“The Recovery Has Nothing to Do With the Government”

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AshokMody“The recovery has nothing to do with the government”. So says Ashok Mody, former head of mission to Ireland for the IMF, according to a report in the Sunday Business Post. He goes on to argue that the current composition of the recovery is unsustainable and that it is unfair. He warns that an export-led recovery cannot be relied on in a slowing world economy and that regressive taxes should be changed. A full interview with him is promised later.

The judgement is valid. In terms of growth the current government’s track record is unexceptional. Taking the 4 ½ years of economic data under the FG/Labour coalition, real GDP grew by 15%. This is an average annual rate of just under 3.2%. This is slightly slower that the growth rate in the last 4 quarters of the previous government of 3.6%. No-one, not even in Fianna Fáil pretends that the previous government had sound economic policies.

The reason for the moderate average growth rate, very modest following an extremely sharp recession, is that the economy actually contracted in the first part of the FG/Labour term (as shown in Fig.1 below). In the first quarter of 2013 real GDP was 0.7% lower than FG/Labour had inherited almost 2 years earlier. The trend line in the graph shows where GDP would now be if it had continued at the same pace over the last 4 ½ years.


But the former IMF chief is mistaken in one important respect. The recovery is not export-led. Fig. 2 below shows the volume of exports and the volume of investment (Gross Fixed Capital Formation, GFCF). The rise in GFCF preceded the rise in exports. GFCF has also risen proportionately faster than the rise in exports. And, if we turn to the monetary contribution, net exports (exports minus imports) have risen at an annualised rate of just under €5bn since the beginning of 2010, while GFCF has risen by €19bn on a comparable basis. Clearly, investment growth is linked to export growth. But the recovery has been led by investment, not by exports.


To sustain the recovery requires a further increase in investment. Yet relying on the private sector is problematic, as Ashok Mody suggests. Private sector dominated investment is inherently unstable. GFCF has fallen in 5 of the last 8 years.  Therefore the stabilising factor for investment must come from the public sector. This is the optimal way to sustain the recovery.

There is a separate but related issue of fairness in the recovery. It is impossible to raise living standards over the long run without economic growth. But this is an insufficient condition. There must also be rising incomes and improved public services. Therefore a twin-track approach is required based on raising public investment, improving public services and redistribution via the tax system, replacing regressive taxation with progressive taxation. For a fair, sustainable recovery.

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