tag:blogger.com,1999:blog-37445327930586129552024-03-07T19:31:00.916-08:00The Irish EconomyComments on contemporary issues in Irish economic affairsPeter Collinshttp://www.blogger.com/profile/03702540376694818466noreply@blogger.comBlogger29125tag:blogger.com,1999:blog-3744532793058612955.post-89218221642945251562013-12-12T03:19:00.003-08:002022-10-27T06:26:45.787-07:00Facebook or Faceless! Reading a summary of the financial position of Facebook Ireland recently, once again brought home to me the extent to which the activities of such well-known profitable companies clearly display a crass regard for any true ethical obligation with respect to tax liabilities.<br />
<br />
According to the Financial Times, Facebook used a complex tax avoidance scheme to limit its corporation tax bill to €1.9 ml. in 2012 (based on a turnover of €1.79 bl.) That would work out as just a little over .1%!<br />
<br />
However of the €1.79 bl. turnover a truly incredible €1.75 bl. relates to administrative expenses for the use of intellectual property. This money (i.e. royalty payments) is paid into a special holding company Facebook Holdings that is incorporated in Ireland but registered elsewhere for tax purposes. So the money in turn passes through this company on its way to subsidiaries based abroad. Many of these appear to be located in the Cayman Islands where no tax is payable.<br />
<br />
Of course Facebook is not alone in this respect with Google and Apple (among others) using similar tax avoidance schemes. <br />
<br />
And Ireland is clearly not the only country benefiting from such schemes with for example several other European countries such as the Netherlands, Luxembourg and Switzerland offering especially attractive incentives.<br />
<br />
<br />
Now these companies can still brazenly keep a straight face in maintaining that they conscientiously fulfil all their tax and regulatory obligations. When asked why they have located in Ireland they routinely provide gushing accounts regarding the quality of the work force (while opportunities for tax avoidance are never even mentioned).<br />
<br />
Unfortunately we are presented here with stark evidence of the unacceptable face of capitalism.<br />
Countries such as Ireland can derive considerable benefits through attracting key multinational operators like Apple, Google and Facebook into their midst. The whole national tax system is then deliberately skewed to the liking of these companies.<br />
<br />
For example, though the Irish economy has been going through a deep recession since 2008 with domestic taxation rising and expenditure on services falling, not alone has there been a unanimous official agreement to maintain the low corporation tax rate (12.5 %) but additional incentives have been made available (e.g. tax concessions for top executives) to make the island even more attractive.<br />
<br />
In many ways however the tax rate is used as a red herring to divert attention from the reality of how these companies pay virtually no tax here through a seeming ability to declare any amount of revenue they wish as royalties. They then use the double Irish system of incorporating a holding company that is registered in a tax free haven elsewhere to then effectively screen all these revenues away from tax.<br />
<br />
So theoretically for example in the case of Facebook, it does not really matter how high the official tax rate is here in Ireland if it can in effect declare all revenues as administrative expenses and then transfer this revenue to a tax haven registered in another country (where no tax liability applies)!<br />
<br />
<br />
Thus everyone involved seems therefore more than happy to focus sole attention on the merits or demerits of the official corporate tax rate on profits, which effectively then acts as a smokescreen against looking at this deeper issue of how these companies effectively avoid paying almost any tax in Ireland.<br />
<br />
Presumably the fact that are willing to pay some small amount of tax (regardless of how minuscule) creates the appearance of tax compliance (which again can be seen as the best tactical approach from their perspective).<br />
<br />
<br />
Now the multinational companies play an increasingly important role in the Irish economy. <br />
<br />
However you will scarcely ever hear any word of objection to the tactics which these companies employ as it would not be seen to be in our national interest.<br />
<br />
For example yesterday we had the directors of a big charity here in Ireland rightly being grilled by the public accounts committee of our national parliament regarding the apparent misuse of its voluntary funding.<br />
<br />
Now one might think that the activities of multinationals (such as Apple, Google and Facebook) are of much greater significance both in economic and ethical terms. However it is highly unlikely that a similar public grilling of its representatives would ever happen as the very attempt to seek accountability would be seen to run counter to our narrow self interest.<br />
<br />
And we would not be alone in this regard! As competition for such international investment is intense, other countries where such companies might locate would be likely to behave in exactly the same manner!<br />
<br />
Therefore if the ethical issues of massive tax avoidance are to be properly addressed, this will require an internationally agreed system of regulation (with every country willing to play by the same rules).<br />
<br />
However by the very nature of capitalism this will not easily transpire while each country is still motivated to maintain its own competitive advantage (relative to others).<br />
<br />
Indeed this is a huge weakness of capitalism which eventually could wreck havoc on the international system.<br />
<br />
We have quickly moved in modern times to a system where genuine global co-operation is increasingly required on a broad range of fronts.<br />
<br />
For example our climatic problems cannot be addressed while countries still seek to maintain a short-term competitive advantage with respect to others. <br />
<br />
Likewise global financial problems cannot be solved while institutions seek to maximise returns for the benefit of their own executives and shareholders.<br />
<br />
And the enormous problems associated with the manner in which multinational corporations wield so much power, cannot be dealt with while again individual countries seek to maximise their short-term advantage through turning a blind eye to the significant ethical issues involved.Peter Collinshttp://www.blogger.com/profile/03702540376694818466noreply@blogger.com0tag:blogger.com,1999:blog-3744532793058612955.post-68572995509343777392013-12-10T03:47:00.000-08:002018-05-28T02:45:31.924-07:00Ireland in TransitionI was watching an interesting programme presented by Ian Kehoe (from The Sunday Business Post) showing how the recent resurgence in the Irish economy owes a great deal to a considerable amount of overseas capital investment, especially with respect to sales of distressed property.<br />
<br />
As is well known the Irish property boom came to a shuddering halt in 2008 leading to massive falls in value with respect to both residential and commercial property.<br />
<br />
Many of the largest loans on these properties were sold to NAMA (an Irish state organisation that has arguably now become the largest property company in the world). Likewise, many other assets however still exist on the banks' balance sheets, which they are anxious to sell to the highest bidder.<br />
<br />
And as Irish developers no longer possess the financial means, these assets are being quickly sold principally to the US (on both coasts) the UK and other international investors.<br />
Some of these assets have been bought up also by successful Irish developers based abroad (though these would be in a minority).<br />
<br />
For example the programme focussed on one Neville Isdell (former Chief Executive of Coca Cola) who has purchased the CHQ in Dublin's Docklands. This was developed with the intention of becoming an iconic commercial centre before the crash quickly ended all hopes. Though €45 million had been spent on its development it was purchased by Isdell for just €10 million.<br />
<br />
Another excerpt featured William J. McMorrow of Kennedy Wilson a real estate auction company that is already invested billions in buying up large portfolios of property in Ireland.<br />
<br />
Then there was the owner of a British chain of pubs Wethespoons that are now buying up pubs at knock down prices in Ireland with a view to becoming the biggest operator.<br />
<br />
There was also a broker Michael Hasenstab from Franklin Templeton that invested several billion in buying up Irish bonds at the height of the crisis (when interest rates were very high). This audacious act paid off handsomely with large profits being made on the investment. It also injected much needed confidence into the bond market at the time with interest rates subsequently falling dramatically.<br />
<br />
We also saw Wilbur L. Ross who bought a substantial stake in the Bank of Ireland (one of Ireland's two largest banks) again helping to stabilise its fortunes at the height of the crisis.<br />
<br />
So what do we make of all of this from a wider economic perspective?<br />
<br />
Undoubtedly the popular mood here would be one of deep resentment. Thus, as many ordinary folk still struggle greatly with an overhang of debt in their personal lives, they see these outside (largely anonymous) wealthy investors as vultures that our seizing large swathes of property at bargain basement prices.<br />
<br />
Of course the attitude of the investors themselves would be somewhat different. They would point to this as healthy capitalism where market forces reign supreme. They would further maintain that they are in fact helping significantly to regenerate the Irish economy through their willingness to invest with the prospect of recovering markets thereby promoting new activity and employment.<br />
<br />
And certainly from a short-term perspective there is a great deal of truth in this view.<br />
<br />
However it does raise the very disturbing longer term spectre of Ireland becoming increasingly dependent on the whims of these outside investors.<br />
<br />
Even before the crash Ireland had become heavily dependent on multinational investment (especially of US origin). Though this greatly increased wealth generation, a very significant proportion of this wealth then flowed out of the economy through profit repatriation (running at about 1/6 of GDP).<br />
<br />
Since the financial crisis, not alone has Ireland becoming even more dependent on such foreign investment in manufacturing industry and services but this has now spread dramatically into commercial retail and residential property activity.<br />
<br />
So in the short to medium terms, what we are likely to experience in Ireland is a significant increase in the amount of money being repatriated from the economy each year.<br />
<br />
Profit flows themselves are likely to increase due to the intensification of investment, especially in internationally traded services, with a growing contribution of outflows also from the retail sector.<br />
<br />
Outflows with respect to interest repayments abroad will also sharply increase due to Government repayments on the substantial bail-out funds we received during the crisis from our Troika partners. <br />
<br />
Now strictly these payments would be measured with respect to debt borrowed from abroad. However there is the further complication that since the crisis increasing amounts of Irish debt are now held by non-resident institutions (e.g. Franklin Templeton) which means in effect an additional large outflow.<br />
<br />
<br />
On top of both these profit and interest outflows we will also see a large rise in outflows relating to rental income (as so much commercial and residential property is now controlled by foreign landlords).<br />
<br />
<br />
Though it is very difficult to put an exact figure on it, it is not beyond the bounds of possibility that we could see in the next decade an effective doubling in the proportion of net foreign outflows. That would mean that up to 1/3 of the money generated from economic activity in Ireland could subsequently be repatriated to other countries!<br />
<br />
<br />
This would imply that though a substantial - and even sustained - recovery may well emerge in the Irish economy over the next few years, its effects are likely to significantly bypass most ordinary citizens living here. Put simply for many years economic growth in Ireland is set to repay outside investors (rather than the majority of domestic citizens).<br />
<br />
I would also fear that it may work in an very uneven fashion with a considerable amount of money (though domestic and overseas investment) eventually finding its way back into property thus inflating prices unduly once more. This in turn will create an artificial market for many domestically produced goods. Though this will enable higher levels of employment to be maintained, greater levels of inefficiency will operate. So the cost of living in Ireland is likely to stay above and even increase with respect to the EU average.<br />
<br />
There is also the worrying fact that investor sentiment can just as easily turn against our interests in the future.<br />
<br />
For example if Franklin Templeton considered (on shrewd profit calculations) to sell a substantial amount of its Irish debt in the future, this could have a very damaging impact on the Irish bond market generally.<br />
<br />
So from this perspective, institutional investors (with no commitment to national economic priorities) now have the power to effectively blackmail small countries with respect to their own private interests.<br />
<br />
This cannot be a healthy development for capitalism internationally. In fact, if the mistaken capitalist view that private greed somehow translates into public virtue, is allowed to continue unchallenged, then the international economic system itself is likely to be its eventual casualty.<br />
<br />
We were given a severe warning sign of this through the financial crisis of 2008. However its deeper message has clearly not yet been heeded!Peter Collinshttp://www.blogger.com/profile/03702540376694818466noreply@blogger.com0tag:blogger.com,1999:blog-3744532793058612955.post-50833987406742406852013-05-29T03:35:00.001-07:002024-02-11T09:11:42.796-08:00Apple's iTax<span style="font-family: "georgia" , "times new roman" , serif;">The US Senate hearings on the tax avoidance activities of Apple last week places uncomfortable attention on Ireland’s relationship with this key multinational company.</span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">This followed a Public Accounts Committee into the affairs of Google who again are effectively using Ireland as a means of legally paying virtually no tax in the UK.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">And they are by means alone in this regard. For example an article in the Wall Street Journal back in 2005, highlighted the manner in which Microsoft used two subsidiary companies operating within a law firm in Dublin to again substantially reduce their overall tax liability.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">Then when questioning the extremely high cost of prescribed drugs In Ireland, one can also point to a growing concentration of the pharmaceutical sector. 9 of the top 10 multinationals are now in operation here with - I strongly suspect - tax avoidance on their global operations a major consideration. <o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">One of the key consequences of all of that due to a growing unhealthy level of dependence on foreign direct investment (mainly of US origin) that it has now become the elephant in the room that is stifling honest economic debate on many important economic issues here in Ireland.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">For due to the<span style="mso-spacerun: yes;"> </span>exorbitant price of drugs under our national health schemes (with so satisfactory official explanation) I reached my own conclusions i.e. that this in fact represents a hidden subsidy with the Government fearful of the short term employment consequences in the sector if it were to adopt a tougher bargaining position.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">Ireland is now one of the most open - if not the most open - economy in the world.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;">Some of the statistics are truly extraordinary (though rarely the focus of economic debate).<span style="mso-spacerun: yes;"> </span></span><br />
<span style="font-family: "georgia" , "times new roman" , serif; mso-spacerun: yes;"> </span><o:p></o:p><br />
<span style="font-family: "georgia" , "times new roman" , serif;">At present the total value of stated exports (goods and services) is over 100% of recorded GDP (with up to 90% accounted for by multinational companies).<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">Thus the wealth in the economy is largely generated by overseas companies (principally of US origin). However they account directly for a relatively small amount of overall employment.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">So the vast majority of jobs in our economy relate to the trade of low value services which we buy and sell to each other at very high prices.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">One of the fallacies surrounding the EU internal market (trading without restrictions) is that it would thereby ensure the benefits of competition in all sectors. <o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">However this clearly does not apply to many services. If I need to buy groceries, get a car repaired, visit a dentist or a solicitor, use the health service etc., the prices will be largely governed by purely local circumstances that are largely immune from outside competition.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">During the earlier part of the Celtic tiger (1994 – 2000), Ireland - in comparison to its EU neighbours - was a competitive economy . However the wealth created by growing multinational activity considerably fuelled demand for local goods and services. <o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">It particular this led to a highly artificial form of domestic wealth creation through an unprecedented boom with respect to both commercial and residential property. This then in turn created a growing demand for domestic services that were largely protected (geographically and otherwise) from overseas competition.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">So when the financial crash came in 2008, ending the property bubble, prices in Ireland had now risen well above the EU norm for most goods and services.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">With debt levels rising and demand plummeting, this led to a significant loss of employment in these sectors.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;">This in turn has created an even greater level of dependence in recent years on ever more investment being attracted to our shores in the hope of counteracting adverse domestic trends.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">So we now effectively have a two-tier economic system in Ireland.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">On the one hand multinational activity in Ireland is booming (helped recently by the location of leading financial service companies such as City Bank and Merrill Lynch and Internet giants such as Google and Facebook).<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">However the domestic economy is largely on its knees with many smaller firms on the verge of extinction. <o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">Though this has led to a series of distortions with potentially enormous consequences, the official unspoken consensus is that no negative questions should be raised regarding the role of multinational investment in Ireland.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">Not surprisingly therefore the official reaction to the hearings in the UK and the US last week have been highly defensive with continual protestations that Ireland meets none of the criteria for a tax haven, that no special deal ever applied to any investor here and that we are totally transparent in all our tax arrangements. The same sentiment has then been largely shared by the media and <o:p>tax commentators.</o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">Unfortunately this response is most unconvincing. The same kind of official propaganda was used during the latter years of the Celtic tiger to quell criticism of anyone who dared question the enormous excesses of the property boom.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">The official mantra then was that the fundamentals in the economy were all sound and that growth in Ireland was the envy of our European neighbours. Then when the credit policies of the banks were questioned we were continually assured that they were stress tested with capital reserves greater than required so that no problem could emerge.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">Then when it was no longer possible to ignore the possibility of a property crash the new official position was now that Ireland would have a “soft landing”<span style="mso-spacerun: yes;"> </span>and that after a short period of adjustment would quickly return to a sustainable growth rate (in excess of 4% pa).<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">The main research Institute the ESRI - despite its fears and misgivings - in effect largely shared this cosy official consensus as did the media and the main political parties. <o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">In the 2007 elections the programmes of both Fianna Fail and Fine Gael were predicated on maintaining growth rates in excess of 4%. <o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;">(In fact the projected growth rate of the opposition party Fine Gael was slightly higher than Fianna Fail!)</span><span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">So any retrospective attempt by FG to maintain that it warned of the impending crisis is without foundation.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">Let’s look briefly at some of these distortions created through the significant presence of multinational companies in Ireland.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">Firstly important issues arise regarding the accuracy of a great many of our economic statistics.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">The official measurement of growth is in terms of GDP. As we have seen exports contribute disproportionately to Irish GDP. However one could validly question the true extent of these exports.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">Take the activities of Google as one example! Google at present considerably benefits from its double Irish arrangement. Clearly it trades in Ireland (currently employing over 2,000) with the offshore company here owning its intellectual property rights. However under Irish law Google also has set up a 2nd company which is allowed to be tax resident elsewhere, - in this case in Bermuda - where no tax on profits applies. <o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">The 2nd company then charges the other Irish company license and royalty fees (based on the holding of its intellectual property rights). Not surprisingly these are designed to effectively wipe out any liability for tax under our system (where officially a 12.5% rate applies). <o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">In fact it has been revealed that Google has paid a miniscule amount in tax to the Irish exchequer in the past few years of its operation (.13%).</span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">They likewise pay little in the UK (where a substantial amount of the advertising revenue is effectively generated). </span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">The UK authorities would like Google to pay tax on the revenue (effectively generated in the UK). However Google cleverly uses a technical loophole whereby they maintain that all sales are closed in Ireland thereby avoiding such a liability.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">One might validly ask why the Irish authorities are therefore not protesting - since Google attributes UK sales to their Irish operation - about the tiny amount of tax paid here on such large amounts of income.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">Well, let’s say it is a convenient arrangement that benefits both sides. On the one hand Ireland has located here one of the most prestigious companies in the world providing high skilled jobs in an expanding enterprise. On the other hand Google is enabled to legally pay a very small amount of tax (on its non-US earnings).<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">Paradoxically the very arguments of the Government demonstrate the effectiveness of<span style="mso-spacerun: yes;"> </span>Ireland as a tax haven. So while it validly protests that it does not fulfil any of the legal criteria for a tax haven, this offers further cover for companies such as Google and Apple (who use it precisely for this purpose).