November 7th Afternoon: The Recession Diaries

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Maybe I’m getting paranoid but I can’t help feeling that we’re being primed to blame the incoming Obama administration if our inflow of foreign investment starts drying up, resulting in massive dislocations in our economy.  Robert Shapiro, an influential advisor to the new President, has suggested that Ireland wean itself off foreign direct investment (FDI).  Arthur Beesly is considering the practicality of the US clamping down on its multi-nationals that use other jurisdictions (one of them is us) to reduce their home tax liability.  And the US Bureau of Economic Analysis has published a comprehensive survey of US multi-national profitability in Ireland: €48 billion in 2005.  Suddenly, the sharks are circling and our craft – our industrial and enterprise policy that has for the last 15 years relied disproportionately on FDI – is leaking.

How likely is it that the Democrats will pull the plug on multi-nationals in Ireland?   It”s open to debate.  Whatever comes out in the wash, though, one thing is certain:  Ireland’s strategy of economic growth based on wooing FDI through low tax rates is now on borrowed time.

It’s not like we haven’t been warned.  In 2004, the Enterprise Strategy Group stated that our dependence on foreign capital was unsustainable.  What has been the Government’s reaction?  Let the property market rip.  There has been no suggestion that an alternative industrial and enterprise model is necessary or desirable.  Look up the word ‘complacent’ in the dictionary and the first synonym will be Fianna Fail.

Take ‘Catching the Wave– a report drawn up by the Services Strategy Group and launched back in September.  It was intended to chart a new strategy for Irish service enterprises – a strategy for growth and expansion.  That was the intention anyway.  Michael Hennigan of Finfacts put it best:

‘It is a political whitewash that continues the delusion that Irish firms are responsible for most Irish exports, when both merchandise and service exports are dominated by American firms . . to produce a report on Irish services, without a reference to for example Microsoft, the main Irish service exporter, is bizarre. By seeking to ride on the success of mainly world class US companies, the goal of developing an appropriate strategy for Irish firms, is simply neutered. Nowhere is there a mention that US world class firms are responsible for most of the exports. How can the challenges of the likes of Microsoft or the banking group Citigroup, which operates from the IFSC, be compared with an indigenous Irish service firm that is seeking to establish an international presence?’

Harsh but fair.  In truth, ‘Catching the Wave’could have been written on the back of beer mats.  The 4,000 word document starts from an incredible assumption in the Tanaiste’s introduction:

‘Ireland is one of the world’s leading service exporting countries worldwide. In per capita terms, we punch well above our weight: we account for 2.7 percent of world services exports, and are currently the 10th highest exporter of services in the world. Nonetheless, the current economic slowdown demonstrates how such accomplishments should not be taken for granted.’

No, this is absolutely not the case.  We have been successful in getting foreign companies to operate from here.  We have been successful in sucking at the teat of FDI – what with our ultra-low tax haven. And those companies – mainly US-based – have been highly successful.  But unless Microsoft is an ‘Irish enterprise’, our indigenous sector lags so far behind, you’d need binoculars to spot them.

We are all aware of how reliant on foreign capital our manufacturing sector is – particularly in the high value-added sectors.  The situation is no different in the tradeable service sector.  Here are some desultorynumbers from Forfas’ recent Annual Business Survey.  At the outset, let me point out that the numbers for the indigenous sector are over-estimates for they don’t include the wealthy and, primarily foreign-owned, financial sector.  So how much does the indigenous sector account for:

  • Total Export Sales: 9.6 percent
  • Growth in Export Sales between 2000 and 2007:  9.8 percent
  • Total Sales: 20.4 percent
  • Total Value Added: 25.1 percent

Nowhere in the report is there any reference to the two-tier nature of our enterprise base (except to point out that tax receipts from the indigenous sector make up 9 percent of total receipts in the tradeable service sector).  The distinctions between productivity and export-orientedness of the two different tiers are glossed over.

A second flaw is, given its complacency over the performance of our tradeable service sector, is the staring point for its recommendations:

‘Of course, it will be up to private businesses to take advantage of the opportunities offered in services. Our report sets out how the State can pave the way by ensuring that barriers are removed and conditions optimised, and makes a number of recommendations.’

This comes straight from ‘climatology’ school of enterprise development:  if we get the conditions right, a hundred enterprises will bloom.  Well, those conditions have been right for years: low tax, low payroll costs, light regulatory regime, etc.  The report doesn’t address this, anymore than it addresses the real problems in our indigenous enterprise base:  limited export knowledge, small scale, backward labour relations, limited investment, deficient managerial skills, etc.  Simply put, if you don’t ask the right questions you won’t get anywhere near the right answers.

That’s why its recommendations reads like a smorgasbord of more of the same: ‘continue to develop’, ‘consider opportunities’, ‘review and amend’, ‘improve the process’, ‘study the implications’, ‘extend policies and strategies’, ‘promote’, ‘facilitate’ and on and on.

Because the report doesn’t recognises or even survey the fundamental flaws in our indigenous base, its analysis is almost useless.  Mr. Shapiro may suggest ‘weaning’ ourselves off of FDI.  The fear is that if we were to do that, we’d starve.  Not only is there no Plan B, there doesn’t seem to be an acceptance at the top levels of government that we even need one.

So here’s my prediction:  if down the line the US Administration does take moves to consolidate its own tax revenue base, the Government will have one more excuse for our economic decline: the people (for buying houses), international conditions, the Euro, a lack of patriotic fervour; and, now, President Obama.

It would be funny if it wasn’t so criminal.

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