PMCA in the Media

Friday, November, 2010

Hear Dr. Pat McCloughan talking with Margaret Ward of Newstalk 106 (19 Nov 2010) about PMCA Economic Consulting’s latest economic research on the positive role of exports growth on employment potential in Ireland (see also articles on that PMCA Economic Commentary article in The Irish Times and Irish Examiner).  Dr. McCloughan’s radio interview runs during 6.50-13.00 minutes within the piece.  Listen to the Newstalk piece here.

Following the announcement of the loan facility to help in the restructuring of the Irish economy, there has been much discussion of the future of Ireland’s comparatively low corporation tax rate.  This is undoubtedly the lynchpin of Ireland’s attraction as a host location for inward foreign direct investment (FDI), which in turn has been the driving force behind Ireland’s economic success for many years (see, for example, ‘Driving force behind the Celtic Tiger’, The Financial Times, 31 Aug 1999, authored by Dr. Pat McCloughan of PMCA Economic Consulting).  Even if the rate were increased by a very small amount, even a single percentage point, it could have serious adverse ramifications for economic growth occuring in Ireland, which in turn could jeopardise the whole 4-year plan announced on 24 Nov 2010.  Existing and potential investors would likely interpret even a very small increase in the corporation tax rate as the beginning of an upward trend, to appease the larger Member States of the EU, and the investors would likely start to view the large and rapidly growing emerging market economies, including China and India, more favourably in what is a brutually competitive international marketplace for mobile FDI, in which Ireland has traditionally punched above its weight but is now at risk of falling behind in the ‘beauty parade’.

According to a previous study of FDI into Ireland by Dr. Pat McCloughan of PMCA Economic Consulting and Professor Bruce Lyons of the University of East Anglia, entitled ‘Uncle Sam’s Ireland: The Nature and Impact of Foreign Multinationals on the Economy of the Republic of Ireland’, Chapter 6 in Inward Investment, Business Finance and Regional Development, edited by Stephen Hill and Brian Morgan, Macmillan Business, 1998), Ireland may be the “best option in Europe for inward FDI” because of the following factors:

“the benefits of (1) tax incentives, (2) grant awards, (3) cheap, skilled and highly adaptable labour, (4) privacy of production with little fear of imitation of know-how, (5) a stable political environment and (6) use of the English language compensate for the disadvantages of (a) geographic isolation, (b) weak infrastructure of input manufacturers and (c) the absence of a major technology base” (p. 110 of the Lyons and McCloughan study, 1998).

That research-based statement by Lyons and McCloughan was made back in the late 1990s and it is worth taking stock of what has changed in the intervening period.  On the plus side, Ireland’s most important competitive advantage remains, namely the internationally low corporation tax rate.  That competitive edge should be protected at all cost and the signs are that the IMF understands this.  However, Ireland can no longer boast low-cost labour nor political stability: these areas require urgent attention if Ireland’s competitiveness and credibility is to be restored.  Also noteworthy, and an example of how a previous minus has become a current plus for Ireland, relates to the fact that the “absence of a major local technology base” in the country has been transformed and we now have a significantly enhanced third-level sector and improved technology exchange between higher education institutions and enterprises.

Noteworthy in this regard is Ireland’s Strategy for Science, Technology and Innovation (SSTI) (2006-2013), which builds on the ongoing and successful Science Foundation Ireland (SFI), aimed at bolstering the scientific research base in a small number of key areas in Ireland, namely biotechnology, ICT and environmental technologies.  PMCA considers that the SSTI/SFI constitutes an example, perhaps a rare one, of a successful government policy development in the past decade aimed at boosting innovation and competitiveness in Ireland.  For too long has research, development and innovation (RDI) been starved of public funding in Ireland and these initiatives are a welcome development in regard to addressing the problem.

Some commentators have criticised the level of funding afforded to the SSTI and SFI.  PMCA considers that these commentators may not fully understand how the scientific research process works in practice.  As well as needing public funding, it is also important to support basic scientific research to build up an infrastructure of research excellence that is genuinely world-class.  When that infrastructure is in place, and it is fair to say that Ireland has made significant progress in that direction in the aforementioned areas of focus, the commercialisation and enterprise spin-offs will occur; but first the investment needed to trigger the research excellence needs to be made.  The investment is also in keeping with the principle of serendipity – the cornerstone of all scientific and ultimately commercial development.

The fiscal consolidation package announced by the Irish government on 25 Nov 2010 risks resulting in higher income inequalities in Ireland in the coming years.  Contrary to what some might believe or choose to think, the gap between the ‘haves’ and the ‘have-nots’ actually narrowed in Ireland between the mid-1980s and the mid-2000s, based on Gini coefficients published by the OECD (OECD Factbook 2009).  (The Gini coefficient is the name for the statistical index used for measuring the degree of income inequality in a country.)  The lowering of income inequalities in Ireland during the ‘good times’, before the onset of the crisis, reflected the public sector wage growth and rising social welfare payments (see, for example, the article by Dr. Pat McCloughan of PMCA Economic Consulting entitled ‘Welfare and public pay reduced income inequality in Tiger years’, Sunday Independent, 26 July 2009).

The likelihood of rising income inequalities in Ireland in the coming years, as a result of the fiscal auterity measures, will make the hard medicine even more difficult to take and may slow the pace of recovery.  It may also heighten the risk of civil disobediance.

According to the CSO’s Survey of Income and Living Standards (2009), published yesterday, average gross household income fell by almost 7% between 2008 and 2009, and the corresponding rate of decline in average net household income was 6%.  Significantly, in PMCA’s view, almost one-quarter of households were behind with bills in 2009, compared with a rate of just over 10% in 2008.  Also significant is the fact that the percentage of people in consistent poverty increased from 4.2% in 2008 to 5.5% in 2009.  PMCA believes that this rate is likely to increase further in 2011 and beyond, as the austerity measures bite into people’s income and living standards, and as income inequalities are expected to rise.  These trends are all likely to part of the severe economic adjustment now underway in Ireland.

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