<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">This is not to maintain that Ireland is by any means alone in this regard. In Europe<span style="mso-spacerun: yes;"> </span>the Netherlands, Luxembourg and Switzerland for example are involved in similar type activities.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">The case of Apple is even more curious in that its 2<sup>nd</sup> (tax avoiding) company does not seem to have a designated tax residence.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">So, all in all, perhaps Apple’s greatest design is with respect to this ingenious iTax which renders vast sums of money invisible for taxation purposes anywhere in the world.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">Considerable distortions also arise through transfer pricing policies that are deliberately designed to artificially lower reported costs with respect to an Irish subsidiary. This criticism has recently been made of Marks and Spencers who operate in both the UK and Ireland. However with corporate taxation higher in the UK, some of this burden can be transferred through the company selling goods and services to the Irish subsidiary at artificially low prices. This then enables the Irish branch to show higher profits which are then taxed at the lower Irish tax rate.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">However with multinational activity at such a high level in Ireland, this raises serious question marks regarding the accuracy of many of our leading economic statistics.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">Once again the official measurement of economic performance is based on GDP which is designed to measure the total value of what is produced in a country. <o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">However because of the significant use of Ireland by large multinationals to reduce their international tax liabilities this figure is likely to greatly overestimated. For example as we have seen with Google they attribute large amounts of sales advertising to Ireland that effectively is sold elsewhere in Europe!<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">So a substantial amount of what is reported in Ireland as GDP, represents artificial profits (created to legally avoid tax payments). Significant amounts of these profits are then - according to our Balance of Payments - treated as negative income flows.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">At present over €30 bl. of profits is reported as flowing out of the economy annually representing nearly 20% of GDP. So our GNP (which takes count of this movement) is considerably less than GDP and arguably a much more accurate indicator of our economic performance!<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">But even this figure must be severely questioned. Though “profit repatriations” is commonly used with respect to these US multinationals, it is very unlikely that the money is going back to the US. Presumably in many cases it is being held in their tax resident location e.g. in the case of Google, Bermuda. However in other cases as revealed in the case of Apple, the profits do not seem to be going anywhere. So in effect Ireland here seems to be the location for the artificial generation of vast amounts of profits that are not officially recorded in our statistics.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">Apart from profits flows (recorded and unrecorded) we then have huge amounts recorded under licence fees and royalties (again at nearly 20% of current GDP). Now these would be treated as services imports in the Balance of Payments. However one could validly question - like the profits - how accurate these figures can be! <o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">Thus enormous question marks hang over the accuracy of our GDP, GNP, import and export figures.<span style="mso-spacerun: yes;"> </span>And all of this matters in several important respects.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">For example our contribution to the EU Budget is largely based on GDP. <o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">Now if one accepts that in the case of Ireland - for the reasons stated -<span style="mso-spacerun: yes;"> </span>this figure represents a substantial overstatement of our true economic performance - then significant sums of money are being lost to the domestic exchequer each year (at a financially difficult time).<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">Also growth performance in Ireland can be highly misleading. Once again the official emphasis is on GDP growth. However GDP figures can be rising while GNP figures (which are more representative of true performance) are falling at the same time.<span style="mso-spacerun: yes;"> </span><o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">The official position at the moment is that the Irish economy is now in recovery with moderate GDP growth taking place. However this belies the fact that many parts of the domestic economy are still in deep recession. <o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">And in any case - again because of the uniquely important role of multinational activity in Ireland - it is especially difficult to trust the accuracy of key recorded statistics.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">Associated with this is a growing dichotomy as between two economies i.e. the one based on the multinationals and the other relating to locally traded goods and services.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">It is no accident that the very conditions that have led to record success in the last couple of years, with respect to attracting multinationals, equally are causing growing problems for the domestic sector.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">In many ways the Irish economy is now more attractive than ever to US multinationals.</span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;">The US authorities understandably are annoyed at the manner their companies legally avoid paying tax in their own country. <o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">So as a first step they are now clamping down on the use of pure tax havens (i.e. where companies register solely for tax purposes with no productive activity taking place). <o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">Some of the companies affected have thereby moved to less overt tax havens - such as Ireland - where genuine production is required and can to an extent be used to mask the nature of tax avoidance adopted.<span style="mso-spacerun: yes;"> </span><o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;"><o:p></o:p><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">As a result of the domestic recession, labour and rental costs have dropped making it more attractive for foreign investors.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">Also because of high unemployment the Government is more anxious than ever to meet their special requirements with an ever expanding range of new proposals such as write-offs on R&D, income tax waivers on earnings of top executives located here and even suggestions to further lower the current corporation tax rate of 12.5%. <span style="mso-spacerun: yes;"> </span><o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">As these multinational mainly use Ireland as a base for selling into the wider European market and elsewhere, the recession in the domestic economy is not of direct interest. Also they are not affected - unlike domestic producers - by the continuing liquidity crisis in our banking system.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">However one feature of special concern with respect to our continued reliance on multinational investment that it is leading to considerable distortions with respect to acceptable notions of social justice.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">Since the property crash in 2008 a huge burden has been placed on young middle income earners.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">Many of these have suffered substantial negative equity on their properties struggling to repay mortgages taken out at the height of the boom.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;">Indeed many are now unemployed with little immediate prospect of finding work in Ireland! <o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">Then to finance the huge debts that have accumulated at public sector, corporate and private levels, the Government has resorted to austerity measures leading to substantial increases in taxation and a decline in customary public services.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">The domestic retail sector has then suffered the fallout from the rapid decline in disposable income while also facing further considerable obstacles.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">So while everything is done to make Ireland even more attractive for outside investors, in effect a reverse set of circumstances applies to domestic business. <o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">Due to the banking crisis Irish business is starved of credit. Meanwhile because of a crazy system of upward only reviews, rental costs for retailers remain far too high <span style="mso-spacerun: yes;"> </span>forcing many out of business. Other important costs such as communications, energy, insurance and waste disposal are among the highest in Europe.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;"><o:p></o:p><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">It is not surprising therefore that the wider public is now taking more notice of the tax avoidance activities of multinationals. <o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">Put simply they ask: Why should these massively wealthy companies be assisted to allowed <span style="mso-spacerun: yes;"> </span>pay virtually no tax when low to middle income earners are being squeezed for tax at every turn? Where is the equity, where is the social justice in all of this?<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">In fact I believe that this represents a growing crisis for the way in which the capitalist system works.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">Multinational companies are immensely powerful due to the considerable resources they control. Because they can bring obvious short term advantages to the economies in which they locate, effectively they can play off one Government against another so as to get the best deal.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">Considerably hypocrisy attaches to the stance for example of the US government (which held its Senate Hearings into Apple). They could change their <span style="mso-spacerun: yes;"> </span>laws so as to make Apple liable for tax on its foreign earnings. However they will not do this, as they are fearful of the consequences with Apple perhaps then threatening to move its entire operations elsewhere.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">So in the absence of a globally agreed approach to the issue of taxing their profits, multinationals will continue to exploit the tax loopholes that inevitably emerge with respect to separate systems designed to maximise national advantage.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">Unfortunately, the very notion of global cooperation does not fit in with capitalist notions of competitive individualism (at either firm or state level).<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">Thus accepting this, the US is likely in the end to attempt to improve its national competitive advantage by providing additional incentives for Apple to repatriate their substantial overseas profits e.g. through a much lower rate of tax applying.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">I have long been of the opinion that our standard economic concepts have increasingly become outdated in the modern world and that we can no longer attempt to disassociate economic activity from moral notions of social and personal justice.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">Equally we can no longer seek to operate from merely an individual national perspective on a wide range of issues.<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">For example the environmental crisis can only be properly tackled on the basis of true global cooperation (based not on the interests of any individual nation in isolation but rather their combined long term collective benefit) .<o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">This also applies to the international financial system which will be quickly subject to further major upheavals if the inherent greed and selfishness on which the system operates is not faced through a disinterested form of global cooperation. <span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span><o:p></o:p></span><br />
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span><span style="font-family: "georgia" , "times new roman" , serif;">At a deeper level this will require substantial revisions in the accepted capitalist notion of profit which we will return to in a future blog entry! <span style="mso-spacerun: yes;"> </span><o:p></o:p></span>Peter Collinshttp://www.blogger.com/profile/03702540376694818466noreply@blogger.com0tag:blogger.com,1999:blog-3744532793058612955.post-64415755383051446472011-01-07T06:36:00.000-08:002017-11-04T07:27:03.351-07:00Health MattersThe earliest days of the New Year sadly only act to confirm my w<span class="blsp-spelling-error" id="SPELLING_ERROR_0">orst</span> fears regarding the state of the public sector in Ireland (and in particular health facilities).
<br />
<br />
Like an ever repeating broken record, we hear accounts at the beginning of <span class="blsp-spelling-error" id="SPELLING_ERROR_1">January regarding</span> the gross over-crowding of our public hospitals. Though we are told that lessons have been learnt with new plans in place to ensure that the same problems do not arise the following year, unfortunately it is always the same old story (with however matters even worse than before).
<br />
<br />
Of course the <span class="blsp-spelling-error" id="SPELLING_ERROR_2">HSE</span> will immediately point to the cuts in the health budget as a ready excuse. However the problem is really much worse than this with the truth being that we have an health service now in Ireland that in many ways has become increasingly dysfunctional.
<br />
<br />
There are many reasons for this sorry state of affairs pointing to key weaknesses in the Irish <span class="blsp-spelling-corrected" id="SPELLING_ERROR_3">personality</span> in dealing with <span class="blsp-spelling-corrected" id="SPELLING_ERROR_4">administrative</span> failure.
<br />
<br />
<span class="blsp-spelling-corrected" id="SPELLING_ERROR_5">Firstly</span> there is a huge lack of leadership at the political level in tackling the many powerful vested interests in the health system. The present Minister, Mary <span class="blsp-spelling-error" id="SPELLING_ERROR_6">Harney</span> represents a party that no longer exists. However far from disqualifying her from the job, the main Government party Fianna Fail has been quite happy to leave her in this important position (so that it can thereby avoid direct responsibility for any unpopular decisions taken.) So the Minister has been effectively out on a limb without enjoying the total support of her Government colleagues.
<br />
<br />
Secondly a new monolithic structure - Health Services Executive (<span class="blsp-spelling-error" id="SPELLING_ERROR_7">HSE</span>) - has been created ostensibly charged with the running of the health sector. However this has created a new problem with no one ultimately responsible for problems arising. The Minister hides behind the <span class="blsp-spelling-error" id="SPELLING_ERROR_8">HSE</span>, while the <span class="blsp-spelling-error" id="SPELLING_ERROR_9">HSE</span> is a somewhat faceless organisation with roles of responsibility deliberately <span class="blsp-spelling-corrected" id="SPELLING_ERROR_10">blurred</span>. So it is all designed to lead to the typical Irish problem of continual "systems failure" with conveniently no one ever directly responsible.
<br />
The <span class="blsp-spelling-error" id="SPELLING_ERROR_11">HSE</span> in any case represents a bureaucratic nightmare with far too many managerial staff who have no clear direction or purpose. Meanwhile the Government has persistently lacked the will to <span class="blsp-spelling-corrected" id="SPELLING_ERROR_12">tackle</span> this obvious problem of inefficiency head-on!
<br />
<br />
The health sector in Ireland has become riddled with powerful vested interests. Unions are very strong and not slow to defend their members' interests. In particular, consultants in Ireland enjoy an immensely <span class="blsp-spelling-corrected" id="SPELLING_ERROR_13">privileged</span> position in this system being paid substantially more than in other countries. Also it has to be said that they have proved pretty expert at defending such privileges in negotiations with weak <span class="blsp-spelling-corrected" id="SPELLING_ERROR_14">Government</span>!
<br />
<br />
Doctors also do very well out of the system in particular out of older patients for which they receive more than generous remuneration from the state. Also because of fears of medical litigation (and the exorbitant cost of medical insurance) rather than directly dealing with complaints, increasingly they refer patients to the hospitals for further tests thus worsening the logjam in the system.
<br />
<br />
The cost of drugs is also very <span class="blsp-spelling-error" id="SPELLING_ERROR_15">high</span> in <span class="blsp-spelling-error" id="SPELLING_ERROR_16">Ireland</span> which again <span class="blsp-spelling-corrected" id="SPELLING_ERROR_17">reflects</span> on the power of the pharmacies' union and also the weak bargaining position which the Government has exercised in negotiating <span class="blsp-spelling-corrected" id="SPELLING_ERROR_18">payment</span> with the pharmaceutical companies.
<br />
<br />
The hospitals too tend to be a law unto themselves with astronomical charges often indirectly applied to customers through the health insurance market.
<br />
So there appears to be little control exercised over health <span class="blsp-spelling-corrected" id="SPELLING_ERROR_19">insurance</span> costs.
<br />
Only yesterday for example the main health insurer, the VHI, announced increases in annual premiums that for some customers would be as high as 45%!
<br />
<br />
And it is not that this represents a once-off charge, <span class="blsp-spelling-corrected" id="SPELLING_ERROR_21">for</span> <span class="blsp-spelling-error" id="SPELLING_ERROR_22">premiums</span> have been escalating in most years by double digit increases in annual charges. And this is at a time when <span class="blsp-spelling-corrected" id="SPELLING_ERROR_23">the</span> <span class="blsp-spelling-corrected" id="SPELLING_ERROR_24">economy</span> is plunged in recession with <span class="blsp-spelling-corrected" id="SPELLING_ERROR_25">disposable</span> incomes for many citizens significantly reduced!
<br />
<br />
<br />
And as it stands things can only get worse. Because of the financial situation, the health budget will have to be sharply constrained for several years.
<br />
<br />
Meanwhile however, medical inflation here is escalating completely out of <span class="blsp-spelling-corrected" id="SPELLING_ERROR_26">control</span>. When one additionally considers that the age profile of the <span class="blsp-spelling-corrected" id="SPELLING_ERROR_27">population</span> is changing rapidly, with an ever higher proportion in the over 65 category, then the demands on the system will sharply increase.
<br />
<br />
In fact, given the lack of political will to enforce radical reforms and the absence of any creative <span class="blsp-spelling-corrected" id="SPELLING_ERROR_28">response</span> to problems that have already arisen, we are inevitably heading here in Ireland for a health crisis of truly considerable proportions.Peter Collinshttp://www.blogger.com/profile/03702540376694818466noreply@blogger.com0tag:blogger.com,1999:blog-3744532793058612955.post-72499988034031831282010-11-24T04:26:00.000-08:002011-05-03T04:03:38.388-07:00Crisis DeepensSince I last wrote several significant developments have taken place making it clear that the present crisis both in <span id="SPELLING_ERROR_0" class="blsp-spelling-error">Ireland</span> and in Europe is much deeper that initially realised.<br /><br />Indeed there is an even growing risk now that <span id="SPELLING_ERROR_1" class="blsp-spelling-error">the</span> <span id="SPELLING_ERROR_2" class="blsp-spelling-error">whole</span> financial system - not just in Ireland - but in the <span id="SPELLING_ERROR_3" class="blsp-spelling-error"><span id="SPELLING_ERROR_0" class="blsp-spelling-error">Eurozone</span></span> generally could spiral out of control with disastrous consequences for its citizens. And unfortunately this risk is aggravated through a lack of effective action at the EU level (where intervention is most necessary).<br /><br />To be honest I was deeply shocked at the manner in which the EU reacted to the growing Irish problems last week.<br /><br />Though I have been a persistent critic of the terrible mismanagement of our economy (especially since 2000) at least I could not fault the Government for its determination to play by European rules. So for example, despite considerable domestic criticism, Brian <span id="SPELLING_ERROR_4" class="blsp-spelling-error"><span id="SPELLING_ERROR_1" class="blsp-spelling-error">Lenihan</span></span> consistently maintained the Government's intention to fully redeem all senior bondholders in our banks (despite the inevitable huge burden that this would place on domestic taxpayers).<br /><br />Now I had always assumed that this assurance was pressed on him by the the <span id="SPELLING_ERROR_5" class="blsp-spelling-error"><span id="SPELLING_ERROR_2" class="blsp-spelling-error">ECB</span></span> who in return for such loyalty would guarantee liquidity to the Irish Banking system. After all, given that our National Central Bank is part of the European <span id="SPELLING_ERROR_6" class="blsp-spelling-error">System</span> of Central Banks, the <span id="SPELLING_ERROR_7" class="blsp-spelling-error"><span id="SPELLING_ERROR_3" class="blsp-spelling-error">ECB</span></span> is now in effect "our" bank.<br /><br />One of the essential functions of a properly functioning Central Bank is to act as lender of last resort! And as the Irish banks cannot borrow from anyone else at present then certainly this "lender of last resort" facility could never have been more necessary.<br /><br />Last week as the threat of contagion spreading to Portugal and then Greece increased, the <span id="SPELLING_ERROR_8" class="blsp-spelling-error"><span id="SPELLING_ERROR_4" class="blsp-spelling-error">ECB</span></span> panicked to assume its new role as "part lender of last resort" Admittedly because of the enormous liquidity hole in the Irish Banking system it was using up a great amount of the resources it had available (about 20%).<br /><br />However the attempted solution to this <span id="SPELLING_ERROR_5" class="blsp-spelling-corrected">problem</span> is so inept as to beggar belief.<br /><br />Ireland had already become a seriously overburdened nation debt wise, with growing doubts as to whether it was at all viable to expect taxpayers to absorb all these losses (without any sacrifice asked with respect to senior bondholders).<br /><br />Then the <span id="SPELLING_ERROR_9" class="blsp-spelling-error"><span id="SPELLING_ERROR_6" class="blsp-spelling-error">ECB</span></span> decided to pull the plug by setting a limit to the extent to which they willing to fund the Irish banks. So Ireland was inevitably pushed into an ignominious bailout that seems inadequate from every point of view.<br /><br />From Ireland's own perspective it greatly increases debt at a time when the nation is already overburdened debt wise. Therefore this bailout is not "free money" but rather comes at an onerous interest rate close to 6%. Furthermore it means that independent decision making will be forfeited now for some years.<br /><br />Personally though in the circumstances we had no option but to accept the bailout, I <span id="SPELLING_ERROR_7" class="blsp-spelling-corrected">believe</span> that we have been let down badly by our European partners (who unfortunately are now quickly changing their role to that of our European masters). Worse still despite Government loyalty we find ourselves to a degree betrayed by that very institution on which we believed we could most trust. So it was the <span id="SPELLING_ERROR_11" class="blsp-spelling-error">ECB</span> that put out the rumours that Ireland would need a bailout and then decided to have the matter confirmed through the Governor of our Central Bank.<br /><br />This bailout is highly unlikely to reassure the markets in any case. If the <span id="SPELLING_ERROR_12" class="blsp-spelling-error">ECB</span> cannot guarantee full funding to support the Irish bank losses, how can it possibly have sufficient reserves to deal with the financial problems of <span id="SPELLING_ERROR_13" class="blsp-spelling-corrected">the</span> much <span id="SPELLING_ERROR_14" class="blsp-spelling-corrected">bigger</span> economies? And a remedy that attempts to place the entire burden for the losses (recklessly funded by large European banks) on to the domestic taxpayers of Ireland is not only morally unjust but is very shortsighted in economic terms. For such a tactic only reduces the ability of the economy to attain growth (which is a precondition for honouring those debts).<br /><br />So as I write - the day after the package was finalised - the markets have responded in predictable fashion with share prices around Europe falling.<br /><br /><br />I take no satisfaction in now stating that so many of the problems that I have always seen in the economic system are now coming to a head.<br /><br />Make no mistake about it! What we are now witnessing throughout Europe is endemic of deeper inherent faults in the way the capitalist global system operates.<br /><br />Important decisions, so often decided by narrow domestic considerations are hugely inadequate in relation to the scale of problems we are facing (as exemplified by the bailout package to Ireland yesterday).<br /><br />Perhaps even more serious is that the time scale for which decisions are taken is far too-short term (again largely dictated by sectional political interests).<br /><br />Also the attempts to treat the market system as an impersonal mechanism (without due concern for the moral implications of those taking decisions in the markets) leads inevitably to great injustice in social terms.<br /><br />In <span id="SPELLING_ERROR_15" class="blsp-spelling-corrected">particular</span> this has already led to an enormous build-up of problems with respect to <span id="SPELLING_ERROR_16" class="blsp-spelling-corrected">financial</span> and environmental issues.<br /><br />So what we are now witnessing is not just a crisis for Ireland or for Europe. It is in fact a defining crisis for the capitalist system.Peter Collinshttp://www.blogger.com/profile/03702540376694818466noreply@blogger.com0tag:blogger.com,1999:blog-3744532793058612955.post-29310220440372499722010-11-07T04:02:00.000-08:002019-05-28T14:46:38.721-07:00Looming CrisisThings are not looking good at present in Ireland with an enforced economic bailout from the EU/IMF Stability Facility in the new year looking ever more likely.<br />
