banking system throughout Europe. In its bulletin the ESRI poses the question as to whether Europe be the new Japan. This wasn’t any positive reference, but instead was an allusion to the stagnation that gripped that country for two decades. But Japan is one country, Europe is many, and extended low growth or stagnation, will reignite the Euro crisis.
While the Government will trumpet its withdrawal from the EU/IMF programme on December 15, it will also be taking a step into an uncertain and an uncontrolled situation. As they have said, Ireland will be the first country to emerge from a programme, and precisely because of that we need to be prepared that events could take unexpected twists and turns. Ireland might again find itself as an agency for EU instability, as it was in November 2010.
Alternatively, the economic situation here could continue as is and even show more signs of improvement, which undoubtedly will be whipped up by a Government that is facing very difficult elections next May and beyond. It is even possible that in headline form Ireland could begin to record a more significant rate of growth, not based on real or sustainable development, but on the whim of the MNCs.
It’s possible the establishment may even begin to ease the austerity programme somewhat because the economic “necessity” has diminished, or possibly for political reasons. However, it is crucial we keep focused on the key underlying trends which point towards weakness not strength, as that’s what will come to the fore.
In some respects it would be more difficult for the representatives of capitalism in Ireland if they believe the situation is improving and they go into overdrive on the propaganda, and somewhat ease back on austerity. Yes, such a development may mean that things remain complex for a time, but it will most likely prepare the ground for a huge difficulty for the capitalist establishment and its political representatives.
If the economy is knocked, or if a crisis hits the banks and as a result of either, new austerity is imposed, that would inevitably also create a huge political crisis. Such a scenario could result in complete loss of market confidence in the state, and furthermore, such developments would alter the consciousness and attitudes of the working class and young people towards capitalism, and could transform the potential to build a socialist movement.
By Stephen Boyd, Editor, the Socialist