March 18th Morning: The Recession Diaries

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There is a sense that, if we could just overcome these temporary setbacks (recession, credit crunch, low export demand) then we might find our way back to a more benign economic climate. There’s very little sense that this is a ‘game-changer’, as Liam, a reader of this blog, put it. For instance, the Sunday Tribune ran a provocative headline:

‘We’ll return to full employment within six years, ESRI predicts’.

Never mind that the ESRI didn’t make this ‘prediction’. Dr. John Fitzgerald was giving a speech. He is quoted as saying:

‘I would be hopeful of a return towards full employment by 2015.’

There’s ever so slight a difference between ‘hopeful’ and ‘prediction’.

Still, that Dr. Fitzgerald is ‘hopeful’ should give us some solace. But full employment by 2015? There is no magic benchmark that signals an economy is in full employment. It is usually taken as either (a) there is no cyclical unemployment and/or (b) that almost everyone able to take a job can do so. Usually, full employment is somewhere in the 4 to 5 percent range.

Starting from 1988 – the year we started using the ILOs standardised rate – we find ourselves with 16.3 percent unemployment. By 1993, it had only fallen by a half percent. Of course, we were fortunate during that period – over 100,000 emigrated. Imagine the impact on unemployment (and public finances) if they had hung around in the land of their birth.

From 1993 – when the Punt was devalued, making our exports cheaper – unemployment started falling. By 1997 – when Fianna Fail defeated the Fine Gael-led government – it was still over 10 percent but falling consistently. By 2000 it fell to 4 percent. This could be described as ‘full employment’.

Ulster Bank is projecting unemployment to rise to 16 percent by next year. Of course, this is just a ‘prediction’ but in any event we could find unemployment will rise to that level by 2011 or 2012 as unemployment lags behind growth. For instance, between 1988 and 1993, the economy averaged a growth rate of 3.7 percent in volume – but no shift in unemployment.

So, depending on your starting point, it took 12 years to go from 16 percent unemployment to full employment (1988 – 2000); or seven years (from 1993 – 2000). So, Dr. Fitzgerald could be justified in his hope – all things going right. But there is another consideration.

The 1990s was the decade of the multi-nationals (MNCs), courtesy of the outstanding work of the IDA. It wasn’t all due to cutting our tax rate – MNCs had generous tax breaks going all the way back to 1956 and in the early 1980s they were effectively exempted from tax (the Export Sales Relief). A number of factors contributed to the take-off – the 1993 devaluation; the single market which gave Ireland, an English speaking country, an advantage; lack of industrial strife. But the IDA strategies were a major contributor. They aggressively targeted those sectors that were, at the time, considered recession-proof and were high value-added: chemicals, pharmaceuticals, electronics, etc.

It’s not just the direct job creation that benefited the economy. The massive increase in export sales, even if whole hunks of profits were repatriated; the relative high-waged jobs; the satellite companies that arose to service the MNCs; and the regional spread of MNC greenfield investment (compare that to exporting service companies which are concentrated in Dublin) – all these formed the basis of the Celtic Tiger economy.

Let’s take one aspect – the contribution of direct employment of the MNCs. After all, if we’re not getting jobs from foreign direct investment, its economic impact will be extremely limited. In 1992 employment in IDA supported companies (we’ll use MNCs as short-hand) – was 6.7 percent of total employment. By 2000 – the highest year for MNC employment – that proportion had risen to 8.4 percent. It may not seem like much, but let’s look at it another way.

IDA 1 In the 1990s, one in every eight new (net) jobs came from the MNC sector – a significant amount, primarily concentrated in our export sector. Remember, this doesn’t count jobs created in enterprises that serviced the MNC sector nor those firms that arose out of the higher spending power of those newly employed at higher than average wage rates.  Since 2000, however, there has been no contribution to direct job creation. Indeed, the number of MNC jobs fell by over 5,400.

It’s not that the IDA fell down on the job. The world economy went into the doldrums following 9/11 and MNC employment fell by over 12,000 between 2000 and 2003. The IDA managed to reverse this trend – since 2003 employment increased by nearly 8,000.

But the going is getting tougher. It’s not just that other countries are emulating Ireland’s low corporate tax rates. The very nature of MNC employment is changing. The jobs we got in the 1990s are now being shifted to lower-wage economies and the type of projects we are competing for are, quite rightly, more capital and knowledge-intensive, but not as employment-intensive as it once was.

The IDA is still working hard – even in the midst of the downturn:

  • HP announced 500 new jobs over the next 12 months in their Global Service Desk in Kildare – highly-skilled multilingual technical support positions
  • Intel is expanding its R&D facility in the Shannon Free Zone (tax-free zone, that is) which will hopefully create 134 jobs over the next four years.
  • Gerson Lehrman Group is establishing its European office in Dublin with plans to create 50 jobs by 2011 – software and quality assurance engineers, product managers, etc.

These are considerable achievements but will they make up for the job losses that are now occurring? No. The IDA, despite its work, could not bring 2007 employment levels back to the 2000 levels – despite both domestic and international growth. With the job losses occurring today, we will be running hard and not be able to stand still.

So, if we can’t rely on MNCs to deliver the job growth that it did in the 1990s what are other historical sectors we can fall back on? Property / construction-related sectors? Credit-fueled sectors? I would suggest not placing too much hope there.

Maybe Dr. Fitzgerald is optimistic about a new dawn for indigenous enterprise. But without an enterprise strategy focused on this sector it is difficult to see this bearing much fruit. Even with the exponential growth in the traded service sector since 2000, employment in Irish-owned agency assisted companies (IDA, Enterprise Ireland, Shannon Development and Údarás na Gaeltachta) increased by less than 17,000 – and that was during a good period.

Still, I’m glad Dr. Fitzgerald is hopeful. Better to have a leading economist being hopeful than going around saying ‘game over, game over’. So hope is good. As Emily Dickinson wrote:

‘Hope is the thing with feathers.’

My only fear is that the Irish economy has been well and fully plucked.

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