<br />
Unfortunately the damage already done to the economy during the totally reckless latter phases of the Celtic Tiger has been so great that in truth it is hard to see how any credible response can now be made to deal with the financial implications.<br />
<br />
As I had always feared, losses from the banking system have been much greater than recognised.<br />
Indeed I suspected that the government was engaging in an unconvincing game of bluff in hiding the extent of such losses. From an initial position that the banks "would cost us nothing" it is now admitted that the losses will be in the order of €50 bl. (which unfortunately is likely to be a severe underestimate). The projections with respect to property prices on which these figures were made were far too optimistic. Furthermore there is a considerable amount of - yet - unrecognised debt in the banking system relating to mortgages and other loans which represent yet another important aspect of an enormous financial problem.<br />
<br />
Effectively therefore our banking system remains on life support and is being almost entirely funded though ECB borrowings.<br />
<br />
<br />
On top of this despite a severe budget last year, no real improvement has taken place in the budgetary position of the Government. Even with all the banking debt excluded, the current deficit stands at about 12% GDP. With a commitment to get this down to 3% by 2014 this requires that even more severe adjustments will need to be attempted over the coming years. So the Government is trying to reduce the gap by a massive €6 bl. in the forthcoming budget (mostly through expenditure cuts). However for this to have any hope of success, several assumptions (e.g. projected growth in the economy) will need to be realised which do not seem to me at all realistic.<br />
<br />
<br />
So even if the Government succeeds in overcoming the considerable political difficulties in getting its budget passed in December, it is very likely that the downward scale of adjustment required will erode any chance of economic recovery in the short-term. If this scenario is proven correct then the revenue side will further deteriorate in 2011 so that we could be facing a largely similar gap in the finances next year.<br />
<br />
<br />
Meanwhile the bond markets already have made this judgement so that interest rates on longer term issues have risen to nearly 8%. And quite simply if such rates continue it is not tenable for the Government to borrow from the market!<br />
<br />
However perhaps there is one little chink of light remaining. Given that Greece has already been forced into a bailout and that there are other Euro economies such as Portugal and Spain also suffering major financial difficulties, the EU will be extremely reluctant to accept that yet another country requires an "official" rescue. Acceding to such an outcome could hasten the end of the whole Euro experiment! Therefore everything possible may be done behind the scenes to actually help Ireland financially (without resort to the Stability Facility).<br />
<br />
As I suspect that the very targets (and broad strategy) of the forthcoming Budget have been effectively decided by EU officials, therefore a measure of responsibility falls on them to see that they can be successfully realised.<br />
<br />
So in a very real sense Ireland has already handed over a considerable amount of sovereignty to the EU and this process is likely to be intensified in future years (even without formal recourse to a bailout).<br />
<br />
<br />
However this does raise very interesting questions with respect to economic management.<br />
<br />
1) Given the nature of our political system with the petty in-fighting that is so typical of our political parties. it seems that we cannot agree on a coherent overall strategy unless it is enforced by the EU. We already have a precedent for this as the Maastrict criteria laid then in the 90's as a condition for entry to the Eurozone greatly assisted in attainment of financial discipline at that time.<br />
<br />
<br />
2) As a member of a viable Eurozone, a considerable amount of economic sovereignty would need to be ceded in any case.<br />
Though this has happened immediately with respect to monetary policy we still believed that somehow we could keep control of our fiscal affairs. However the very logic of what has now happened would suggest that overall control of fiscal policy in the Eurozone needs to be conducted at a central level.<br />
<br />
Not surprisingly therefore the Germans - who see themselves as the ultimate paymasters - are already suggesting conditions for future bailouts that would significantly erode national sovereignty.<br />
<br />
In the case of Ireland these problems are considerably magnified by the fact that we one of the most open economies of the world (with the great bulk of our exports relating to multinational firms).<br />
<br />
On a more general note as global interdependence with respect to finance and economic activity increases, the traditional model of taking key decisions at a national level makes less and less sense. Though larger nations will still dominate with respect to influence, smaller nations like Ireland will have to become ever more realistic regarding the inevitable erosion of real power.<br />
<br />
<br />
3) Despite our present difficulties I still think that the penny has not really dropped as to the highly artificial nature of Irish economic activity.<br />
Though the property bubble has indeed been exposed, a potentially bigger issue relates to the manner in which multinational companies dominate our economic landscape.<br />
<br />
This can be highlighted by an interesting statistic.<br />
It now seems that Ireland has risen to no. 9 in the World with respect to the value of export services (which is the fastest rising component internationally of trade). For a small economy of 4.5 ml. inhabitants this does indeed seem highly impressive!<br />
However about 90% of the value of these services relates to the multinationals and when one examines further, a considerable proportion can be attributed to dubious activities with respect to income diversion for tax purposes. To put it bluntly much of our export sales do not in fact originate in Ireland! However we are still happy to turn a blind eye to this fact (and of course the tax loop holes that make it all possible).<br />
<br />
In fact the vast bulk of employment in Ireland relates to the generation of domestically produced services (which are very much overpriced). So if one shops in a supermarket in Ireland one can expect to pay about 25% more (than the average EU price). Likewise if one goes to a car dealer, a dentist, a pharmacist, seeks childcare or eats out in a restaurant one is likely to pay well over the odds. Of course providers of such services will immediately counter that their costs are very high (though in some cases this is used to justify excess profit margins)! But this only underscores my general point regarding the uncompetitive nature of the local indigenous economy! And lack of value is even more pronounced with respect to many publicly provided services. For example in the health sector, the law of diminishing returns has been operating for some time with a vengeance. Therefore despite a huge increase in employment over the past 10 years there is little evidence of an overall improvement in service.<br />
<br />
The root problem goes back to the days when the public sector was used to provide employment (which was not available in the private sector). Not surprisingly a whole set of practices were then built up that were not based on the need to promote efficiency. And then with these now well-established (and vigorously defended by powerful public sector unions) it becomes extremely difficult to make effective changes.<br />
<br />
<br />
Much as I hate to admit this, it may even be necessary that the radical changes required be enforced from an outside agency (such as the EU Commission or IMF) for the urgent action now required is unlikely to materialise from within our present partnership type model.<br />
<br />
So to conclude the bulk of employment in the Irish economy relates to over priced goods and services which we buy from and sell to each other in the domestic economy.<br />
We thus have an opportunity therefore during the next few years to get to grips with a fundamental weakness (which is the serious lack of competitiveness with respect to the indigenous economy).<br />
<br />
And if we cannot do this voluntarily ourselves then we cannot really complain if eventually such changes have to be enforced on us from outside.<br />
<br />
The Celtic Tiger was a period of great illusion in Ireland. Part of this illusion is being slowly stripped away (in the shape of the property bubble). However we are still in considerable denial as regards the bigger part i.e. reliance on multinational activity built on artificial tax advantages that are effectively exploited here due to a - deliberate - lack of regulatory discipline.Peter Collinshttp://www.blogger.com/profile/03702540376694818466noreply@blogger.com0tag:blogger.com,1999:blog-3744532793058612955.post-20619760899219967592010-10-01T04:05:00.000-07:002018-03-24T07:27:57.996-07:00A 30 Year CycleIt struck me recently that the prolonged recessions (lasting up to a decade a length) have been a consistent feature of the Irish economy since independence. Furthermore these recessions have occurred on a fairly regular 30 year cycle.<br />
<br />
When we obtained our Independence in 1922, the country became ravaged by a very damaging Civil War. Manufacturing industry was practically non-existent with the country almost totally dependent on agricultural production.<br />
<br />
Though little progress was made during this first decade of freedom, surprisingly, in a qualified fashion, the economy started to revive during the era of the Great Depression. The high tariff barriers now in place enabled the replacement of - formerly - imported commodities by new domestic firms. Also the Government, recognising the lack of private capital took the initiative in setting up several large state-owned enterprises. Then we escaped the worst ravages of the 2nd World War through our neutral stance.<br />
However during the next decade of the 50's the limitations of this strategy were cruelly exposed. As the import substitution phase of industrial development (afforded by tariff protection) neared completion, further possibilities for growth were stunted through the small sized uncompetitive nature of Irish industry. So in contrast to the rest of Europe which was now booming, the Irish economy stagnated with an enormous amount of associated emigration.<br />
<br />
A dramatic change in policy then took place. Rather than using significant tax and grant incentives in a vain attempt to promote Irish export growth, we now sought to attract foreign enterprise to Ireland. Half a century later, this policy is still very much in place and so successful that we are now one of the most open economies in the World with about 90% by value of exports (goods and services) coming from foreign multinationals located here.<br />
<br />
So the 60's and lesser extent 70's were a period of comparative growth and prosperity. In addition Ireland had joined the EC in 1973 creating further opportunities for trade and significant financial support (e.g. agriculture and regional policy).<br />
<br />
Then in the 80's we had another prolonged recession. The root cause of this was due to an accumulation of borrowing (mostly foreign) in a vain attempt by the Government to maintain an illusionary boom. <br />
<br />
However the harsh adjustment required to adapt to this new situation eventually brought about many of the conditions for a return to growth in the 90's with the commencement of the famed Celtic Tiger. When the first phase of this - based initially on a genuine competitive advantage - had run its course by 2001, we embarked on an ill advised second phase almost totally fuelled through an enormous property bubble. Then all of this came crashing down as the result of the financial shocks in 2008 (after the collapse of Lehman Brothers).<br />
<br />
So as we entered the new decade in 2010 we were facing the aftermath of another major economic recession, the effects of which are likely to last for the entire decade.<br />
<br />
Enormous losses have been accumulated in the banking system. The domestic economy is now very uncompetitive compared to neighbouring countries and there is an enormous hole in our public finances with current expenditure greatly exceeding tax revenue. <br />
<br />
Though it is perhaps small consolation to the many struggling to cope with such adverse financial circumstances, the economy will eventually recover. And if the past is to be a guide this will be due to many painful adjustments lasting the best part of a decade.<br />
<br />
However perhaps it is time to learn an important lesson. If we do not manage the next recovery wisely we could be facing an even greater economic crisis in 30 years time. <br />
Perhaps it is not accidental that these prolonged recessions have been recurring at regular 30 years cycles. They all have had a similar pattern 1. A decade of pain and slow adjustment 2. a following decade of recovery based on a new competitive advantage 3. a further decade of attempting to prolong the good times in the absence of such advantage. And inevitably this has then paved the way for the next economic crisis.<br />
So if we do not properly learn from our mistakes, we are likely to make them yet again with perhaps even more devastating consequences.Peter Collinshttp://www.blogger.com/profile/03702540376694818466noreply@blogger.com0tag:blogger.com,1999:blog-3744532793058612955.post-85175316264210963352010-09-26T06:28:00.001-07:002017-11-04T07:33:11.676-07:00Iceland and Ireland: economic comparisonsI must admit that I enjoy reading the economic columns of David McWilliams. Whereas I do not generally agree with him with respect to the fine detail implications of his proposals, he invariably however manages to make interesting suggestions assisting valuable reflection.<br />
<br />
In this morning’s Sunday Business Post article, he addresses the present situation in Iceland, where apparently interest rates on long term bonds have now fallen below corresponding recent - and still rising - rates in Ireland.<br />
<br />
And given that a short time ago Iceland was looked on as the undisputed financial basket case of Europe, this indeed is a disturbing revelation.<br />
<br />
One has to admire the resilience of the Icelanders in dealing with their problems. Though they did require IMF assistance, they refused to bail out their banks with the losses therefore falling on depositors and lenders (rather than as in Ireland on the shareholders). Also in allowing depreciation of their currency, they have thereby managed to substantially reduce costs giving them a more competitive edge in trade. <br />
Probably most importantly - as McWilliams emphasises - they have based their revival on the success of locally traded goods and services. So rather than relying on the rest of the World, the Icelanders are looking firstly to themselves to resolve their issues.<br />
<br />
McWilliams - perhaps unsurprisingly - then uses Iceland as a blueprint for what we should be doing. In particular he believes that we should transfer the mounting costs of our bank debts (especially in Anglo Irish) on to the bondholders and then concentrate on increasing domestic trade as the prime means of achieving economic recovery.<br />
<br />
<br />
However what McWilliams’s article fails to address is the fact that the Irish economy in many ways differs from that of Iceland.<br />
<br />
Though geographically we are both islands of roughly the same size on the periphery of Europe, the Icelandic economy is much smaller than that of Ireland being less than 1/10th the size. Therefore though relatively their banking debts were greater per head of population than in Ireland, they have less impact on the overall international financial system.<br />
<br />
Secondly, not alone is Iceland not a member of the Eurozone, it is not even a member of the EU. In fact their present status is pretty much akin to that of Ireland at the time of the 2nd World War. Because of the isolationist stance then pursued by Fianna Fail under DeValera, Ireland was able to come through that period without any great damage to its economy. However since those times, there has been a fundamental change in policy direction. So from an economy that looked decidedly inwards we are now one of the most open in the world.<br />
<br />
So when one looks at the percentage of the total value of exports in Ireland (relative to GDP) it comes to about 90% (with the corresponding percentage of imports only slightly less).<br />
<br />
What McWilliams does not also relate is the uncomfortable fact that over 90% of the value of our current exports in goods and services is directly related to the activities of the multinational companies that have invested here in Ireland (mostly from the US). <br />
So unfortunately the big difference in this regard from that of Iceland is that we do not at present have a sufficiently viable domestic economy with which to spark recovery!<br />
<br />
Whereas the Icelanders can rely on their fishing industry, the tourism sector and the enormous potential of geo-thermal activity for producing energy, the fact is that we are deeply dependent on the multinational sector. Indeed the one bright recent indicator here amidst all of the doom and gloom has related to the buoyancy of exports (which again highlights the importance of the multinationals).<br />
<br />
Likewise McWilliams ignores the important fact - that unlike Iceland - we are members of the Eurozone. What this means in effect is that we simply do not have the luxury of making fully independent decisions as economic policy in Ireland ultimately has a bearing on the potential viability of the Euro.<br />
<br />
Therefore the most important reality regarding our present situation is the extent to which we have mortgaged our economic independence to the whims of international sentiment both in Europe and elsewhere.<br />
<br />
I would agree however with McWilliams that recovery will ultimately come from domestic - and not international - initiatives. However in the meantime we have an extremely uncomfortable transition period where we will have to rely on the international community (and be held hostage in many ways to its transient opinions) while gradually trying to wean ourselves from such dependence. <br />
<br />
There are other examples which McWilliams might have quoted - but which would not have suited his argument - regarding the best approach here in Ireland in the short run.<br />
<br />
<br />
For example Latvia is suffering an even greater economic meltdown than Ireland in in recent years with the origins of its problems very similar i.e. an enormous property bubble. However though having a separate currency, they did not use devaluation of the lats to attempt a recovery. Rather it resorted to a much more dramatic form of internal devaluation than we have attempted in Ireland. So for example in the public sector, salaries have been cut by up to 30% with welfare payments also suffering. <br />
So in dramatically cutting costs, it is hoping to significantly improve competitiveness and use this as the main means of economic recovery. Also in showing such discipline at a time of acute crisis with respect to the value of its currency, it is attempting to quickly attain membership of the Euro (which it would see as affording greater protection in any future crisis).<br />
<br />
<br />
So in the examples of Iceland and Latvia we see two separate accounts of how small countries in Europe are attempting to deal with a severe economic crisis. <br />
<br />
And what explains this difference is the nature of the two economies in question!<br />
<br />
Iceland for its part sees itself as largely self sufficient and therefore entitled to follow a go-it-alone strategy. However Latvia by contrast has a high level of interdependence with neighbouring Baltic and Scandinavian economies and sees its future in cementing ever closer ties with the EU.<br />
<br />
When we look at Ireland these problems of interdependence with Europe and the Euro currency are further complicated by a massive reliance on US foreign investment.<br />
<br />
So the go-it alone strategy that presently suits Iceland would seem particularly inappropriate at this time.<br />
<br />
I would of course agree with McWilliams that we need to greatly increase self reliance which is the best long-term solution. However this will not be achieved overnight.<br />
What is obvious to me during recent debates is the extent that we are in denial regarding the need to reduce costs (which presently on average are way in excess of the EU average). So whatever way you look at it addressing this issue in the short-term will inevitably mean significant internal deflation and a big drop in general living standards.<br />
<br />
A large part of the present lack of confidence on the bond markets is due to the fact that investors doubt whether we have the appetite to apply the necessary painful measures.<br />
Though this problem has been greatly aggravated by rising bank debts and an uncertain political climate, a firm commitment on all sides to follow through with the necessary competitive adjustment (possibly with both EU and IMF assistance) would eventually reassure the markets.<br />
<br />
And here is another point that McWilliams glides over. Whereas in certain circumstances the cancellation of debt obligations can swiftly aid economic recovery, a long term price could also apply. So if the same economy that previously cancelled debts was to get into further difficulty, bond holders would have greater reason to fear for their investments thus raising interest rates. <br />
On the contrary if a country has a reputation for always attempting to honour debts (despite domestic problems) this would cause less risk for bondholders thus lowering interest rates in the long-term.<br />
However having said this the performance of the Government - especially in recent months - has been unsure and hesitant which has only compounded the growing fears of the markets. Thus it is becoming increasingly difficult to convince them of our ability to properly manage the crisis.<br />
<br />
Now there are wider issues about the very viability of the Euro for small economies in Europe, and on this score I would share many of the same opinions as McWilliams.<br />
<br />
