MORELLA AND PENISCOLA

My wife, Finola and I have just spent an enjoyable few days in part on the Valencia region on the east  coast of Spain.

One of the highlights of our visit was the spectacular walled mountaintop city of Morella, which is about 70 km from the coast. It is one of the oldest recorded settlements in Spain, was occupied by the Berbers in  714, but reconquered by King Alfonso in 1117. Its walls are well preserved and are more than 2km long and were besieged many times, most recently in the Carlist civil wars of the 19^th century. The castle is magnificent and intimidating, but unfortunately, as seems to be a pattern in this part of Spain, the famous basilica was closed both to visitors and to would be worshippers.

We were staying close to Peniscola. This fortified town is on a peninsula jutting out into the sea. It was occupied at different times by the Carthaginians, the Romans, the Moors and the Knights Templar. During the time of disputes about the Papacy, one of the claimants, Benedict XIII lived in Peniscola from 1417 to 1423.

ECONOMIC GROWTH—WHAT IS IT?

There is one thing we need, all economists agree, to get us out of our financial and banking difficulties.....economic growth.

What ideas can we in Ireland contribute to the debate on how best to restore sustainable, robust, and fair economic growth to Europe’s economy?

The adjectives are interdependent.

Temporary growth, funded by unwise borrowing or inflation, would not be sustainable.

Nor would growth that ran down limited non renewable material resources be robust

Growth that enriched one section a community while leaving others behind would certainly not be fair, but it would, in practical terms, not be robust or sustainable either.

It is also important to specify what it is we want to see growing, when we aim for economic growth. 

In statistical terms, an increase in numbers in hospitals or prisons adds to GDP, but it is not the sort of growth we are looking for.

Taking time off from paid work to look after children or sick relatives subtracts from GDP, but it does not subtract from human welfare, and may add substantially to it. 

That is not an argument for abandoning GDP as a measure of growth, but it should be complemented by other measurements that look at resource sustainability, and at people’s own assessment of their wellbeing taking into account of things like their connectedness with their family and friends, their physical and mental health, and their sense of control of how they spend their time.

 Some of these measures will be subjective, but just because something is subjective, does not make it less real.

Economic growth is really an expression of a society’s ability to adapt quickly to new opportunities or needs.

 A flexible society will “grow” faster than an inflexible one.

 But economic growth is a means to an end, not an end in itself.

 A society that is contented and well ordered, and in which people enjoy democratic  freedoms, may not need to grow quite as fast, to keep its people satisfied, as a society which does not enjoy these “non economic” advantages.

 Perhaps China has to grow faster, to satisfy its people, than India does because Chinese citizens do not enjoy the same democratic freedoms as Indians do.

But the strange thing is that mainstream economists often have very little to say about what makes economies grow, at least before the growth happens. 

They frequently can explain growth after the event, but not before.

 FACTORS THAT PROMOTE ECONOMIC GROWTH

My sense is that growth occurs in an economy when six factors are present

1. Spare capacity and unused resources.

 It is easier to get an economy to grow after a period of stagnation than on the back of a boom, because there will be more spare unused resources around at moderate cost after a period of stagnation. 

 There have been rapid recoveries   in the past, for example after the second world war, but those rates of growth could not be sustained once full capacity had been achieved.

 The rapid recovery after the economic troubles of the 1980s, and the currency crisis of 1993, in Ireland misled some people into thinking that those exceptional “bounce back” rates of growth could go on forever, and this mistake led them to borrow foolishly.

 I believe there is considerable pent up consumer demand in the Irish economy at the moment, and when the people who have money feel confident they will start spending again. That will lead to a spurt in growth, which will not necessarily endure, although it will be very welcome when it happens. 

 During a downturn in an economy, scientists do not stop inventing, so when the upturn comes there is often a disproportionately large stock of readymade inventions waiting to be marketed.  There is a great deal of unexploited scientific invention, especially in the pharmaceutical and energy fields, and a healthy European venture capital industry is vital to exploiting this as part of a strategy to promote economic growth.

