Editor's comment
The publication of the IMF Report was the equivalent of a political hand-grenade. In a way it merely confirmed what has become all too obvious: the economy was badly managed over much of this decade. The opposition parties have been making much political capital on the back of IMF's damming verdict.
But the IMF report highlights more than economic policy errors. What was the quality of the information at the government's disposal during the heady days of the Celtic Tiger? More importantly, where does the economy go from here?
The Taoiseach Brian Cowen can rightly point to an unprecedented global downturn exposing Ireland's vulnerability as one of the most open economies in the world. But there were domestic factors at play which have added greatly to this country's problems.
Following the internet fuelled bubble of the late 1990s, that pithy phrase ‘new paradigm' should have sent alarm bells ringing anytime it was invoked to justify a departure from conventional economic or business cycles.
When this country's manufacturing industries were being relocated overseas, the soothing mantra coming from the Government was that it was all part of the grand masterplan of moving up the value chain. Never mind that well paying jobs in multinational and indigenous plants were moving elsewhere. There were enough jobs being created in construction and related sectors to keep the economy booming along at a breakneck pace for the foreseeable future.
And because construction was pumping so much money through the economy, anybody who queried the sustainability of this model was told that we had now entered a ‘new paradigm'. Moreover, the economy had become services oriented based on the wealth generated by the unstoppable positive equity generated in the residential housing sector.
As the IMF succinctly pointed out in its report, the construction boom masked a fundamental shift away from a competitive export oriented economy towards an overpaid uncompetitive economy with a banking system undone by an ill-advised consumer binge.
But why was the economy allowed to become so over-heated in the first place? True, it is highly unlikely that any government would have been willing to shout stop when the national coffers were being filled at an unprecedented rate.
In the UK, the decisions over monetary policy were handed over to the independent Monetary Policy Committee to ensure objectivity. Ireland handed over monetary policy to the ECB when it joined the single currency. But that is why it was critical that counter-cyclical measures should have been introduced when it was obvious that the low interest rate environment was fanning an already over heating economy.
What was the quality of information coming out of the department of finance? Was it a case that there wasn't enough expertise available to advise on measures on how to deflate the economy even when it was becoming obvious that it was heading for a loud wallop? When times are good a minister for finance sitting around a cabinet table comes under huge pressure to open the purse strings. Ditto when times are bad.
In the future, there has to be much more independence and objectivity when framing economic policy.
There is also the issue of where does the economy go from here? On 29th June, the Government announced a task force on innovation. This is an encouraging move, but one that will have limited benefits. There is a huge unemployment problem mounting.
Employment levels were ramped up to unrealistic levels during the construction frenzy. The Government's much vaunted ‘Smart Economy' sets out ambitious plans for doubling the number of PhD students in science and technology.
The IDA is doing a commendable job in still attracting foreign direct investment in what is an extremely tough environment. But many of these jobs are at senior graduate level.
The fact remains that this country will be struggling with a structural unemployment problem for generations to come unless an industrial strategy that adequately addresses widespread job creation is unveiled.
The huge initial wave of foreign direct investment in the early 1990s that attracted the likes of Intel was based on a low tax environment combined with a very competitive cost base. Some of this low level assembly type production has flown to much lower cost locations in China and India, which was unavoidable.
But there are manufacturing and industrial activities at a more value added level that provide good employment opportunities that this country cannot compete in anymore because of the high cost base. Fiddling while Rome burns may be a jaundiced interpretation of the government's innovation strategy. It is a step in the right direction, but only a small step in a very long journey.