Unfortunately in the short-term we have to work within that system and achieve a compromise as between what is presently workable in terms of our own interests and that of the wider Eurozone. This leads to a range of possible policy choices all of which are uncertain as to their effects. Which of these might prove the best option is not obvious; all are likely to be very painful!Peter Collinshttp://www.blogger.com/profile/03702540376694818466noreply@blogger.com0tag:blogger.com,1999:blog-3744532793058612955.post-29489858901565947662010-09-18T12:18:00.000-07:002019-05-28T14:41:15.006-07:00Democratic DeficitIt is now some months since I last wrote regarding the Irish banking crisis and unfortunately the situation has worsened since then with debts accumulating at an even faster rate than previously expected. Also because of our accompanying severe fiscal crisis, international confidence has steadily receded. This in turn has led to sharply rising interest rates in the bond markets, which could yet prove a vital tipping point for the economy.<br />
<br />
Realistically speaking, there is no easy solution to our problems. The present Government lacks true legitimacy (with Fianna Fail having presided over the very crisis that it is now trying to solve). However there is little reason to suggest that the main opposition parties would bring about any real improvement.<br />
<br />
A new Government is likely to entail a coalition arrangement of Fine Gael and Labour. Enda Kenny the leader of FG and - likely - larger party after the next election is thereby in line to become Taoiseach. However he seems to lack sufficient intellectual grasp of the issues involved to inspire any real confidence (even among his own TDs). Also, there is likely to be a degree of conflict as between FG’s proposals to deal with the problems and that of Labour. So the uneasy comprises that will inevitably be required may only add to the uncertainty.<br />
<br />
In any case political leadership at all levels is quite weak in Ireland with every mainline party desperate to achieve a wide level of popular consensus. This means in effect that there is no appetite anywhere for taking the really hard decisions needed to genuinely recover from the present recession. In effect political leaders just go along with the mood of the - in many ways - uninformed electorate regarding proposed policy decisions.<br />
<br />
For example because of the huge losses of Anglo-Irish Bank, the popular angle is to promise to close it down (without any real recognition of the huge financial issues that inevitably would still be involved).<br />
<br />
Now a more honest - and credible approach - would require doing a careful analysis of the likely cost and benefits of a variety of the possible proposals on offer before reaching a difficult decision with respect to any one option (which would still inevitably imply huge potential costs). <br />
<br />
So opposition to present policy does not represent a coherent strategy (as the likely costs of any proposed alternative strategy are not honestly addressed).<br />
However because the electorate - understandably perhaps - is still unwilling to embrace this harsh reality, opposition politicians are in many ways pandering to such sentiment.<br />
And this is the very same problem that led to the huge property bubble of the Celtic Tiger (and its subsequent crash).<br />
<br />
In the last general election in 2007 all the major parties had proposals based on unrealistic growth rates of 4% plus being maintained in the Irish economy (though such rates were clearly unsustainable due to the massive property bubble already existing). <br />
<br />
Now imagine for a moment if say the main opposition party e.g. Fine Gael had accurately foreseen the impending crisis in 2008 thereby promising to put into effect immediately the harsh economic measures required for adjustment! Well, it would simply have been decimated at the polls even though such a proposed strategy would have represented true foresight and leadership!<br />
<br />
So the point I am making is perhaps the very unpopular one that even though we like to think of ourselves otherwise, in fact we act quite immaturely as an electorate. Therefore we are always more ready to accept the easy option than the harsher medicine that true leadership and responsibility might often require.<br />
<br />
And indeed this is not a problem solely confined to Ireland but rather is endemic throughout the democracies of the Western World. It could even spell the death knell of the capitalist system, as we know it. Basically the problem - which is the same problem that has created a growing monster out of the financial system - is that we continually place the desire for prosperity based on short-term perspectives above the need for policies that are sustainable in the long term.<br />
<br />
And then when things go badly wrong we immediately look for scapegoats. So, in Ireland we blame the government, the bankers, the developers and the regulators for our problems.<br />
However during the good times the behaviour of all these groups (which indeed was often greatly misguided) in large part was greeted by our enthusiastic approval. <br />
<br />
So for example we voted Fianna Fail back into office because we saw this party as the best hope of continuing the illusionary Celtic Tiger dream. <br />
<br />
We greatly welcomed the easy credit terms on which money was simply thrown our way by the bankers because this enabled us to purchase more and more houses; we were equally happy that the developers kept planning new estates providing what we were so eager to buy; and then when this wasn't enough we went abroad in droves amassing property all over Europe and beyond.<br />
<br />
And finally we were very happy with the easy regulatory and planning environment, which placed so little obstacles in the way of all this happening. Now when things have gone so badly wrong we project our anger on these same groups who we so vigorously supported during the boom.<br />
<br />
Before true change can take place, firstly we need to properly acknowledge both the nature and extent of our current problems. Secondly we need to honestly accept responsibility for our considerable collective role in enabling these problems to develop.<br />
Unfortunately there is little sign that either requirement is being properly met. While we now consciously recognise many of the issues, subconsciously we are still in a state of denial and largely unwilling to make the adjustments required. <br />
And while this continues, we will just stumble on in the same unsatisfactory manner with our anger being vented on an ever increasing range of convenient targets.Peter Collinshttp://www.blogger.com/profile/03702540376694818466noreply@blogger.com0tag:blogger.com,1999:blog-3744532793058612955.post-74333979655497928232010-03-28T04:10:00.001-07:002012-08-23T16:04:41.586-07:00Anglo Irish Bank - againOnce again Anglo Irish Bank is in the news - for all the wrong reasons.<br /><br />This week it is about to announce the largest corporate losses in Irish financial history which could be - if reports are right - as high as €14 bl. Having already received in the region of €4 bl. last year in Gov. capitalisation, it looks like a further $7 bl. or so further handouts from the Government will now be additionally required to keep the bank functioning. And it would take a great deal of optimism to believe that this will be the end of the story!<br /><br />Not surprisingly when the public hears of the horrendous losses made by this one bank (that has no branch network) the cries go up to close it down immediately so as to avoid further losses.<br /><br />However though understandable at one level such a policy is not realistic. The losses that arise relate to the excessive loans extended during the Celtic Tiger to fund - in the main - highly extravagant commercial property developments both here in Ireland, the UK and the US.<br /><br />If these loans were now just written off the ultimate losses would be much greater than currently projected.<br /><br />I have always accepted that even greater problems would perhaps be created if the Government was now to renege on commitments to depositors.<br /><br />Because of the closely knit nature of the Irish banking system, this could immediately jeopardise confidence in the whole fragile structure with potentially devastating consequences.<br />Also because of the present lack of confidence in the international market (that is presently used to fund the great bulk of Irish government debt) non-payment to senior bond holders (or even proposals to renegotiate terms with such bondholders) would probably backfire in raising international uncertainty further thus adding to the cost of funding the fast growing national debt.<br /><br />There is perhaps some scope for renegotiating terms with junior (i.e. subordinate) bond holders. However the amount now owing to this group is not particularly large (in the context of the overall total) at about €2 bl.<br />Though I would be open to alternative suggestions, given the present precarious financial position in Ireland it would perhaps be best even here to honour existing commitments in full while the present state guarantee is in place before reviewing the situation again in August.<br /><br />Indeed on this point the arguments put forward by others such as David McWilliams - and in a more modified sense - Richard Bruton I would not find convincing.<br /><br />McWilliams for example argues that bondholders are forward looking people with short memories who accept fully the nature of the capitalist system. So they invest in bonds knowing the potential risks and therefore winningly accept their losses when things go wrong.<br /><br />I would find some merit in this argument (especially with respect to speculative bondholders). Indeed I would even accept that alternative examples can be provided where default on such debt proved the best option. However I do not believe that in the particular circumstances of the present financial crisis in Ireland that a similar remedy should be adopted.<br /><br />Firstly Ireland is an extremely open economy and therefore more vulnerable to loss of international investor confidence. The present total annual value of exports (goods and services) is almost as large as GDP (with 90% coming from multinational companies). Also with respect to our present large borrowing requirements about 85% is funded by overseas investors!<br /><br />Secondly we are members of the Eurozone and therefore not full masters in this regard of our own decisions. Indeed the present financial and economic policy correctly represents more a jointly agreed Irish-EU initiative (than an independent Irish Gov. policy).<br /><br />Thirdly - and most importantly - the Irish financial system comprises a few key institutions with close interlocking arrangements. One could make the argument that Anglo Irish Bank was of no systemic importance but this would be somewhat disingenuous. Clearly it had no branch network and did not deal with ordinary retail customers. However in many ways it was in fact the most important in determining the whole banking ethos in Ireland that lead ultimately to such a dramatic financial collapse. Also the manner of its rapid growth is inseparable from the extremely weak regulatory environment that prevailed at this time which in turn was approved by successive Fianna Fail administrations.<br /><br />So unfortunately Anglo Irish Bank is of key systemic importance in the manner it highlights the overall weakness of Irish banking, regulatory and political practice especially during the latter phases of the Celtic Tiger. So if we are ultimately to get out of this present debacle the best course is to start by taking full responsibility for the failure of Anglo.<br /><br />So I do not accept as some are arguing that Anglo should be immediately closed down.<br /><br />However I would have serious questions regarding the present policy as articulated by Chairman Alan Dukes. My own preference - in the absence of convincing counter arguments - would be for an orderly wind down of the bank. In the present climate a quick fire sale of the assets relating to the considerable volume of loans extended by the Bank would realise very little money. So a great deal of importance attaches to the manner in which these assets are managed over the coming year (a significant proportion of which have been transferred to NAMA). Some perhaps should be disposed of quickly. However the value of others may well increase by waiting somewhat longer while further development will inevitably be required in other cases to secure a realistic return.<br /><br />So the ultimate losses that will accrue to the taxpayer greatly depends on the skill through which outstanding loans are managed in the coming years.<br /><br />However Dukes is strongly committed to an alternative good bank, bad bank model plan for Anglo, which I suspect owes more to pragmatic political considerations than any sound business logic.<br /><br />In other words, through at some stage proposing to resuscitate Anglo as a profitable special purpose business bank, Dukes unconvincingly argues that this course could thereby save the taxpayer billions of euro.<br /><br />On the face of it there are very good reasons for not attempting to breathe new life into Anglo as its reputation has been destroyed, for ever symbolising the grave excesses of the Celtic Tiger. Of course Dukes would respond that this problem could be avoided through "rebranding" the bank with a different name and image. However if a solid case does indeed exist for such a specialist bank, why not set one up a fresh institution with no connection to Anglo?<br /><br />So I suspect that the attraction of eventually rebranding Anglo relates to financial sleight of hand.<br /><br />So for example if the new bank - when eventually reconstituted - was to make regular profits, it could then be argued that this would be thereby reducing the overall financial cost to the taxpayer. However this is to ignore the fundamental economic principle of opportunity cost!<br /><br />Indeed the same fallacious argument had been used by Brian Lenihan when originally trying to sell the NAMA project when he stated that he was confident that NAMA would return a profit to the taxpayer over 10 years.<br /><br />After yesterday's horrendous news regarding the deepening losses of the banking sector, it is hard to see how anyone can believe in this outcome! However even if profits were to materialise, this ignores the important notion of opportunity cost relating to expected returns on alternative ways of investing the same money. So where a higher return would arise from an alternative investment, then in economic terms one thereby makes a (relative) loss through proceeding with the first option (even where accountancy profits arise).<br /><br />So applying this argument to Anglo! Even if the proposed good bank could return regular annual profits, this has to be contrasted with the profit prospects of an alternative freshly constituted business bank (with no previous links to Anglo).<br /><br />Now I find it hard to see why such an alternative, with no damaging previous history would not have better prospects for profits than a "good" Anglo. So if this is true, then to go ahead with Duke's proposal would actually lead to even greater losses in economic terms!<br /><br />After yesterday's announcement we are now told that another €10 bl. on top of the amounts already indicated will be required, bringing the overall liability to the taxpayer to over €20 bl. And who can be confident that even this figure will represent the end of the story?<br /><br />If there are in fact good reasons for Duke's good bank, bad bank strategy for Anglo I would like to hear them, for certainty nothing convincing has been put forward yet that would suggest that this represents a better option than an orderly winding down of the bank. And where the taxpayer is being asked to underwrite ever growing massive losses, it is not enough for Dukes to simply state that that the specialists dealing with Anglo recommend this course as the best option!<br /><br />Also another important factor is now entering the equation. The present strategy has been based on the understandable desire to restore international investor confidence in Ireland through restoring our financial system and quickly returning to fiscal rectitude.<br />However the financial liabilities associated with the banking system have grown so large (especially due to Anglo) that it is now more likely likely to severely threaten the Government's ability to proceed with further severe cut backs that are required to achieve the EU's budget deficit target of 3% by 2014.<br /><br />If this in fact is the case then - rather than enhancing investor confidence - the rapidly growing costs associated with the banking cleanup may in fact increase uncertainty as to our ability to achieve the necessary fiscal reforms. And this problem will be accentuated if the anticipated return to economic growth does not in fact materialise later in the year. So whatever way you look at it, we have got ourselves in a deep bind.<br /><br />Only yesterday, pay talks as between Government and public sector unions were finalised with a commitment by Government not to reduce public sector pay further over the coming 3 years. However this begs the question as to where the Government is going to find the money to meet its projected fiscal targets!<br /><br />Indeed we are not far from social anarchy with taxpayers, facing ever larger financial commitments to bail out the banks, likely to revolt at the patent injustice of what has transpired.<br /><br />At one level I have a great deal of admiration for the manner in which Brian Lenihan in particular - almost single-handedly in Government it would seem - has attempted to come to terms with the enormous financial and economic problems facing the country.<br /><br />However the one great weakness of the strategy has been the failure to address glaring injustices that have been allowed to fester, with the very rich in society seemingly immune from any real censure. And this in turn is largely due to the fact that the main ruling party since 1997 (Fianna Fail) has aligned itself so closely with this wealthy inner circle. During the Celtic Tiger, wealth creation became the new God in Ireland and this has left an extreme political reluctance to take any measure that might scare off its representatives in our midst.<br /><br /><br />The single most infamous speculative development of the Celtic Tiger era relates to the Glass Bottle site in Rigsend. This site was acquired at the height of the Celtic Tiger for a grossly inflated figure of over €400 ml. by a consortium involving the Dublin Development Dockland Authority (DDDA) and two prominent appointees from Anglo (Sean Fitzpatrick the Chairman) and Lar Bradshaw a former director. It was now clear that these Anglo personnel were driving the whole project as major partners and financiers.<br /><br />The value of this site has now fallen so rapidly that the DDDA values its own stake at zero. However worse still most of the money to finance these stakes was lent by Anglo so that the taxpayer could now owe up €500 ml. from this one failed investment!<br /><br />So this whole sorry saga says a great deal about the unacceptable free-wheeling climate that pervaded the latter days of the Celtic Tiger. It was totally inappropriate in the first place that the biggest high fliers in Anglo should be appointed to a state board. Had everyone in Government forgotten about conflict of interest? It was also unacceptable that this state agency should then have engaged in a highly speculative commercial investment with such partners. This incident then also points to the total lack of regulation in the system that allowed all these machinations to happen without interference and finally receive tacit Government approval with the Minister for Finance (Brian Cowen) meekly signing off the whole deal.<br /><br />Just reflect for a moment on the massive imbalance in our justice system! Failure to pay a TV licence could ultimately result in a prison sentence. However the loss of €500 ml. on a speculative deal (with every governance safeguard flagrantly disregarded) is still highly unlikely in Ireland to lead to penal censure for anyone involved!<br /><br />This growing sense of injustice can only have been further highlighted by the announcement last week that many employees of Anglo would be receiving increases in pay. And judging by the reluctance of Alan Dukes to specify the actual figures involved, we can take it that in certain cases these proposed increases are considerable.<br /><br />Dukes unconvincingly tried to defend this move by stating that due to many Anglo staff losing their jobs, overall pay has fallen. On the contrary, what surprises me greatly is the high proportion of staff that have retained their jobs! And Anglo at present is merely a zombie bank with no lending service to the community. Now I accept that an important role still remains with respect to its orderly wind down. However staff pay had been already exceptionally high during the Celtic Tiger with bonuses featuring strongly. So surely there should be significant cuts to pay with respect to existing remaining staff to reflect the present changed reality.<br /><br />Now, admittedly if new specialist staff are required from outside the organisation to manage the wind down, they should be paid the going rate. However I think it eminently reasonable to expect this to be done through compensating downward adjustments to pay rates of existing staff (or through additional redundancies).<br /><br />It simply will not wash with the public (many of whom are finding it increasingly difficult to manage their financial situations) to ask them to pick up the tab for Anglo's losses of over $20 bl. and then announce increases in pay to Anglo staff.<br /><br />Not surprisingly, this only causes further outrage. Now Dukes somewhat dismissively retorts with "Anger is not a policy" and that new awful cliche "We are where we are". However I would say simply in response that if we do not properly address the justifiable anger that is out there, we will not be able to pursue any chosen policy in the first place. And before people can accept where we now are, the various institutions involved (government, bankers, developers and regulators) need to accept full moral responsibility for the grave mistakes that have been made and once again the failure to properly recognise this, reveals a glaring weakness in present policy.<br /><br /><br />We are indeed facing critical financial, economic and social problems. However underlying all of these are extremely important moral issues of justice and fairness. Ultimately we cannot hope to satisfactorily resolve the former without properly addressing the latter.Peter Collinshttp://www.blogger.com/profile/03702540376694818466noreply@blogger.com0tag:blogger.com,1999:blog-3744532793058612955.post-85510198036691726872010-02-19T03:59:00.001-08:002018-11-09T02:49:44.412-08:00Tackling UnemploymentUnemployment is truly a great scourge in economic and social terms.<br />
<br />
It is welcome therefore to see that the main motivation of some of our most popular analysts (such as David McWilliams and George Lee) has arisen out of a genuine desire to deal with unemployment ills.<br />
<br />
The present statistics however are certainly not encouraging. The official figure (for standardised unemployment) has risen from 4.8% in Jan. 2008 to 12.7% in Jan 2010.<br />
However this does not convey the full story regarding worsening unemployment conditions. According to the methodology by which standard rates are assessed, 1 hrs. paid work a week would exclude one from the unemployed statistics!<br />
<br />
However, we have also many others - still listed as employed - who may however have suffered a significant drop in working hours or in temporary contract work that may not be continued.<br />
And even for those not yet directly affected a much greater degree of uncertainty exists with respect to the security of their employment.<br />
<br />
<br />
While readily accepting that the recession poses special problems in terms of dealing with unemployment, much more imaginative measures could be taken by Government to help alleviate the situation.<br />
<br />
The official line aims at a return to economic growth as soon as possible and then hope that employment will slowly rectify itself in the process. Thus with current concerns so much devoted to budgetary arithmetic and bank rescue measures, little attention has been focused directly on job creation. <br />
<br />
In the modern economy, the bulk of employment - and especially new job creation - is in the services sector (accounting for close on 70% of total).<br />
What would worry me however about the Irish situation is that a high proportion relates to "soft" employment in locally traded services that are very high cost compared to other jurisdictions. By their very nature little competition exists for such services. Though still requiring an appropriate level of domestic demand to remain viable, during the Celtic Tiger years this was substantially generated through artificial wealth creation in other sectors (speculative property development and multinational companies locating here for tax advantage purposes).<br />
<br />
It is now slowly being realised that the Irish economy had in many ways become very uncompetitive during the boom years and that these problems will need to be addressed if we are to restore exports (especially for indigenous companies). However it is not really feasible to reduce costs for export firms while ignoring the problem of high costs in the locally traded economy. So as the artificial high incomes of the Celtic Tiger are reduced, the fall in demand in local discretionary services (e.g. restaurants and hotels) is likely to force down costs leading to a further increase in unemployment. However providers of essential services (e.g. energy, communications, financial, medical and pharmaceutical) in the absence of tough regulation, will still collude to maintain excessively high charges.<br />