2. A market for what one produces. 

The EU provides a big potential market, but that potential will only be realised if consumers and businesses have the confidence to spend.

Creating confidence in the global economy is difficult, but one of the requirements for it is political stability, and a sense that the political leadership in Europe has a medium term plan. 

 That is beginning to take shape, but far too slowly.

 For Ireland, a political agreement on a banking union in the EU is a vital national interest. 

This is not so much because it may lead to some the banking debt taken on by the taxpayer may be relieved.

 Compared to the amount we are saving on day to day interest to borrow to fund the excess of what we spend over what we raise in tax, the extra interest we pay on the bank related portion of our national  debt is  a smaller figure.

 The really big gain for Ireland from an EU banking union being agreed is the huge  boost in confidence it would give to the  global and European economy, on which Ireland depends for its prosperity.

It is also important that the EU Single market, which was  supposed to fully open  twenty years ago, be fully completed. There are still barriers to  business, especially in services, the professions and energy. New barriers are arising in banking. Retail banking cannot be conducted across borders because  property rights differ from  jurisdiction to  jurisdiction. This is a gross waste of scarce resources, at a time when  EU can afford to  waste nothing

2. A young population.

 Young people are more innovative that older people, and they have more unmet needs.  Both of these factors stimulate economic growth.

 Ireland has a comparatively young population, many other euro area countries do not. The age profile is one of the reasons why some countries have a bigger medium term growth prospect than others. 

The OECD has done some estimates of the annual  growth potential of different counties  for the period  2016 to 2025.

 Whereas Germanys   growth potential is estimated at only 1.2%, Greece’s and Netherlands  both at 1.4%, and Italy’s at 1.4%,  Spain’s is estimated to be 2.3%, Potrugal’s  2.1% and Ireland’s  2.7%.

 Sustainable growth requires sustainable demographics, and policies and social values that depress the birth rate, by making it economically costly to have children, may boost shorter economic growth, but they are not compatible with sustainable long term growth in an economy. Families who have children are meeting the cost of educating the people whose work will pay the pensions of everybody else, including the pensions of those who do not incur the cost of having children and can save the money instead or spend it on themselves. A tax code that ignores the cost of having children is inequitable in this respect.

4 Available capital at moderate cost.

 It is very difficult to set up or operate a business if banks are afraid to lend because they themselves are unable to access funds at moderate interest rates. That is the situation we are in now, in places like Ireland but also in the southern European euro member states.

 Just as lax regulatory policies which fuelled the credit boom were both pro cyclical and disastrously mistaken, the present, severely contractionary, and exacting credit policies, which are just as pro cyclical, may be adding to the damage.

  I am not talking about prudential regulation here, but about policies that progressively increase capital ratios at a time when the shock of recent losses is so seared into the memories of both lenders and borrowers, that they are most unlikely to repeat the mistakes of the 2000 to 2006 period, for a good while to come no matter what capital ratios are.

 One must ask if the higher capital ratios proposed in Basel Three and Solvency Two make any sense in present circumstances. One must also ask if  regulators fully comprehend the full impact on availability of money in our economy of the closing down of so called shadow banking and interbank lending.

 I believe there is a need to clean up the banking system and  liquidate unviable positions, but the last three hundred years of history have shown that we do need banking and credti, and a lot of it, if economic potential is to be realised. Without them, the West would never have developed and  the Est would  have continued  to dominate economic activity in the globe, as it had done  for  two thousand years up to 1750.

5 A competitive workforce.  

This means more than just moderate pay expectations and low rates of inflation.

 It also means good skill levels, adaptability, and willingness to work in new ways.

 It means having service professions where restrictive practices do not apply

 believe Ireland has great strengths in this area. Our workforce, many of whom have worked abroad, and understand the needs of a competitive global market, are very willing to try new ways of doing things. 

