Economic Fundamentals and a Unified Irish Economy

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This article is based on a background paper which was delivered to a fringe meeting at the recent Sinn Féin Ard Fheis

1tIn Ireland there are two separate economic entities. Their separation means they run up against the fundamental laws of economics, as first identified by Adam Smith[i].

In the first instance it is the size of the home market which determines the scope of the division of labour. But in Ireland both economies, by their separation, have a truncated home market. This was not always the case. As part of the British Empire the North East portion of the island was highly integrated into what was then the largest ‘home’ market in human history. At the same time most of the rest of the island was primarily a breeding ground for cattle, to help feed the large metropolitan imperial centres.

Post-Partition the situation has dramatically changed.  The Empire is gone while the southern economy has both developed a home market of a certain size while integrating itself to one of the world’s largest markets in the EU. This is the key fundamental fact which explains the dramatic changes in average living standards in the two parts of the Ireland since Partition.

This is illustrated in Fig.1 below, which shows per capita GDP using common international Dollars (adjusted for Purchasing Power Parities, first Angus Maddison and then OECD). It amounts to a startling transformation of relative prosperity within Ireland.

To specify the data, Maddison shows that per capita GDP in Ireland in 1921 was $2,533 and that in Britain it was $4,439 (and from a variety of sources that average incomes in the north-east counties of Ireland was at least on a par with Britain). From OECD data per capita GDP in RoI was $37,581 in 2013 and in the UK it was 34,755 (and the ONS data shows NI per capita output was 82% of the UK level).

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Fig.1 Relative Per Capita GDP 1921 and 2013

 

As the size of the home sets the boundary for the scope of the national division of labour, it follows that increasing the size of the national market would increase the scope for all enterprises to benefit from the increased size of the home market. This is true of enterprises whether they operate in the public or private sectors, or both; an airline or a bank as much An Post as or the NHS.

The arithmetic of a unified Irish home market is straightforward. In 2013, in common currency terms (OECD PPPs) the RoI economy produced $210bn and the NI economy produced $50bn. Therefore a unified Irish economy would increase the scope of the home market for all enterprises currently operating in RoI by nearly 25% while the home market for NI enterprises would increase by fourfold.

International Division of Labour

The home market is decisive only in the first instance, as domestic enterprises are established and develop. The division of labour also occurs on an international or even global scale through the medium of overseas trade[ii]. This is increasingly the case and is the underlying power of ‘globalisation’ which draws billions of producers into world markets, and into greater prosperity.[iii]

After removing itself from the dominant relationship with Britain, the RoI economy has become more integrated into the world economy. The same is not true of the NI economy. NI ‘external sales’ amounted to just £14.3bn[iv] in the most recent annual data[v]. In RoI the value of exports in 2013 was €89bn[vi]. The composition and quality of international trade is equally important. A key problem is that its trade is increasingly dominated by Britain, which accounts for more than half the total. By contrast Britain is the destination for about one-eighth of RoI’s exports.

This is important because trade is not simply the exchange of commodities, especially in advanced economies. International trade reinforces the international division of labour and the level of productivity through the exchange of the most advanced capital goods. RoI’s trade (both exports and imports) is mainly with countries that have a higher level of productivity than Britain[vii], Fig.2. Britain has one of the lowest levels of productivity in both the G7 and among the major EU economies. Any economy whose trade is mainly confined to that of Britain is unavoidbaly cut off from the most advanced global output. Because of the trends in British relative productivity this problem is increasign in scope.

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Fig.2 Productivity (output per hour worked) in selected EU economies. Source: ONS

Investment

One of key effects of the division of labour is the rise in the proportion of capital goods and fixed capital in the economy[viii]. Production of certain goods used in the production of ther goods is the physical embodiment of the division of labour. Machinery, transport goods, computers etc. represent the embodiment of someone else’s skilled labour. The more advanced the machinery used, the higher the output per hour and therefore the greater prosperity in the economy as a whole.

Therefore the level of investment plays a decisive role in realising the potential created by the division of labour, along with the educational quality of the workforce. The long-term relative decline of the NI economy is in part a function of the low level of investment. In RoI the misdirection of investment towards housing (which is unproductive capital) helped to cause the crisis and the failure of investment to recover is prolonging it (and productivity is falling in the recent period, shown in Fig.2).

The potential benefits of a unified Irish economy can only be realised with increased investment. The independence and reunification of the very diverse economies of India and China required investment to realise their potential. But German reunification provides a cautionary tale, as post-reunification growth is slower because investment was cut.[ix] The important question remains of how will the potential of a unified Irish economy be realised. In different degrees, the private sector in both parts of the Irish economy is not providing the investment necessary to lead to sustainable economic development.

This requires a political answer to an economic question. Unifying the Irish economy will require a political leadership at governmental level, but also one willing to prioritise investment. Only in this way can the very substantial potential of a unified Irish economy and increased prosperity be realised.

 

Notes

[i] In The Wealth of Nations Smith’s genius was to identify the division of labour as the primary driving force of all increases in prosperity. From this it follows that size of the market, the central role of labour in the creation of value, the inherent trend of increasing in the stock of capital goods and the key role of international trade are all derived, and more besides. Rather than the ‘hidden hand of the market’ which is phrase invoked by neoliberal economists who appear not to have read Smith, his focus was on the powerful effects of increasing division of labour. This is what Marx more scientifically designates as the increasingly socialisation of production; the increasing complexity of the production procession requiring both greater collaboration of individuals, firms and countries in economic development and expressed through the accumulation of productive capital.

[ii] Difficulties of road transport meant that even in Smith’s time bulk goods were more likely to be transported by sea, which made international trade the near-equivalent of domestic trade- it was as easy to ship goods from Newcastle to the Low Countries as it was to London.

[iii] Global growth rises and falls with the growth of international trade. The many critics of globalisation are expressing discontent with the distribution of the effects of globalisation, particularly regarding inequality within economies. Yet the greater the integration of any economy into the world economy, the faster it will grow; because it is increasing its participating in the international division of labour  and access to the most efficient global production.

[iv] http://www.detini.gov.uk/stats-manufacturing-sales-exports

[v] DETINI has produced new data showing external sales somewhat higher, this series only has experimental status http://www.detini.gov.uk/measuring-ni-exports.pdf?rev=0

[vi] http://www.cso.ie/multiquicktables/quickTables.aspx?id=tsa01

[vii] US, Germany and France each have a productivity level (output per hour worked) 28% higher than Britain.

[viii] Smith calls this ‘stock’

[ix] Both parts of the reunified Germany now grow more slowly than when they were separate. This is because the German government engaged in a process of disinvestment, scrapping productive capacity primarily in the East and not replacing it http://martinamep.eu/wp-content/uploads/2013/12/Mick-Burke-Reuniting-Ireland-contribution.pdf

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