<br />
We are thus facing a Catch 22 situation at present. Though the Government is paying lip service to the need for improved competitiveness to retrieve the economy, instinctively it knows that any serious attempt to achieve this will create considerable further unemployment in the short-term. Though the recession will indeed force such competitiveness in certain sectors, costs for essential services are likely to significantly increase. And without such reform, adjustment to the recession will be somewhat uneven with overall competitiveness difficult to achieve.<br />
<br />
<br />
Measures to deal with unemployment must therefore be realistic and consistent with the need to maintain - and indeed significantly improve - overall competitiveness. This clearly creates a considerable problem in the short run where an increase in present figures may prove inevitable.<br />
So the following suggestions relate to measures that 1) relate more specifically to better management in the short-term and 2) creating more sustainable employment opportunities in the long run. <br />
<br />
<br />
Apart from the adverse social consequences, dole payments to unemployed workers make little sense from an economic perspective (involving financial commitments by the Government with no productive return). Indeed there are likely to be further opportunity costs in a recession with loss in tax revenues, downward multiplier effects on economic activity and also possible additional costs due to rising crime levels.<br />
<br />
Much more should be done therefore by Government to preserve existing jobs through a degree of subsidisation in appropriate cases.<br />
Now this would require a greater degree of intervention in the day to day management of firms with every option explored for keeping workers (or at a least a proportion of them) in employment through a measure of state financial assistance. And if this entails a 4-day or 3-day week, surely this would be preferable than the alternative of the dole!<br />
<br />
In the present climate, the problems of these firms would be in many cases be compounded through an inability to raise finance from existing banks. Therefore I would propose that a state bank - on the lines perhaps of the former ICC - should be set up to deal with the financial requirements of supported firms.<br />
<br />
Though it would not be practical to have such a bank attempting to generally service business needs, it could however play a special limited role in cases such as this i.e. where jobs could be reasonably saved through additional financial assistance by the state. (Also additional temporary placements of young people with firms providing valuable work experience could also be facilitated in this manner!) Remember that the failure to preserve such employment in a recession would require extra expenditure by the State in any case! So the alternative option of using this money to actually save many of these jobs represents a much more sensible strategy. <br />
<br />
<br />
Even with such a policy, unemployment unfortunately in the immediate future is likely to rise. However much greater imagination however could be used to provide community based work activity for those presently unemployed.<br />
I am not of course suggesting this as an ideal answer as the loss of employment has major implications in personal, financial and social terms. <br />
However I would still propose however that when this happens, that a much better strategy would attempt to maintain an affected individual active and involved in some alternative work capacity.<br />
<br />
Our current notions of work are unduly influenced by the needs of the market based economy. Meanwhile however it is glaringly obvious that many community based tasks - that can serve a valuable role in their own right - are not properly serviced. Alternatively when they are provided, their value is not adequately recognised.<br />
<br />
For example, carers in our society give a huge commitment in time and energy to looking after the needs of others. However most of these (tending to loved ones in their homes) would be deemed as unemployed, though the opportunity cost of replacing such care with paid employment through health and social services is considerable.<br />
<br />
However there are many other activities in communities - not carried out by the market economy - which are inherently of significant value.<br />
<br />
Therefore I believe that an enormous opportunity is being lost during our recession in not seeking to mobilise the unemployed to carry out such activities.<br />
<br />
Of course a great deal of attention would need to be given to appropriate ways of organising this work.<br />
<br />
My own suggestions would go something like this. Each local community - perhaps based on traditional parish lines - should be asked to come up with suggestions as to the kinds of work that could be usefully provided (not presently being offered on a market basis). These could range from tidying up operations such as removing litter to calling on old people in their homes, helping with sports based activities for young children, community based neighbourhood watch schemes, providing time relief for carers etc. Now many of these may already be provided to a certain extent on a voluntary basis. However incentives could be deliberately provided to mobilise the resources of unemployed members of local communities to enhance their provision. <br />
<br />
For example a tiered kind of unemployment relief could be structured with a basic payment (for those opting out of such participation) that would be less than the current rate. However for those opting in, the basic payment could be progressively increased depending on the level of commitment.<br />
<br />
The financing of such a scheme could come from a number of different sources.<br />
<br />
With the cut in the basic rate, some financial resources would thereby be freed for supplementing payments to "active" unemployed. Also a concerted effort should be made to tighten up on present abuses in the social welfare system where over 10% is paid out on fraudulent claims. Savings made here could then be available for these other purposes. Also I can see no reason why the EU could not include such schemes in payments for its Social Fund. Indeed if schemes were in place the Government could perhaps have already achieved a commitment from Brussels for funding!<br />
<br />
Some of the proposed initiatives would perhaps overlap with community based employment schemes promoted by FAS. So it would make sense therefore to promote greater liaison as between local based community promoters of work schemes and FAS representatives, with perhaps some of its financial resources diverted to fund viable proposals. <br />
<br />
Finally once the positive benefit of such schemes becomes more apparent, it would then be possible perhaps to raise further money through voluntary contributions from participating communities. <br />
<br />
One of the negative side effects of market based activity - based on quantitative criteria amenable to monetary measurement - is that qualitative considerations can thereby be easily devalued. Thus the all important social "glue" that cements communities through a shared common purpose can become significantly lost. <br />
So from this perspective proper recognition of this non-market activity could even help to revitalise communities thereby lessening the alienation and futility that can sow the seeds for serious crime and social disturbance.<br />
<br />
Also through focusing on the inherent value of work - presently accepted as non-market - that opportunities to convert many of these later into market form would thereby arise. In other words an alternative type of enterprise culture could be fostered. <br />
<br />
Realistically however even with the support (that presently is so greatly lacking) these could only hope to ameliorate some of the problems caused by unemployment. They are not meant to replace existing approaches but rather to supplement them to a certain extent.<br />
<br />
<br />
In a time when employment opportunities are few, work sharing practices again make sense with the hope of spreading out what is available in a more equitable manner. <br />
Again too much should not be expected an in any case they are already taking place to some extent.<br />
<br />
For example many college students - rather than seeking to directly enter the labour market on obtaining a primary degree - are staying on to do postgraduate work. Likewise early retirement schemes in the public sector and the threat of possible pension reductions in future years are enticing many to retire before the mandatory retirement age. In addition facilitating those who might be happy - say for family reasons - with a 3 day or 4-day week - could also reduce the pressure to cut costs in the public sector through better deployment of labour.<br />
<br />
In the current circumstances therefore the Government should further facilitate such practices through modest additional financing of extra college courses, further early retirement options and encouragement of more flexi-time in the public sector. <br />
<br />
However though in theory work sharing seems a very simple concept, in practice there are many difficulties with its implementation (especially in the private sector). <br />
So though possibly making some contribution, in itself it does not offer a solution to the problem.<br />
<br />
Though I am well aware of the perilous financial situation of the country at the moment, I would also recommend some special purpose investment by the Government that would stimulate economic activity while providing much needed jobs.<br />
<br />
I have suggested before an acceleration of the school building programme as one appropriate way of achieving this goal.<br />
<br />
Unemployment is particularly high in the construction industry. Also favourable social and political benefits would arise from decisively tackling the issue, where lack of sufficient action in the past has caused widespread frustration. <br />
Also the Government would be in an ideal position to enforce very strict terms ensuring that such work would be done at very low cost.<br />
<br />
Now one could argue that this would increase Government expenditure. However there would be several compensating benefits to the exchequer from additional economic activity, associated multiplier effects throughout the economy and reduced unemployment. So the net cost of such investment could be surprisingly modest. <br />
<br />
Meanwhile it would make a valuable contribution in terms of social infrastructure, providing much needed hope at a difficult time.<br />
<br />
<br />
Though performance here did indeed appear very impressive during the Celtic Tiger years, it was built on artificial conditions that cannot be repeated.<br />
<br />
Unfortunately the legacy of the Celtic Tiger years is that we have now created a high cost economy with unsustainable work practices (where unions still enjoy considerable power).<br />
<br />
Though of course it may not appear popular (or even compassionate), the key guiding principle for long term recovery should be the desire to restore a level of competitiveness (stronger than most of the developed economies with which we deal).<br />
<br />
This indeed involves much more than wage costs. However the fiction - still unconvincingly maintained by union leaders - that wage costs are somehow not important with respect to sustaining competitiveness, needs to be challenged. Hopefully, the present testing environment in the economy will bring about a much needed conversion in mentality. <br />
<br />
Workers of course have rights that need to be respected by employers. However the long term interests of both are in fact best served through a mutual commitment to competitive work practices.<br />
<br />
Just to give one example. SR Techics who employed more than 1100 skilled aircraft maintenance personnel at Dublin Airport - left in the end largely due to the high costs that pertained here. It also did not help that this strongly unionised group of workers had been involved in the past in damaging industrial disputes leading to the loss of valuable contracts.<br />
<br />
Now suddenly in the changed environment Michael O'Leary - formerly the "bete noir" of unions - is receiving total support from these now unemployed workers in his attempt to create 300 jobs at Dublin airport!<br />
<br />
<br />
It is not alone high costs but also frequently the poor quality of service delivered that constitutes a major problem. Again this is a legacy of the madness of the Celtic Tiger years when for example in construction, demand was so buoyant that little attention was often given to acceptable quality standards! So this is another horror that is likely to surface in the coming years as more and more residents experience fundamental structural problems with their expensively acquired properties! Another recent example of the same problem is provided by the dreadful state of so many roads that are now full of dangerous pot holes following the freeze up in January! Though the cost of building these these roads was excessive to start with, councils are now faced with heavy bills in the attempt to provide a temporary patch-up solution. So even when recovery begins to take place in the Irish economy, it would make eminent sense to deliberately maintain cost increases below growth for some time so as to enhance competitiveness. Indeed this should be the real boast of the Government in years to come in being able to sell Ireland as the most competitive place to do business (in Western Europe)!<br />
<br />
As regards more specific suggestions, while accepting that the multinationals will play a considerable role here for some time to come, we need to develop indigenous strengths that will give us an international competitive advantage.<br />
<br />
Agriculture and the food industry have traditionally been extremely important to the economy. With consumers increasingly fussy regarding health standards, we should trade in on our traditional "green" image, guaranteeing quality food produced to the highest standards available. In particular we could greatly enhance the role of the organic sector (which has been comparatively neglected).<br />
Considerable opportunities also exist perhaps for activity abroad with Irish food companies offering financial support to organise food production in less developed economies. For example the Ukraine at present offers great opportunities here, so potentially this route could lead to a much greater role for Irish food multinationals.<br />
<br />
Tourism likewise has been an important industry historically here (with high employment potential) that unfortunately has suffered a relative decline in recent years.<br />
Much of the problem here is due to the high costs that now pertain. So cost competitiveness is vital in terms of restoring this sector.<br />
<br />
And Michael O'Leary is right! The present Government policy on air travel is very misguided. As an island economy on the fringe of Europe it makes eminent sense to encourage more visitors here through an especially low airport cost regime. Indeed I see no reason why we should not aim to market the economy on the basis of the lowest airport charges in Europe! However achieving this would require a major sea change in current policy and its protection of high cost operators (such as the DAA). So easy and cheap access with respect to air (and sea) travel could significantly enhance both tourism and business flows alike.<br />
<br />
The most prominent high tech sectors in Ireland are IT and chemicals/pharmaceuticals. It is perhaps here that the best possibilities in future years arises for generating employment. In fairness the indigenous IT sector has already achieved notable successes. However opportunities are still being missed. One obvious problem is the slow pace of broadband provision. Again this is an area that should have achieved priority years ago. However even at this late stage much could be done to quickly improve the situation. Another problem is the lack of sufficient IT skills generated through the educational system (reflecting a lack of emphasis on science and mathematics at the earlier secondary school stage). <br />
<br />
One interesting example of what could be done was raised on Frontline last night where we were told that Ireland has already - unknown to most - acquired a prominent position with respect to online gaming. The suggestion was that some major tax incentive such as total remission on profits generated in this area here could help to greatly increase such activity and consolidate our pre-eminent position.<br />
<br />
And the varied opportunities provided by internet related applications are unlimited.<br />
<br />
Here is a suggestion that I would make. At the moment we have far too many overpaid special advisors to Ministers (essentially acting as spin doctors). The number here should be greatly reduced and replaced by a mixture of advisors and travelling ambassadors with respect to new employment opportunities that could be opened up by the Internet and other technologies.<br />
<br />
I was reading last week that Ireland is now the largest exporter of medical products in the world (though the figures here may be somewhat artificial). So once again it makes sense to specialise at an indigenous level in medical research and development. Indeed there have been several impressive research breakthroughs here already with potentially huge commercial implications. So it seems to me that this is an obvious area of specialisation in future years (with enormous potential).<br />
<br />
Though Ireland is a member of the EU, indigenous trade with EU countries (apart from the UK) still remains quite limited. Indeed it is no accident that our strongest ties are with the UK and the US (two English speaking countries). <br />
So in many ways we are limited by our inability to speak other languages.<br />
<br />
Therefore I think it should be a goal of policy to encourage from an early age in school studying at least two other European languages. Personally I would suggest removing any compulsory requirement for Irish. Present policy has not worked with negative consequences for further language involvement. Paradoxically with a more open approach, genuine commitment to Irish could actually be strengthened! With better language skills we would naturally better assimilate ourselves with other European countries (and cultures) which could greatly enhance trade and employment opportunities. Even in the most direct sense, many jobs in the call centres require multilingual skills which at present cannot be provided by Irish workers.<br />
<br />
A major change with respect to traditional energy policy is now required in Ireland. At present we are greatly dependent on both oil and gas for the great proportion of our energy needs (most of which is imported). <br />
<br />
A significant opportunity now presents itself therefore with respect to the development of alternative energy sources (especially renewables such as wind and water). Again if we truly committed ourselves to this, there is no reason why we should not aim at becoming market leaders in the future (in at least some of these energy market niches).<br />
<br />
<br />
At a general level a lot more needs to be done in Ireland to foster a true enterprise culture. Though significant strides have been made in recent years unfortunately the bulk of such enterprise was associated with unsustainable property development. If more of this enterprise was directed at providing necessary infrastructure it would have helped better with future development. Unfortunately - greatly assisted by misguided Government incentives - we have created a huge surplus of unwanted commercial and housing development leaving enormous negative financial implications.<br />
<br />
I have no doubt that the Irish have inherent entrepreneurial abilities well suited for imaginative new proposals.<br />
The secondary school curriculum needs to be revised in a more practical direction with entrepreneurial studies introduced at an early stage. Also competitions that foster and regard new ideas should be increased. In this respect I welcome very much the recent presidential initiative "Your Country your Call" which is creating a nationwide competition to come up with entrepreneurial ideas that have the potential to create significant numbers of jobs. Finance and assistance will then be made available to bring the two best ideas to commercial reality. And perhaps others ideas not considered as potential winners will in fact provide the real success stories of the future.Peter Collinshttp://www.blogger.com/profile/03702540376694818466noreply@blogger.com0tag:blogger.com,1999:blog-3744532793058612955.post-35213257884723441472010-02-15T08:39:00.000-08:002010-07-26T02:59:41.807-07:00Michael O'Leary - again in the newsA major issue has arisen at Dublin Airport with Michael O'Leary once again centre stage.<br /><br />It appears that 200 aircraft maintenance jobs have been lost to Prestwick Airport due to the inaction of The Minister for Enterprise Trade and Employment (Mary Coughlan). Cleverly, by highlighting that these jobs have already gone with a further 300 still up for grabs he has considerably raised the political stakes with respect to the Government's response.<br /><br />The background to the dispute is as follows. For many years a large skilled base of aircraft maintenance engineers existed at Dublin Airport formerly known as Team Aer Lingus and more recently as SR Technics. However due to the pressures in the airline sector SR Technics (a Zurich based firm) announced in early 2009 that it was to cease operations in Ireland with the loss of over 1100 jobs (citing the high costs of doing business at Dublin Airport as a major factor).<br /><br />The Dublin Airport Authority (DAA) which is responsible for the running of the airport is a state owned monopoly lacking any true business initiative. Michael O'Leary for years has been looking for the opportunity to open up an alternative terminal at Dublin that would have offered just the kind of competition for the DAA that was needed. But the Government - operating from no sensible commercial logic - persistently refused the idea.<br /><br />Then when former head Willie Walsh acted decisively to rescue Aer Lingus from imminent collapse he was so frustrated by the then Taoiseash Bertie Ahern regarding his (i.e. Walsh's) future plans for the airline that he decided to leave. Then more recently the Government in a deep recession has imposed a nonsensical travel tax (which can only act to further reduce airline traffic at a difficult time).<br /><br />Unfortunately the DAA if anything is even worse. In its previous incarnation as Aer Rianta it had a stranglehold over the decisions taken at the other major airports (Cork and Shannon) until Seamus Brennan, who in fairness was always supportive of competition, ended this practice.<br /><br />However things have not improved much at Dublin Airport with the DAA acting as a typical monopoly always ready to take the easy option in making decisions. So rather than properly tackling costs and inefficiency it has simply sought to raise revenue initially through their "Customs Free" Operation, then from excessive parking fees and from rapidly increasing airport charges. Even their attempt to build a second terminal (in preference to facing competition from one financed by Ryan Air) has proven a largely botched affair with significant delays and increased costs during the construction process. And now when it has come on stream, airline traffic has dramatically fallen off due to the recession. <br /><br />And of course DAA's high cost strategy is hardly likely to boost business. Rather it will seek to keep raising airport charges even higher in future years so as to recover the cost of its investment.<br /><br /><br />Since the loss of the SR Technics operation, apart from Ryan Air there have been various proposals as to how perhaps some of these skilled jobs could be saved. At present Hangar 6 (which Michael O'Leary considers ideal in terms of his proposal) is leased on to Aer Lingus for line maintenance on their aircraft with somewhat vague proposals for the creation of about 250 jobs over 5 years. However one could hardly be excited at this prospect, as Aer Lingus' heavy maintenance is already carried out abroad and given the present state of the airline market one could validly question whether Aer Lingus will even still be in existence in 5 years time!<br /><br />On the other hand we had the Ryan Air proposal to create 500 jobs immediately (now 300) with the prospect of further growth in future years (through continual expansion and other airlines perhaps switching their maintenance requirements back to Dublin).