6 An efficient state. 

If a country has poor security, poor tax collection, an inefficient legal system, a costly and ineffective health service, and an education service that emphasises the rights of education providers over the achievement of deeper understanding and higher competences by students, the country will not grow as quickly as it should.

 Part of the challenge faced in Greece is that of reconstructing state institutions.

 In Ireland , we also have to ask ourselves some very hard questions about the efficiency of our health and education systems. 

“An efficient and effective public service is essential for a growing economy and we have to ask ourselves some very hard questions about the efficiency of our health and education systems. 

Reforms in these sectors are essential and I hope that the Government extracts long term meaningful reforms from the Croke Park Agreement.   This week’s deal with consultants on more flexible working and rosteringneeds to be replicated across the heath and education sectors.

It is all about management of resources to obtain results. The tendency in the past was to put more resources into a service and hope for the best.

 Between 1997 and 2009, there were increases in numbers in management grades in the civil service of 82%, while numbers generally rose by only 27%. Managers did not manage well enough. I believe that is now changing using the instruments of the Croke Park Agreement.

From 2000 on there were very big increases in the number working in, and spending by, the health service and one must ask oneself whether there have been commensurate improvements in health outcomes. 

For example, between 2001 and 2006, the numbers employed in the health service increased by 20,000 people, and , between 2000 and 2009, the  number of items prescribed in the GMS increased from 22 million items to  53 million. Did we become proportionately healthier during that period?

In education, between  2001 and  2006, the numbers employed increased by 27%, yet our comparative performance in international comparisons in science and mathematics has been slipping , and ” teaching for the test”, to game the Leaving Certificate points system, has distorted education. 

I am in favour of compulsory Irish and  time spent on teaching Irish in primary school is of course essential, but one must ask if it might not be better if some of that time(say 25%) ought not be diverted to science and mathematics. If students fall behind in those subject, particularly maths at primary level, they may never catch up. 

We also need to ensure that the public service operates in a cohesive manner to achieve government objectives and live within budgets set for them by Government. If budgets are exceeded, there has either been a failure to estimate demand properly, or a failure to manage supply. Neither should happen.

My own experience of Government was that Departments of state focussed almost exclusively on their own goals, with little reference to the broader purposes of Government. In the US, they refer to this as government operating within vertical silos.

 This failing places undue stress on the cabinet of the day as it is the only place where an overall view was being taken. I believe the Secretaries General of Government Departments should be required by law to come together on a  weekly  basis as a collective” implementation council” to ensure that government decisions are implemented coherently, and thoroughly.

 This would go some distance towards removing the vertical silo problem.

Speech by John Bruton, President of IFSC Ireland, and  President  of the European Sustainable Materials Platform, at a meeting of ACCA in the Gibson Hotel Dublin at  4.15pm on 19 September 

.

A POSITIVE PROPOSAL TO BOOST GROWTH

What is needed to restore growth to Europe’s economy?

This is a critical question for Ireland.

The financial viability of any country with substantial debts, depends on the inter relationship of three factors

1. Interest rates that are low and affordable
2. Growth rates in the economy that are sufficiently high to generate tax revenues to pay off debts over time

3. Whether the Government is running a primary surplus (that means that its revenue is  higher than its spending if one leaves out of account the spending that o in interest on debts)



It looks as if the ECB and the US Federal Reserve are going to  keep interest rates low for a long time to come and there is little risk on inflation in the  short term. So condition number one for a return to financial viability is being met. This is the big difference between now and the 1980’s when international interest rates were kept cripplingly high.



The third condition has yet to be met.   While the Government is meeting its immediate EU/IMF targets , but Government spending still exceeds Government  revenue by an amount that is greater than the  amount  being spent on paying interest on existing debt. 

That is why reducing spending and increasing revenue are still such a priority.





But what about the second condition, growth.



The longer term(2016 to 2025) growth potential of the Irish economy is better than most EU countries because of Ireland’s age profile, its type of industry and its general flexibility. But, in the shorter term, things are not so good. Growth projections have had to be reduced because of a decline in international trade.