<br /><br />So from this perspective it seems a no-brainer. However with Michael O'Leary things are never quite that easy. For one thing he refuses to deal directly with the DAA (which is responsible for addressing any such proposal). Now this is a clearly deliberate tactic by O'Leary whose business approach would represent a total polar opposite to that of the DAA. <br /><br />In fact in this regard I would support O'Leary. If he negotiated with the DAA, while pretending to be supportive, it would probably attempt to tie him up indefinitely in red tape before pleading that it cannot accept his plans in their present form. And then a weak Minister, afraid to overrule the Authority, would meekly accept its decision. So by appealing directly to the Minister, he is removing this convenient line of cover and highlighting what he sees as the central issue i.e. in a deep recession with unemployment so high, that the airport's needs would be better served by a highly competitive company like Ryan Air than a self serving monopoly such as the DAA!<br /><br />But in the world of crony politics, which still infects the way decisions are taken at every level in Ireland, O'Leary knows quite rightly that the issue will never be addressed unless he can cause considerable embarrassment for the Government. <br /><br /><br />Another possible barrier that has been raised with respect to O'Leary's proposals is the fact that Hangar 6 (which clearly is his favoured site for operations) is already leased out to Aer Lingus. However this is perhaps a red herring. One must remember that Ryan Air and the Government are the two principle shareholders in Aer Lingus. Therefore if they both agree that it is now preferable that Ryan Air take control of Hanger 6 (with Aer Lingus being adequately facilitated elsewhere), there really should be no issue.<br /><br />However there are other problems that are likely to arise. Michael O'Leary is notorious for driving a hard bargain. So even if in principle a decision is taken to go along with his plans, the aircraft maintenance workers may be in for a rude awakening with respect to their new work conditions.<br /><br />This was a continual problem in the old days both with Team Aer Lingus and SR Technics. Though in fairness the quality of their work was recognised, the heavily unionised approach under which they operated led to a high cost operation and disastrous industrial stoppages. In a cut throat business this was certainly not geared to ensure their long run survival. Even Aer Lingus, who one might of thought would have been most anxious to remain at Dublin, had already under Dermot Mannion moved abroad to carry out its heavy aircraft maintenance.<br /><br />Indeed listening to Live Line yesterday, it was remarkable to hear what seemed like 100% support from former SR Technics workers for the Ryan Air proposals. One would have imagined that these same people would have been bitterly opposed to Michael O'Leary (and everything he stood for) under the old unionised regime. However faced with the loss of skilled jobs and no realistic prospects of future employment their attitude has changed utterly.<br /><br />And there is a lesson here! For the very same plight facing these now could well face Aer Lingus workers in the not too distant future. So perhaps they may recognise that O'Leary probably offers them the best chance of maintaining their jobs in the long run.<br /><br /><br />Of course if the Government does finally bow to the strong public pressure over the possible loss of these 300 jobs, the DAA will indeed have every reason to be concerned. For one thing is certain. Michael O'Leary's campaign against it is likely to greatly intensify once he gets a foothold in Hangar 6. I would imagine the decision to maintain these jobs on an on-going basis at Dublin will be made dependent on all sorts of changes at Dublin Airport that will be anathema to the DAA.<br /><br /><br />So Michael O'Leary might get his wish and end up effectively running an airport terminal in Dublin after all. <br /><br />Then again, we cannot be quite sure that he is even truly serious about these maintenance jobs. He is very shrewd and might have already judged that there is no realistic prospect of his plans now being approved. Meanwhile however he can score a wonderful public relations success posing as the worker's champion while causing acute embarrassment for both the Government and the DAA.<br /><br />And who would have thought it for if this current trend continues he could wind up even more popular than George Lee!Peter Collinshttp://www.blogger.com/profile/03702540376694818466noreply@blogger.com0tag:blogger.com,1999:blog-3744532793058612955.post-59089135227165088742010-02-14T12:43:00.000-08:002010-02-25T03:35:56.904-08:00Bank DespairAttempting to follow the litany of problems faced by the banking system here in Ireland would lead one almost to despair!<br /><br />Though we knew more than a year ago that they faced horrendous difficulties, the continually evolving situation reveals them as much worse than originally anticipated.<br /><br />In September 2008 following the Lehman crisis the Government took the unprecedented step of guaranteeing bank deposits to the sum of €400 bl.<br /><br />At first we were assured that this move was due solely as a result of a temporary liquidity crisis in the banking system (triggered by the international financial upheaval at the time).<br /><br />However it quickly emerged that one of the banks Anglo Irish - with no branch network - had accumulated huge losses on loans mainly to the commercial property and would need to be nationalised (costing the taxpayer countless billions).<br /><br />Then it became apparent that the other banks were all very much under capitalised (thereby requiring the State to pour in additional billions of taxpayers money).<br /><br />Next when it became clearer regarding the extent of the bad loans extended to the property sector by all of the major banks, the Government proposed a highly expensive rescue plan NAMA (National Asset Management Agency) whereby it would buy up the larger loans on the banks' books at a discount. However this discount of about 1/3 was still much higher than current market value with once again the taxpayer funding the difference.<br /><br />However we were assured at the time that this step was indeed necessary to get the banking system lending quickly again.<br /><br />It now appears that the banks will also be suffering large losses on many loans not included in NAMA (e.g. on mortgages that were being thrown like confetti at unsuspecting house purchasers during the height of the boom). <br /><br />Also it is already apparent that the losses on NAMA loans will in fact be much greater than originally anticipated.<br /><br />This therefore means that the Government will now have to put in large additional sums in fresh capitalisation into the banks.<br />Meanwhile it is being slowly conceded - in what was apparent to many of us all along - that in fact there is no realistic chance of the banks being in a position to restore liquidity for some time.<br /><br /><br />So with respect to the banks we seem to be getting the worst of all possible worlds.<br /><br />Then last week it was announced that Bank Of Scotland (Ireland) was closing down its Halifax Bank operation entirely here with loss of 750 jobs (in an opening move that seems to herald an eventual total close down here).<br /><br />Now it was this Bank in particular that offered a breath of fresh air when it entered the Irish market in that it - perhaps for the first time - stimulated some real competition in the consumer banking market.<br /><br />However since the crisis it appears that all the overseas banks are rethinking their commitment and likely therefore to significantly scale down operations with every likelihood of further job losses.<br /><br />Also the domestic banks (such as AIB and BOI) who are desperate to cut losses are likely to reduce job numbers to a significant extent. So the banking sector will contribute hugely to the already very high unemployment figures in the coming months.<br /><br />Not alone is this very bad news for the workers employed but likewise for bank consumers.<br />As the market inevitably contracts (with fewer institutions remaining) the degree of competition will fall. Therefore again with a view to repairing large losses, the surviving banks are likely to operate effectively as a cartel whereby they will extract high profit margins from consumers. So not alone do we face the prospect that many firms and consumers will be unable to obtain credit but bank charges could steeply rise steeply with those successful in obtaining credit paying excessively for the privilege.<br /><br />And this understandably is likely to lead to further disillusionment and anger among the wider public who have already contributed massively to to cost of cleaning up the banking mess.<br /><br /><br />There is a deeper problem here which goes to the very heart of the capitalist system in that it fails to properly recognise a collective aspect to all profits.<br /><br />During the good times bank profits are narrowly associated with shareholders. However during recessionary times, such as we have now, losses are associated more widely with the general public. Though not directly responsible therefore for the bad decisions taken, in effect it is required to substantially bear the losses (resulting from such decisions) <br /><br />Market Economics as we know it has been built on an unduly limited individual notion of identity. However rightly, there is also an irreducible collective dimension involved in all economic decisions.<br />So ultimately this whole crisis is pointing to a need to redefine our economic ideas at the most fundamental level.Peter Collinshttp://www.blogger.com/profile/03702540376694818466noreply@blogger.com0tag:blogger.com,1999:blog-3744532793058612955.post-90131222477351965552010-02-09T08:36:00.000-08:002019-12-19T07:14:42.630-08:00Exit of George LeeSo George Lee has left Fine Gael after just 9 months in the party.<br />
<br />
How much things have changed since the heady heights of his sensational by-election triumph last May! In the eyes of many he was seen as the new political messiah for Fine Gael bringing the promise of fresh economic thinking and future electoral success. However it has all turned sour so very quickly.<br />
<br />
Frankly I was surprised when Lee left his influential post as RTE's revered economics correspondent, a role for which he was clearly designed and in which he excelled. Apart from correctly alerting listeners regarding the flawed nature of Celtic Tiger policies, the reports gained additional credibility through his communication skills and a sincere emotional engagement with the issues involved. So in this respect he did not fit the stereotype of the detached economics observer and was all the more loved for that very reason!<br />
<br />
However on the negative side, Lee's reports rarely displayed great detail or originality. Rather, they were of the "broad brush" variety which was very effective in communicating economic matters to a non specialist audience. <br />
<br />
I would be more impressed with Richard Bruton in terms of ability to forensically investigate the details of economic policies. Then in relation to imagination and originality - though I do not always agree with his proposals - I would find David McWilliams to be a much more interesting commentator.<br />
<br />
Due to the failure of politicians in 2008 to foresee both the financial crisis and property slump, people were looking for a new type of hero among those economic commentators who had correctly warned of the crisis. And chief among these was George Lee who thereby enjoyed enormous popularity. <br />
And I am afraid George began to bask somewhat in this warm glow, developing perhaps an exaggerated view of his political potential. And when the main rival party came hunting for him he couldn't resist the invitation believing that somehow he had the magic formula to cure the country's ills. <br />
<br />
Even at the time I thought that his decision did not make any sense. <br />
<br />
For one thing Fine Gael were in opposition and despite the very low political ratings of the Government likely to remain there for some time. <br />
<br />
Secondly, the most talented people in Fine Gael already filled key economic positions in the shadow cabinet. Richard Bruton as the Finance spokesperson is a highly respected and able politician of 30 years experience whereas the Enterprise Trade and Employment spokesperson Leo Varadkar is the most promising of the younger generation. So there was no obvious economics position that George could immediately fill and he was always likely therefore to be used as a "poster boy" offering an invaluable marketing opportunity for the party.<br />
<br />
Then on a few occasions when he did engage in debate he displayed his political naivete and - perhaps - lack of detailed economic understanding of policies. In a couple of exchanges in the Dail and at a Summer School (attended by the Minister of Finance) he came out badly when his "sound bite" approach was exposed as inadequate in the light of more comprehensive questioning on issues. <br />
<br />
It is all very well railing against the deficiencies of the political system (which indeed are many), but surely he should have been aware of this before entering politics. For once that line is crossed, he no longer was representing just himself, but also the party and the many people who gave him support and voted for him in the by-election. And of course his political neutrality, so valuable in an economics commentator, has been forever sundered.<br />
<br />
<br />
It is very mistaken in any case to think that one must enter politics to have a real effect on economic policy.<br />
<br />
In fact in the present climate the, opportunities have never been greater for outside commentators (such as George Lee) to exercise a marked influence.<br />
<br />
I mentioned already another popular economics contributor of the moment David McWilliams who has had a key impact on recent economic debate through his books, newspaper articles and many radio and TV performances.<br />
<br />
The most important economics decision ever taken in Ireland was the bank guarantee scheme undertaken by the Government in September 2008 where the State decided to underwrite bank assets to the value of €400 bl. Well that was a scheme that was being proposed at the time - among others - by David McWilliams. And as he recounts in his latest book, McWilliams was consulted in his home by Brian Lenihan, the Minister of Finance shortly before it was implemented.<br />
<br />
And then another respected economist Alan Ahearne, who likewise had warned about the dangers of Ireland's property bubble, was subsequently appointed as special advisor to the Minister of Finance. <br />
<br />
And finally yet another very respected economist Patrick Honohan was recently appointed as the new Governor of the Central Bank. So if one is interested in influencing current economic policy, surely these examples suggest better options than as a backbencher with an opposition party!<br />
<br />
Thus George Lee was perhaps in a more favourable position than any other economist here in Ireland to potentially influence current economic events. He may have been required to eventually vacate his position as RTE's economics correspondent in order to speak out more freely. However he would have remained greatly in demand by the media, with ready access to any important figure he wished to consult with a view to disseminating his economic viewpoints.<br />
<br />
However for me this is really the nub of the whole issue for I have seen little evidence that George can truly offer fresh thinking on contemporary economic issues.<br />
He was privileged to be filling the very post which maximised his talents and influence but somehow failed to properly recognise that very important fact.Peter Collinshttp://www.blogger.com/profile/03702540376694818466noreply@blogger.com0tag:blogger.com,1999:blog-3744532793058612955.post-39906971414001010682010-01-17T09:34:00.000-08:002015-02-27T03:17:39.096-08:00Water - too much, yet too littleIt has been very strange living In Ireland in recent times.<br />
<br />
Ireland is a country which even at the best of times experiences a great deal of rainfall. And during summer 2009 we had one of the wettest Summers on record.<br />
<br />
Then in November the country experienced some of the worst floods in living memory.<br />
This was followed - starting in mid-December - by a long spell of snow and ice.<br />
<br />
Yet after all this we are experiencing great problems with our water supply. For example in Dublin many houses have been cut off for several days. In many others water supply has been greatly restricted.<br />
<br />
<br />
What on Earth is happening? <br />
<br />
Unfortunately heavy rainfall does not necessarily translate into a properly functioning water supply.<br />
<br />
Like so much other infrastructure, insufficient attention has been paid to the maintenance of the water system in Dublin and elsewhere in the country.<br />
<br />
Most of the underground piping that serves Dublin was laid in the late 19th century (when the population of the city was just a fraction of present levels). Though this served well for many years, the lead pipes are now very old and cracking in many places. So a considerable amount of water (instead of flowing through to household taps) leaks out earlier in the process. <br />
<br />
Though some limited upgrading of this system has taken place in recent years, it was apparently done in a slipshod and careless manner (as so much construction work during the Celtic Tiger). Though local councils are slow to admit as much, it seems that regulations with respect to laying of new pipes during the housing boom were frequently ignored. Many have been inserted far too close to ground surface and have shown little tolerance therefore for the prolonged cold weather (such as we have experienced in recent weeks). So ironically it is in newly built areas that many of the worst problems are occurring. So this clearly points to pipes being laid "on the cheap" far too close to ground surface.<br />
<br />
So it will now perhaps require extensive excavation to find the many leakages and breaks with this new piping (arising from the job not being properly done in the first place).<br />
<br />
Another contributory problem in recent weeks has been the fact that many residents - in the desire to avoid pipes freezing over - have allowed taps continually run. However I do not honestly think that this problem has been as bad as the authorities are claimimg (who in many cases are deflecting attention from their own negligence). <br />
<br />
<br />
There is another huge in-built problem. Dublin has grown enormously in recent years with the streets now very congested with traffic. Therefore proper upgrading of the system has been continually delayed to avoid the major disruptions that would thereby inevitably affect business. Though it should have been done many years ago (when conditions were much more favourable) this did not happen. And now because of the fear of ever increasing disruption, the issue is now continually put on the long finger.<br />
<br />
Another problem relates to the financing of local authorities. In recent years Central Exchequer funding has been restricted with councils required to raise revenues from their own operations (such as waste collection). However the councils are always claiming that they are underfunded in an attempt to get Central Government to bear more of the costs. <br />
So as it stands now there seems little chance that major infrastructural works will be instigated by the councils! <br />
<br />
<br />
It has also to be said that in other parts of the country, water supplies in recent years have suffered increasing contamination (from slurry and chemicals draining from landfill dumps). For example this has been a persistent problem in Galway with many residents still having to boil their water before use.<br />
<br />
<br />
However there are opportunities also arising from the present situation. The days of unrestricted water usage (even in a rain rich country such as Ireland) have come to an end.<br />
<br />
The time is now ripe to install water meters in all houses. A certain minimum amount could be granted free with charging applied above that limit. This would create an incentive for people to economise on usage. It would also provide a big short-term business opportunity in an economy gripped by recession.<br />
<br />
However all these problems represent a huge lack of forward planning.<br />
<br />
We see frequently in the business press Ireland promoted as an ideal location for companies (needing a plentiful supply of water). However the fact remains that several businesses in recent weeks had to close down (for lack of water).<br />
<br />
The same lack of foresight was in evidence in relation to our promotion of Ireland as a premier IT location where the basic need of building an adequate broadband infrastructure was never tackled.<br />
<br />
However on a deeper level, problems with water shortages worldwide are likely to grow significantly in future years. My own belief is that we are finally beginning to witness "the inherent contradictions of capitalism".<br />
<br />
The very nature of the capitalist system tends to foster short term opportunities for the private pursuit of profit over longer terms concerns with sustainability of physical and social resources.<br />
<br />
Because of the - literal - exploitation of nature, key resources such as oil and gas are becoming increasingly scarce. Also climate change in large part, accentuated through unsustainable economic growth, is likely to create basic shortages with respect to food and water in many regions of the world. This is then likely to lead to significant problems of migration from affected countries creating huge political and social tensions.<br />
<br />
A major change in attitudes is required. Though I would be optimistic that this eventually will occur, in the short-term major economic and social crises are inevitable.Peter Collinshttp://www.blogger.com/profile/03702540376694818466noreply@blogger.com0tag:blogger.com,1999:blog-3744532793058612955.post-50391764274251820712010-01-03T13:55:00.000-08:002019-08-05T03:08:35.094-07:00Breaking with the EuroI have been reading David McWilliam’s most recent book "Follow the Money".<br />
<br />
<br />
It provides a gripping account of the nature of our recent economics problems with the mania for property and easy money being likened by him to a serious drug problem!<br />
<br />
However what is always a little weaker in accounts such as this are practical suggestions as to how the problem might be eventually alleviated. Just as the drug addict becomes especially prone to need the constant "quick fix" solution, popular commentators such McWilliams often fall into the same trap of creating the impression that there are likewise "quick fix" solutions to be found (if only the authorities could fully embrace the author's own particular pet scheme of the moment).<br />
<br />
So in the final stages of the book, McWilliams offers as his key solution to the present recessionary crisis in Ireland that we should leave the Euro.<br />
<br />
Now to be fair I would not completely deride this suggestion as the validity of our membership of the Eurozone and indeed the validity of the whole Eurozone currency area generally in Europe has never undergone appropriate critical analysis (especially here in Ireland).<br />
<br />
In the past the vast bulk of Irish trade was with the UK and not surprisingly Ireland effectively preserved monetary union with Britain though maintaining our punt at an exact 1:1 ratio with sterling. Up until 1979 the Irish punt effectively represented sterling with an Irish face (as sterling was likewise freely accepted in exchange for goods in the Republic). The first major decision was to break this link when we opted for the more limited European Monetary System (EMS) which effectively meant tracking the mark (rather than sterling). <br />
In fairness there were some good economic arguments for this strategy at the time. The UK had been proving less competitive than other European economies and this had been leading to a growing problem of inflation in Ireland. So breaking the link was seen as one way of tackling this problem. Also there was the view that as members of the EU that we should be diversifying our trade away from dependence on the British market.<br />
<br />
However it has to be also admitted that part of our enthusiasm was also due to the additional aid we expected to receive from the EU for such a decision. As the poorest member of the EU at the time Ireland benefited disproportionately from EU transfers (e.g. agriculture and structural funds). Then, as a result of this decision to join the EMS we stood to achieve massive amounts of money in borrowing from the European Investment Bank (at very attractive rates). Indeed this was subsequently to lead to a huge increase in our National Debt in the early 80's!<br />
<br />
There was also more than a touch of economic nationalism as well regarding the decision. Political independence from Britain had been obtained in 1922. However because of the strong trading relationship with the UK and the link with its currency, economic dependence continued. So the break with sterling signalled an important transition in this respect.<br />
<br />
Having taken the decision to join the European Monetary System in ’79 (without Britain’s participation) it was always likely that we would likewise opt for joining the new Euro currency (irrespective of Britain’s decision).<br />
<br />
The general view at the time when the single currency first came into existence in 1999, was that Britain would eventually join in any case (thus relieving us of an important exchange rate difficulty). However this has not in fact happened and a decade later still looks very unlikely in the foreseeable future.<br />
<br />
<br />
As regards the Euro project generally I have always considered that it contains a special weakness. Whereas it is strong in the monetary area with the common currency (and the European Central Bank exercising a key level of control) it is very weak unfortunately in the equally important fiscal area. <br />
<br />
If we compare the situation with the US (which represents another good example of Economic and Monetary Union) we can appreciate the difference.<br />
In the US the federal budget represents an important level of central control where authorities can influence the overall economy through decisions taken. For example in the present recession the standard fiscal expansionary policies are being pursued so as to encourage more spending and greater economic activity generally.<br />
<br />
However no such mechanism exists in the Eurozone. Though there is an EU Budget it is tiny in terms of overall spending (and in any case is not designed to deal with cyclical type adjustments). Therefore in dealing with a a sudden shock (such as the current recession) huge weight is placed on cooperation between the various fiscal authorities so as to obtain a coordinated response. <br />
However if effect this is not how fiscal policy is pursued with each member state bringing in budgets largely to deal with merely domestic circumstances. Though there are overall controls placed by the EU on the parameters within which budgetary policy can be exercised (the Growth and Stability Pact), these have not worked well. The largest countries (e.g. France and Germany) have ignored them (even in relative good times). Now in recession the limits (such as a 3% deficit budget limit) are totally impractical in dealing with recessionary conditions.<br />
<br />
Coordinated response at a European level is also further hindered by the fact that while many members are part of the EMU (the Eurozone) other important countries such as the UK lie outside with freedom to pursue interest and exchange rate policies (more in keeping with domestic circumstances).<br />
<br />
<br />
There is also a particular problem associated with Irish membership as our two principle trading partners - the UK and the US - lie outside the Eurozone. Therefore one of the main benefits of a single currency area (exchange rate stability) does not apply to the bulk of Irish trade.<br />
<br />
This situation is even worse when one considers the breakdown as between indigenous and multinational trade.<br />
Most of indigenous exports still go the UK market. In fact it is the multinational companies here (especially US) who benefit from our membership of the EMU for most of their exports are indeed destined for the wider Eurozone economy. In particular US multinationals tend to use Ireland as a convenient satellite bridging state (between the US and Europe). They locate here because of special tax and regulatory advantages in an English speaking country (that then in turn provides the benefits of Eurozone membership with respect to trade). <br />
<br />
Ireland is a small island on the outer fringes geographically of Euroland (accounting for 1-2% of overall GDP).<br />
Policies for control of the Eurozone are applied by the ECB in a general manner. It is much more likely therefore than - for example - inflation in a larger country such as Germany will approximate more closely with the target set than Ireland. Because Ireland is so small, inflation could in principle be running at 10% while the ECB overall is successful at keeping inflation at the target rate of 2% in the Eurozone.<br />
Therefore there is every reason for believing that overall policies would not in fact suit domestic circumstances in Ireland. <br />
<br />
This in fact was a major contributory factor to the property bubble that engulfed Ireland by the mid noughties. The economy was already overheated due to a prolonged boom in 2001. However because the Eurozone was in recession at the time, the ECB cut interest rates thereby pouring petrol on an enflamed situation. This also enabled extensive euro borrowing abroad by Irish banks at very cheap rates (which has greatly aggravated our present financial crisis). <br />
Now we have the opposite fear that the ECB may start increasing rates and curtail lending while the Irish economy remains in deep recession. <br />
<br />
<br />
However, having acknowledged these problems, this by no means establishes that a break with the Euro would help our current situation.<br />
<br />
As regards the precise mechanics of a break, I do not understand precisely what McWilliams is advocating. Is he suggesting that we now reintroduce the punt and devalue it against the Euro? Or does he have notion of a separate “green” version of the Euro operating in Ireland (where again it would be effectively devalued against the official Euro)?<br />
<br />
Surely he realises that major political as well as economic repercussions would flow from such a decision! <br />
The EU would be extremely reluctant to sanction such a course as it would threaten to jeopardise the whole Euro experiment. If Ireland today why not Greece, Spain and Italy tomorrow? <br />
<br />
Now perhaps he is proposing that we should take the decision unilaterally (issuing it as a fait accompli).<br />
Surely, however he understands that this would greatly erode good will for the country in future. For example the ECB has provided an extraordinary amount of liquidity funding for our banking system during the present crisis. Without this help, it is hard to see how the system could have survived. Why would continued assistance be provided to a rebel member that has decided to leave the Eurozone? <br />
<br />
In any case it would also be very hard for such a decision (as regards leaving the Eurozone) to be taken without speculation arising as to its possibility. Such speculation in itself could prove very destabilising threatening to undermine any possible benefit that could ultimately be realised.<br />
<br />
Where I would differ most from McWilliams is however the simplistic view that devaluation of the currency would magically transform our economy.<br />
<br />
Though devaluation could certainly ease short-term problems with competitiveness, its benefits from a long-term perspective are much more questionable.<br />
<br />
Prior to the formation of the EMU it was the countries such as Germany and the Netherlands that historically had the strongest currencies as well as the strongest economies. By comparison Italy that resorted to frequent devaluations of the lira, had a much weaker economy.<br />
<br />
In fact there is a particular problem in relation to Ireland resorting to devaluation. Everyone knows that costs are far too high. One could argue therefore that the present recession though unpalatable and very uneven in its effects, is at least forcing costs downwards which is a prerequisite for any long-term restoration of competitiveness. <br />
<br />
Imagine if Ireland was to resort to - say - a 30% devaluation of a new separate currency against the Euro! <br />
Clearly exporters for a while would be happy as they would find it easier to compete price wise. And tourism to Ireland would almost certainly improve! However this very easing of the present problem would greatly reduce pressure to keep costs down. Also imports - which represent the other side of the equation - would significantly increase in price. As the demand for much of Irish imports is inelastic (e.g. oil), prices would sky rocket here. So consumers would face growing inflation while increases in raw material prices would considerably erode any initial benefit from devaluation.<br />
<br />
Now McWilliams might point to the apparent beneficial effects of the 1993 devaluation which coincided with the rise of the Celtic Tiger. However looked on from an equally valid perspective this served as one important factor that led to a subsequent loss in competitiveness (eventually undermining the whole Celtic Tiger).<br />
<br />
It also must be said that during membership of the EMS, exchange rate adjustments (such as took place then for the Irish punt) were allowed under the system. Indeed 1993 was a period of such general turbulence for EMS currencies (with several forced to devalue) that the exchange rate regulations were later significantly modified to enable the system to continue.<br />
<br />
<br />
However equally it was the experience of this time that convinced me that the introduction of the Euro was a premature idea. Though with further turbulence due to the financial crisis, the Euro has held firm, this has been at the cost of significant deflationary pressures in several member countries.<br />
<br />
So I would go a certain distance with McWilliams in arguing that EMU was in fact prematurely conceived and even further that with our peculiar economic circumstances that it only makes sense for Ireland due to the wrong reasons (i.e. in that it suits US multinationals). However our huge dependence on such multinationals arises largely from artificial tax considerations. <br />
So ironically far from strengthening indigenous ties with the EU, the single currency has led to a greatly increased dependence on US investment in Ireland. Such investment is conveniently served by the single currency together with several other artificial reasons for locating in Ireland.<br />
<br />
Also the devaluation of a currency is potentially of most advantage when the countries with which it trades remain on fixed currency rates. However this clearly is not the case with Ireland as both Britain and the US have floating currencies. Also if we were to devalue it is likely that the whole Euro experiment would significantly unravel leading to perhaps several other countries joining the floating party. <br />
<br />
Now it is not at all clear what the correct exchange rate policy should be for Ireland (if we were to break the link with the Euro).<br />
<br />
<br />
In dealing with the present crisis, the first thing that we need to realise is that there there is in fact no sustainable "quick fix" solution and that appropriate policy choices represent various options all of which will prove difficult with many unpalatable consequences.<br />
The problem is that during the Celtic Tiger, damaging habits of behaviour took hold in the national psyche which now need to be faced and uprooted before genuine progress can be resumed.<br />
<br />
Unfortunately at present, because of so many poor choices in the past we are now heavily compromised on many sides. Costs are far too high; in addition lack of consumer discernment leads to the frequent imposition of "premium mark-ups" on goods sold in the Irish markets. I would also be of the view that in a wide range of areas, not alone is the price of essential services far too high, but the quality of what is offered has fallen considerably.<br />
In many ways Ireland has an extremely artificial economy. During the latter phases of the Celtic Tiger, wealth in the economy was largely based on an unsustainable speculative property boom. However of even deeper concern is the fact that we have become so totally dependent on multinational companies, spurred on by artificial tax advantages and light touch - or perhaps more accurately no-touch - regulation, for the vast bulk of wealth creation (with over 90% of all exports coming from this source).<br />
<br />
<br />
As an extremely open economy based on shifting sands we are now heavily compromised in dealing with the situation.<br />
<br />
It would be much better in my opinion that we use the next few years (of comparative hardship) to address more fundamental issues. We need to develop a new more authentic indigenous spirit based on hard work and genuine pride in country. Then we need to realistically look at developing new sustainable sources of competitive advantage.<br />
<br />
Perhaps in the future we could even review issues such as membership of the Eurozone.<br />
Then if continued experience in fact demonstrates its unsuitability for the economy, we could threaten to leave (from a greater position of strength). Unfortunately at the moment we do not have that luxury and need all the help that we can get from the EU to cope with our present financial problems.Peter Collinshttp://www.blogger.com/profile/03702540376694818466noreply@blogger.com0tag:blogger.com,1999:blog-3744532793058612955.post-77917533637851649092009-12-14T08:19:00.000-08:002010-06-03T05:45:04.706-07:00The BudgetWell! The Irish Budget which promised draconian cuts in expenditure certainly lived up to expectations with most of the burden falling on public servants and welfare recipients. Naturally both Trade Unions and members are extremely angry as a result. However the important question that really arises relates to the existence - if any - of more palatable alternatives.<br /><br />From one perspective I actually applaud Brian Lenihan for at least having the guts and leadership qualities to follow through on what he considered necessary and yet which was bound to be highly unpopular among large sections of the population.<br /><br />And indeed there is a valid case for the measures he took. Overall expenditure is way out of line with revenue receipts. Also surveys show that public sector pay in general is much higher than the private sector in an economy that is seriously lacking in competitiveness. Quite simply the price of most products and services is excessive at present in Ireland. Likewise due to an actual fall in inflation during the past year, the real value of welfare receipts has increased. Thus there was a good case to tackle such expenditure.<br /><br />Unfortunately Ireland is now heavily dependent on satisfying international opinion on how to address our problems. The Minister can justifiably argue that bond charges would be much higher if harsh measures were not now taken. Likewise investment from multinational investment e.g. manufacturing and finance) which comprises 90% of Irish exports could be badly hit in the absence of such tough measures.<br /><br />However there is a deeper issue that has not yet been directly addressed in the ongoing debate in Ireland.<br /><br />Due to our attempt to achieve rapid growth the economy is now greatly mortgaged to the sentiment of outside investors and domestic wealth creators representing together a somewhat extreme version of the liberal capitalist ethos. Therefore over the past 15 years or so Ireland has cultivated a wealth friendly ethos (as the cost of maintaining growth).<br /><br />However this has been greatly at the expense of social justice. Though inequality was indeed worsening during the Celtic Tiger years, this could somehow be ignored as long as the greater mass of the population could aspire to an improved standard of living.<br /><br />However now in the recession the patent injustice of what has been happening in our midst has become all too apparent.<br /><br />Higher paid groups are intent on maintaining their great privileges (e.g. hospital consultants) while so many others desperately struggle to make ends meet. Meanwhile the Government in its attempt to reassure the "wealth creators" has immediately returned to its customary policy of appeasing them at every turn.<br /><br />The clear implication of all this is that the very model of capitalism that we are now seeking to promote is proving itself quite incompatible with acceptable notions of social justice. One indication of how serious things have become is the threat of the police to go on strike action (even though this is illegal within their rules). <br /><br />We are now facing a period of growing unrest and disruption that - if we are not careful - could spiral out of control into lower forms of social anarchy.<br /><br />What we are actually seeing now is as Marx spoke about all those years ago "the inherent contradictions of capitalism". We are now facing growing global threats on many fronts e.g. financial system and the environment. Meanwhile social unrest is likely to grow in many countries.<br /><br />In short we need a more integrated approach to economic life (where moral values are seen as inseparable from actual decisions taken). Unfortunately powerful vested interests are likely to resist this need for some time to come thus increasing the chances of truly enormous problems developing within the system.Peter Collinshttp://www.blogger.com/profile/03702540376694818466noreply@blogger.com0tag:blogger.com,1999:blog-3744532793058612955.post-21062638873328855962009-12-08T11:10:00.000-08:002009-12-28T08:49:27.361-08:00Welfare Fraud"Prime Time" last night on RTE dealt with the issue of social welfare fraud.<br /><br />The total Social Welfare bill in Ireland is currently running at over €20 bl. per annum with at least 10% of this relating to fraudulent claims. Thus at a time when stringent cuts in expenditure are required we have a massive case of over-spending that simply is not being properly addressed.<br /><br />Unfortunately to a certain extent we have long had a mentality - no doubt relating to our colonial past - that leads to a lot of petty fraud. Many people while paying lip service to the system do not really respect it. So if telling a little white lie, or indeed a big major lie (and perhaps many such lies) helps people beat the system in some way they feel justified in doing so taking comfort from the assertion "Well! isn't everyone doing it? <br /><br />In a recent survey for example it was found that up to 70% of people taking out car insurance in one county had lied in providing information. Many who are self employed or working unofficially in the "black economy" feel perfectly relaxed regarding undisclosed income. And as this programme demonstrated there is widespread abuse of the welfare system taking place.<br /><br />Personally I believe that the the phenomenon of the Celtic Tiger has greatly contributed to a lessening generally of moral standards and to creating a culture of waste (which rapid economic growth only encouraged).<br /><br />Thus there is a high tolerance of "ripping off" and in turn being "ripped-off" by the system in Ireland.<br /><br />One of the reasons why there is now so much resistance to pay cuts despite the very high level of income per capita here (in official estimates) is that prices are unusually high for a wide range of goods and services. Though much of this does indeed reflect the higher level of costs generally prevailing, a considerable amount is due to a culture that dramatically escalated during the Celtic Tiger where over pricing e.g. in housing market, retail stores and restaurants was readily accepted (without much question). <br /><br />Also it has become apparent that where the same company is selling goods - say in the UK and Ireland - that a premium is generally applied to the Irish price (unrelated to cost, tax or exchange rate considerations).<br /><br />It is true for example that Ireland is still a very high wage economy. However the cost of living is also unduly high (which negates somewhat this advantage). It would be much better to have a lower wage economy with a corresponding lower cost of living.<br /><br />As Ireland depends crucially on trade, success here (especially for indigenous firms) will require a much higher degree of cost competitiveness.<br /><br />If for example wages fell over a period by 20% and the cost of living also fell by 20%, our livings standards would remain unchanged. However crucially, we would then be in much better position to successfully compete both in home and export markets. <br /><br />Trade Unions especially would need to grasp this reality. Of course social justice requires that income be distributed more equally. However a fundamental fact remains that costs are too high in Ireland both in the private sector and in Government (as for example with social welfare).<br />There is no point in continuing to deny this reality. Common sense dictates that we now decisively deal with the issue.Peter Collinshttp://www.blogger.com/profile/03702540376694818466noreply@blogger.com0tag:blogger.com,1999:blog-3744532793058612955.post-59491676896425307162009-11-18T03:28:00.000-08:002009-11-25T02:26:54.965-08:00Patent Nonsense!The Health Minister, Mary <span id="SPELLING_ERROR_0" class="blsp-spelling-error"><span id="SPELLING_ERROR_0" class="blsp-spelling-error">Harney</span></span> has mentioned a new proposal (likely to be included in the forthcoming Budget) regarding the making of a nominal charge (50c) for every prescription.<br /><br />As well as providing some additional revenue to the Exchequer this would perhaps have the benefit of discouraging many freely availing of prescriptions (on the Medical Card) which they don't subsequently use. It is estimated that up to a quarter of <span id="SPELLING_ERROR_1" class="blsp-spelling-corrected">the</span> drugs <span id="SPELLING_ERROR_2" class="blsp-spelling-corrected">dispensed</span> by <span id="SPELLING_ERROR_3" class="blsp-spelling-corrected">pharmacies</span> in this way are wasted!<br /><br />However there are more serious issues that need to be addressed.<br />A critical matter relates to the fact that the cost of drugs in Ireland is exceptionally high compared to other countries.<br /><br />One important contributing factor relates to the excessive mark-up enjoyed by pharmacies for dispensing drugs. In fairness this was addressed earlier in the year by the Minister leading to a tentative compromise resolution with the pharmacies in August.<br /><br />However the key factor has not yet been addressed which relates to the <span id="SPELLING_ERROR_4" class="blsp-spelling-corrected">exorbitant</span> amounts paid by the <span id="SPELLING_ERROR_5" class="blsp-spelling-error"><span id="SPELLING_ERROR_1" class="blsp-spelling-error">HSE</span></span> (as the National Purchasing Agency) to the drugs companies.<br /><br />Two reasons have been put forward for this <span id="SPELLING_ERROR_6" class="blsp-spelling-corrected">problem</span>.<br /><br />1) The practice still predominantly exists in Ireland whereby medical practitioners prescribe patent drugs (which generally are much more expensive) rather than their generic substitutes (which become available after the initial patent period expires).<br /><br />Apparently in the UK more than 50% of drugs <span id="SPELLING_ERROR_7" class="blsp-spelling-error">prescribed</span> are of the generic variety (whereas in Ireland it is down at around 10%).<br />So clearly much more should be done to persuade doctors here to prescribe generic rather than patent drugs whenever possible. (It should be borne in mind that generic substitutes are not inferior to the patent brands!)<br /><br />However there is another problem here. Doctors will <span id="SPELLING_ERROR_8" class="blsp-spelling-corrected">maintain</span> - perhaps correctly - that in Ireland that often there is no appreciable price difference as between patent and generic varieties. Therefore in many cases they lack any real incentive to <span id="SPELLING_ERROR_9" class="blsp-spelling-error">prescribe</span> generics (even when available).<br /><br />So the real problem in Ireland seemingly relates to the fact that the <span id="SPELLING_ERROR_10" class="blsp-spelling-error"><span id="SPELLING_ERROR_2" class="blsp-spelling-error">HSE</span></span> pays far too much for its drugs (and especially for generic substitutes).<br />Indeed it appears that the cost to the <span id="SPELLING_ERROR_11" class="blsp-spelling-error"><span id="SPELLING_ERROR_3" class="blsp-spelling-error">HSE</span></span> of buying some of these generics runs at 16 times the corresponding cost to the UK authorities (which is totally <span id="SPELLING_ERROR_12" class="blsp-spelling-corrected">ludicrous</span>).<br /><br />Even more <span id="SPELLING_ERROR_13" class="blsp-spelling-corrected">ludicrous</span> is the attempted explanation by the drug companies of this vast price discrepancy on the grounds that they cannot obtain the same economies of scale (presumably in relation to distribution) with respect to Ireland as in the UK market.<br /><br />Now the <span id="SPELLING_ERROR_4" class="blsp-spelling-error">HSE</span> say that their hands are tied as the current agreement will run till next next September.<br /><br />However though some concessions on price will possibly be made by the drugs companies in new negotiations with the <span id="SPELLING_ERROR_5" class="blsp-spelling-error">HSE</span>, I would confidently predict that we will still be paying considerably more for the same drugs than our UK counterparts.<br /><br />One would of course like to offer a real explanation here. On the face of it - presuming that the <span id="SPELLING_ERROR_6" class="blsp-spelling-error">HSE's</span> account is accurate - the drugs companies are in breach of competition law (as they are enforcing a clear case of blatant price discrimination with respect to two EU markets).