So, in the absence of a boost from international trade, we depend on the production of credible policies to boost the European growth rates, independently of what is happening in the rest of the world.



In the late 1930s the Great Depression in Europe was ended by a surge in investment, in armaments. Not a cure we need to use now!



But perhaps there is another form of security related investment that would make sense for Europe today........investment in climate security?



Climate change is happening, and it is a threat to the lives of  millions of people, especially in drought  ridden part of the world. Our Long term ability to feed ourselves is being put under threat. The depletion of phosphate and potash resources  mean that soil conservation, and the avoidance of soil loss through climate change, should be a top priority, if we want to be able to feed the  9 billion people we will soon have  living on our globe.



In the 1990’s, the EU set itself a goal of reducing CO2 emissions by 2020 to 20% below their 1990 levels. Thanks to the recession, that goal will now be easily achieved in most countries.



The German Ministry of the Environment commissioned a report in 2011 which  suggested that  the EU should scrap the old 20% target as too unambitious, and set itself a new target, to reduce CO2 emissions to 30% below the  1990 level by 2020, and accompany that new target  with a major  EU wide investment programme in cogeneration of heat and power, insulating all older buildings, enhancing the power grid, and  building new wind turbines.





The report suggests that this investment programme would increase the growth rate of the overall EU economy from  a potential 2.2% to 2.8% .



In Germanys case, it suggests the unemployment rate could, as a result of the additional investment, be 2.9 percentage points lower than it would otherwise be, and in Ireland’s case, unemployment could be  3.3 percentage points lower.   Detailed estimates are produced for most EU countries



The biggest potential increase in employment identified in the report  was be in the construction sector, a sector in which Ireland has  substantial under used resources.



The detailed measures proposed in 2011 report undoubtedly need further work and updating, but they provide a basis  for injecting some hope into the debate about Europe’s future and a sense that we are taking charge of events again.





It would be a good idea for this German paper of 2011 to be put on the agenda for the EU Summit of December 2012.

ECONOMIC GROWTH...EVERYONE WANTS IT, BUT HOW DO YOU GET IT?

There is one thing we need, all economists agree, to get us out of our  financial and banking  difficulties.....economic growth.The strange thing is that mainstream economists often  have very little to say about  what makes economies grow, at least before the growth happens. They frequently can explain growth after the event, but not before.

My sense is that growth occurs in an economy when seven  factors are present

1. Spare capacity and unused resources. It is easier to get an economy to grow after a period of stagnation than  on the back of a boom, because there will be more spare unused resources around  at moderate cost  after a period of stagnation
2. A market for what one produces. The EU provides a big potential market, but that potential will only be realised if consumers and businesses have the confidence to spend. Creating  confidence is difficult, but one of the requirements for it is political stability, and a sense that the political leadership in Europe has a medium term plan. That is beginning to take shape, but far too slowly.
3. A young population. Young people are more innovative that older people, and they  have more unmet needs and both of these stimulate growth. Ireland has a comparatively young  population, many other euro area countries do not.
4. Available capital at moderate cost. It is very difficult to set up or operate a business if banks are afraid to lend because they themselves are unable to access funds at moderate interest rates. That is the situation we are in now, in places like Ireland but also in the southern European euro member states.. 
5. Previously unexploited technical and scientific advances. During a downturn in an economy, scientists do not stop inventing, so when the upturn comes there is often a disproportionately large stock of readymade inventions waiting to be marketed. 
6. A competitive workforce.  This means more than just moderate pay expectations and low rates of inflation. It also means good skill levels, adaptability, and willingness to work in new ways. But a competitive workforce, on its own, will not produce economic growth unless capital is available. The EU/IMF programmes for Ireland, Greece, Portugal  will run into this difficulty.
7. An efficient state. If a country has poor  security, an inefficient legal system, a costly and ineffective health service, and an education service that emphasises the rights of education providers over the achievement of deeper understanding and higher competences by students, the country will not grow as quickly as it should.

Readers may has other items to add to this list.