<br /><br />Why therefore has the <span id="SPELLING_ERROR_7" class="blsp-spelling-error">HSE</span> not asked the EU Commission to investigate this case which could have far reaching implications? I am aware that there is on-going case involving EU Competition Policy in relation to GlaxoSmithKline which was seeking to prevent discounters obtaining drugs from Spain (where prices are generally lower than in the UK). The pharmaceutical industry would maintain that such price discounting - it it were to become commonplace - could eventually erode justifiable profit margins on drugs. However, whatever the merits of this argument it cannot justify the blatant price discrimination they operate with respect to the Irish market.<br /><br />One obvious remedy would entail that a Central agency (within the EU) in future would negotiate directly with the drugs companies purchasing on behalf of all EU countries. Then having afforded the pharmaceutical industry maximum "economies of scale" in this fashion (and with due regard to acceptable profit margins for the manufacturers), it could then distribute to national agencies in accordance with agreed allocations. Failing that, if manufacturers persist in their exploitation of the Irish market, authorities here could seek to purchase drugs from other EU markets (where prices are so much lower).<br /><br />However precisely because these options have not been <span id="SPELLING_ERROR_8" class="blsp-spelling-corrected">pursued</span> in Ireland (despite such massive price discrimination) I suspect that another explanation must exist.<br /><br />I have often argued on these blogs that the Government has effectively followed a policy of appeasing multinational investors at every turn. Because such investment has become so vitally important to the economy it is then loath to take any action that might incur possible disfavour.<br /><br />In particular the chemical and pharmaceutical companies dominate the landscape in Ireland with over 60% of all merchandise exports now coming from this sector. As argued before, this sector offers special advantages with respect to tax diversion activities which perhaps explains the considerable extent of their presence. Indeed many of the drugs prescribed by the doctors are produced by subsidiaries of these same pharmaceutical companies located here in Ireland.<br /><br />It is the very dominance of such companies with respect to the economy that gives them great bargaining power. And this power has been been apparently used to extract a far higher price for drugs here than in other markets.<br /><br />Sooner or later we will have to recognise this elephant in the room i.e. multinational activity and how both directly and indirectly it is effectively determining so many of our economic decisions (greatly limiting in the process any genuine exercise of freedom).Peter Collinshttp://www.blogger.com/profile/03702540376694818466noreply@blogger.com0tag:blogger.com,1999:blog-3744532793058612955.post-25490588470097925312009-11-12T04:10:00.000-08:002010-02-10T06:29:40.925-08:00Taxing WealthThere is a great deal of unrest with much simmering anger evident in Ireland at present. The economy is in deep recession with borrowing rapidly mounting (both in the public sector and private households).<br /><br />Meanwhile the Government is making preparations to bring in a draconian budget which threatens to depress living standards further for those already struggling to make ends meet.<br /><br />How have we got ourselves into such a mess? Also what is the best way forward in such trying circumstances?<br /><br />On the face of it per <span id="SPELLING_ERROR_0" class="blsp-spelling-error"><span id="SPELLING_ERROR_0" class="blsp-spelling-error">capita</span></span> income in Ireland is still very high and - indeed - well above the EU average (which - by world standards - remains a highly <span id="SPELLING_ERROR_1" class="blsp-spelling-error">privileged</span> area). Yet so many people genuinely seem to be faced here with real financial worries and potential hardship.<br /><br />There are indeed many possible explanations for this.<br /><br />Firstly, because of the highly artificial nature of the Irish economy. which is so dependent on multinational activity, official figures overstate true per <span id="SPELLING_ERROR_2" class="blsp-spelling-error"><span id="SPELLING_ERROR_1" class="blsp-spelling-error">capita</span></span> income.<br /><br />Secondly the cost of living is very high in Ireland - and exceptionally high - in relation to many basic services. Also because of the excesses of the Celtic Tiger, services that are provided - at inflated prices - are often of low quality.<br />In many cases therefore consumers could expect to get much better service for less in other countries.<br /><br />Thirdly the spread of income and wealth is very uneven in Ireland with a small untouchable minority pocketing the lion's share of the gains of the Celtic Tiger era.<br />Furthermore the culture has evolved to offer <span id="SPELLING_ERROR_3" class="blsp-spelling-corrected">privileged</span> protection to this minority.<br /><br />Fourthly, in the latter phases of the Celtic Tiger an explosion in credit took place. This meant in effect that it became widely acceptable to live well beyond one's means. As much of this credit creation was related directly to the financing of property, people took comfort from short-term gains in wealth (based on the escalating value of such property).<br /><br />Meanwhile the financial institutions were liberally throwing money at both developers and consumers alike in a desperate attempt to maintain a continuing property bubble.<br />Thus now that the bubble has burst, many who had become over-<span id="SPELLING_ERROR_2" class="blsp-spelling-error">commited</span> financially are greatly exposed with negative equity growing on their homes and debt payments mounting.<br /><br />Also the general standard of living has sharply contracted within the last two years and unemployment has soared.<br /><br />And just as the boom distributed gains in a very uneven fashion, likewise the recession is now distributing pain in a similarly uneven fashion.<br /><br />For a <span id="SPELLING_ERROR_3" class="blsp-spelling-corrected">considerable</span> minority, life still remains very comfortable. However major adjustments are now being forced on large sections of the population with genuine hardship looming in many cases.<br /><br />At government level a chronic hole in the public finances has emerged with current expenditure massively exceeding revenue intake. In simple terms at present we are spending €3 for every €2 taken in revenue (a position which obviously cannot be sustained.)<br /><br />So the clamour now regards the prospect of sharp cuts in expenditure allied to further increases in taxation.<br /><br />Understandably much attention has <span id="SPELLING_ERROR_4" class="blsp-spelling-corrected">focused</span> on the higher income earners with many suggesting that they should bear the brunt of taxation.<br /><br />Now it is certainly true that <span id="SPELLING_ERROR_5" class="blsp-spelling-corrected">unnecessarily</span> large amounts are paid at the top end of the public service e.g. to well known broadcasters, executives of state companies and agencies, secretaries of civil service departments. Also the state has been in the habit of paying ludicrously high amounts to consultants and advisors for legal and financial services.<br /><br />And in the private sector not everyone is facing the brunt of tough competition with many professionals e.g. dentists, consultants, lawyers and accountants quite expert at maintaining their customary privileges.<br />In particular, the <span id="SPELLING_ERROR_6" class="blsp-spelling-error">unjustifiable</span> rewards pertaining to senior management of the major banks - who failed us disgracefully - remains a special bone of contention.<br /><br />So certainly, much higher marginal rates of taxation are justified on the top income earners.<br /><br />Unfortunately even with such measures are imposed, are we likely to see a major dent in the public financing gap. Also, they are unlikely to have any real impact on the distribution of wealth in our society.<br /><br />Those who are most wealthy generally do not derive their gains from accountable income. Rather they are likely to be prominent business people who hire tax experts for the specific purpose of avoiding tax. And if this requires becoming "tax exiles" as for example with Denis O'Brien and U2 well so be it! Also considerable "super-normal" profits were made by many entrepreneurs e.g. large developers during the boom. However remarkably little information is available both as to to the extent of such earnings or as to their subsequent use.<br /><br />So this is the real problem. The whole success of the Celtic Tiger was built on cultivating a wealth friendly ethos in Ireland. At one level this applied to the multinational companies (e.g. IT companies and financial services) where a low corporate tax and undemanding regulatory <span id="SPELLING_ERROR_7" class="blsp-spelling-corrected">environment</span> were skillfully used as the primary means of their attraction.<br />Also everything possible has been done in recent years to facilitate domestic wealth creators through offering numerous tax breaks and allowances thus increasing their power, status and privilege in our society.<br />Putting it bluntly, we have created a culture over the past few years which has sought to appease the wealthy and privileged in our society at every turn. And when all appeared to be going well with the economy, this was not really questioned despite the growing inequality that it actually fostered in our midst.<br /><br />Now however that the bubble has burst, a dramatic <span id="SPELLING_ERROR_8" class="blsp-spelling-error">clash</span> in cultural values has emerged.<br /><br />The root problem with the Celtic Tiger related to wholesale acceptance of the most dubious capitalist ethos which fostered profit, greed and monetary success as positive virtues. Though traditional community based values of service to the common good became rapidly eroded in the process, this was easily overlooked in an increasingly materialist culture where the majority could aspire to be winners.<br /><br />Not only are we greatly in debt financially (both in private and public terms) but in a deeper sense we are spiritually in debt due to eagerly embracing a false set of values. These are serving us very poorly indeed in dealing with this present crisis.<br /><br />Just look! Though there is now a truly great need to come together in a spirit of genuine <span id="SPELLING_ERROR_9" class="blsp-spelling-corrected">solidarity</span>, all that one can see is group after group attempting to look after their narrow sectional interests.<br /><br />Thus the present crisis is really one relating to values. Having ignored the basic issue for so long, we finally have to ask ourselves this question. What kind of society do we really want here in Ireland? Do we wish to embrace gross materialism where monetary gain is pursued above everything else or one based on true community values (though this may risk a considerable drop in economic prosperity)?<br />At the moment, unfortunately we have merely the pretence of seeking the common good while remaining firmly locked in a materialistic culture. Until this issue is faced, no real solution to our immediate economic problems will be attainable.<br /><br />So in the end, how we should deal with wealth depends on the kind of society we wish to choose. We now need to honestly face up to that choice!Peter Collinshttp://www.blogger.com/profile/03702540376694818466noreply@blogger.com0tag:blogger.com,1999:blog-3744532793058612955.post-76832343643753797782009-10-14T02:24:00.000-07:002009-11-12T04:10:15.335-08:00Lack of CompetitivenessI have considered for many years that the Irish economy suffers from a fundamental lack of competitiveness. Unfortunately this was persistently ignored during the crazy property bubble years of the 2<span id="SPELLING_ERROR_0" class="blsp-spelling-error">nd</span> phase of the Celtic Tiger. So what was misleadingly trumpeted then by politicians as "inherent strengths" of the Irish economy e.g. continuing high growth and employment were in effect hiding the true reality of a highly artificial economy, with bad value and poor work practices evident in every sector.<br /><br />One of the <span id="SPELLING_ERROR_1" class="blsp-spelling-corrected">unchallenged</span> assumptions that was made here was that removal of barriers in the EU internal market would in itself guarantee competition in Ireland.<br /><br />However for a number of reasons this <span id="SPELLING_ERROR_2" class="blsp-spelling-corrected">argument</span> is highly suspect due to grave faults with respect to the way the market operates.<br /><br />Though the market works better in relation to freely traded goods, even here major impediments exist. For example Governments prevent cars being freely imported from lower price jurisdictions. So apart from differing road regulations here favouring right hand drive cars (as opposed to left hand drive on the Continent) hefty regulation fees have been put in <span id="SPELLING_ERROR_3" class="blsp-spelling-corrected">place</span> to deter direct customer buying from other EU states.<br /><br />Then well known prescribed drugs (such as for blood pressure and <span id="SPELLING_ERROR_4" class="blsp-spelling-corrected">cholesterol</span>) are available in other EU countries for as little as 1/10<span id="SPELLING_ERROR_5" class="blsp-spelling-error">th</span> of the price of what is charged in Ireland. However rigid <span id="SPELLING_ERROR_6" class="blsp-spelling-corrected">prescription</span> practices are deliberately used to deter customers availing of much lower prices elsewhere.<br /><br />Also many products for which the economy is inherently suited to produce, sell at especially high prices in Irish supermarkets e.g. bottled water, yogurts and cheese.<br /><br />Ireland is a small economy that - apart from <span id="SPELLING_ERROR_7" class="blsp-spelling-error">Northern</span> Island - is geographically isolated from the rest of Europe. Thus when the price of bottled water is pitched at an outrageous level, the consumer is left with the option of either directly importing from another countries, which due to the bulky nature of the product is impractical. Alternatively one could travel to Northern Ireland which can be time consuming and inconvenient (creating its own additional expenses). So where goods are perishable such as food, or alternatively bulky of relatively low value, little competition can be enforced on domestic sellers. <span id="SPELLING_ERROR_8" class="blsp-spelling-corrected">Then </span>as all can mutually benefit from maintenance of high prices, an effective cartel is often then operated by the oligopoly sellers.<br /><br />The situation is even worse in the provision of services. Dental charges for example are wildly excessive in the Republic again through high costs and collusion amongst providers. One is therefore forced to travel to another jurisdiction to avoid such charges. However this involves additional travel costs, a considerable amount of inconvenience and problems regarding effective follow-up.<br /><br />One could argue that the answer is to encourage outside service practitioners to set up in Ireland. However there are considerable difficulties to this as the EU still does not provide the same rights of establishment to service providers.<br /><br />The services sector is now the most important, both in terms of output and employment throughout the EU. So one can realise the restricted nature in practice of competition.<br /><br />So the Irish economy as an isolated geographical entity on the West of Europe is most easily able to avoid <span id="SPELLING_ERROR_10" class="blsp-spelling-corrected">the</span> <span id="SPELLING_ERROR_11" class="blsp-spelling-corrected">rigours</span> of competition. As so many services are consumed locally, there is little need to match prices in other member countries. And where the domestic market is concerned local competition is often avoided through cartel type arrangements between providers.<br /><br />Likewise many goods providers are insulated from foreign competition through prohibitive costs and time delays with respect to the importation of foreign products. And once again <span id="SPELLING_ERROR_12" class="blsp-spelling-corrected">because</span> of the small size of the market, it is much easier for sellers to operate informal cartels and price fixing arrangements which distort competition further.<br /><br />And as over 90% by value of exports (goods and services) comes from multinational <span id="SPELLING_ERROR_13" class="blsp-spelling-corrected">subsidiaries</span> located here <span id="SPELLING_ERROR_14" class="blsp-spelling-corrected">mainly</span> for tax advantages, to a considerable extent we have been able to ignore the problem of competitiveness.<br /><br />As measures to tackle this issue would indeed <span id="SPELLING_ERROR_15" class="blsp-spelling-corrected">prove </span><span id="SPELLING_ERROR_16" class="blsp-spelling-error">unpopular among sellers,</span> the Government has so far largely evaded the issue.<br /><br />Due to the damaging effects on sales, the deep recession in the economy will gradually take care of competitiveness for many firms in <span id="SPELLING_ERROR_17" class="blsp-spelling-corrected">the</span> private sector. This problem is further compounded for indigenous exporters by the current high value of the euro against sterling and the dollar. However far tougher implementation of competition regulations is required with respect to many service providers e.g. doctors and dentists, as we cannot <span id="SPELLING_ERROR_18" class="blsp-spelling-error">maintain</span> a model <span id="SPELLING_ERROR_19" class="blsp-spelling-corrected">whereby</span> practitioners here continue to enjoy unrealistically high earnings.<br /><br />The Government should also introduce a specific regime to continually monitor costs and prices in various sectors (both over time and in comparison to other EU countries). The very fact of making the information publicly available would serve to highlight key problems thus causing pressure for change. Also campaigns focusing on special anomolies would be in order.<br /><br />A particular difficulty exists with respect to public services. Payment here e.g. in health and education is out of line with rates in other EU countries and also with private sector pay in Ireland. We have allowed this problem grow during the inflated riches of the Celtic Tiger. The problem is that many people have entered into financial commitments based on this lax approach which then creates considerable resistance to any proposed reforms. This is worsened by a patent lack of social justice whereby <span id="SPELLING_ERROR_21" class="blsp-spelling-corrected">privileged</span> groups such as politicians, judges, bank directors and hospital consultants seek to live by different rules than those that apply to the rest of the community. So this issue will create distortions in our economy for some time. Public sector unions enjoy an unduly powerful role in Ireland (effectively acting as coalition partners) largely because of weak government. So when demands for pay cuts and <span id="SPELLING_ERROR_22" class="blsp-spelling-error">reduced</span> numbers are made the unions will stoutly resist. And then I expect the Government to back off making cuts to capital rather than current expenditure.<br /><br />This is a sure recipe for continued recession in the economy with short-term recovery highly unlikely.<br /><br />Of course competitiveness involves more than just consideration with unit wage costs. Largely because of our reluctance to properly face up to the cost issue, many seek to promote Ireland as "the knowledge economy" presumably concentrating on high skilled activities where pay competiveness would not be so important. However there is considerable delusion in this. So far Ireland's competitive advantage largely springs from artificial tax provisions. Also other countries will quickly see the benefit of developing the "knowledge economy" with much lower costs.<br /><br />So we need to stop fooling ourselves. We have been trading for years off artificial advantages i.e. low corporate tax and the propery boom and in the process lost any real compass as to future directions.<br />We need to quickly get back to basics i.e. low costs, hard work and genuine pride in the country. Even then we will need all the ingenuity at our disposal to develop new competitive strengths that can serve us well into the future.Peter Collinshttp://www.blogger.com/profile/03702540376694818466noreply@blogger.com0tag:blogger.com,1999:blog-3744532793058612955.post-3400396874880728162009-10-09T03:57:00.000-07:002009-10-11T04:39:45.188-07:00Dealing with RecessionThere is little doubt that Ireland is in the grips of a deep recession at present. The inflation rate is currently - 6.5% (on an annualised basis) and real output could fall by 10% this year.<br /><br />Because liquidity is so tight with banks at present many small and medium sized businesses are finding it extremely difficult to survive. In deed it is heartbreaking to hear on programmes like <span class="blsp-spelling-corrected" id="SPELLING_ERROR_0">Joe</span> Duffy's "<span class="blsp-spelling-error" id="SPELLING_ERROR_1"><span class="blsp-spelling-error" id="SPELLING_ERROR_0">Liveline</span></span>" the incredible pressures that many of these are now, with unpaid debts mounting and <span class="blsp-spelling-corrected" id="SPELLING_ERROR_2">the</span> prospects of survival looking slim.<br /><br />We all know the reasons why banks are refusing these firms credit. Because of the huge losses they have <span class="blsp-spelling-corrected" id="SPELLING_ERROR_3">suffered</span> from wildly speculative lending during the property boom, their balance sheets are now in a bad way. <span class="blsp-spelling-corrected" id="SPELLING_ERROR_4">Therefore</span> they have a vested <span class="blsp-spelling-corrected" id="SPELLING_ERROR_5">interest</span> in <span class="blsp-spelling-corrected" id="SPELLING_ERROR_6">preserving</span> money to meet uncertain future liabilities, rather than lend it to stressed businesses in the midst of a recession. And despite all the efforts of <span class="blsp-spelling-corrected" id="SPELLING_ERROR_7">the</span> <span class="blsp-spelling-corrected" id="SPELLING_ERROR_8">Government</span> here at <span class="blsp-spelling-corrected" id="SPELLING_ERROR_9">capitalisation</span> and taking <span class="blsp-spelling-corrected" id="SPELLING_ERROR_10">the</span> riskiest loans off their books, this <span class="blsp-spelling-corrected" id="SPELLING_ERROR_11">situation</span> is likely to continue for some time.<br /><br />To get credit flowing <span class="blsp-spelling-corrected" id="SPELLING_ERROR_12">sooner</span> rather than later in the economy, <span class="blsp-spelling-corrected" id="SPELLING_ERROR_13">the</span> state itself needs to take responsibility by setting up its own bank precisely for such purposes. It is ironical that we used to have two state banks i.e. <span class="blsp-spelling-error" id="SPELLING_ERROR_14"><span class="blsp-spelling-error" id="SPELLING_ERROR_1">ACC</span></span> and ICC in the economy until quite recently. Though <span class="blsp-spelling-corrected" id="SPELLING_ERROR_15">these</span> <span class="blsp-spelling-error" id="SPELLING_ERROR_16">had</span> become more commercialised in any case before privatisation, their original purpose had been to provide credit to businesses (<span class="blsp-spelling-corrected" id="SPELLING_ERROR_17">where</span> full commercial criteria would not apply).<br /><br />In a sense this is precisely what is <span class="blsp-spelling-corrected" id="SPELLING_ERROR_18">required</span> now! The (private) banks will argue that they are open for business and willing to extend credit. However quite clearly in <span class="blsp-spelling-corrected" id="SPELLING_ERROR_19">the</span> current economic climate very few <span class="blsp-spelling-corrected" id="SPELLING_ERROR_20">enterprises</span> can match the tough criteria they are setting. Therefore many businesses that are starved of credit are on the very brink of failure.<br /><br />Therefore because the existing banks are not likely to extend such credit, the only way it will be made available is through a government willingness to make up the shortfall. So quite simply an urgent need now exists for such a bank to be created. Though a large number of businesses are probably bad bets at present and should not receive assistance, many others with credit more easily available, could indeed have a reasonable chance of survival.<br />And we need to consider the multiplier aspects of all this. Each business that fails puts more workers on the dole. So there is a price for the government to be paid through additional social welfare payments and loss in tax revenues.<br /><br />Once the economy ha<span class="blsp-spelling-error" id="SPELLING_ERROR_3">s properly</span> recovered with banks finally returning to "normality", the activity of the state bank could be wound down considerably. However it would be a good idea to keep it in existence in the event of a further baning crisis arising in future.<br /><br /><br />The other possible <span class="blsp-spelling-corrected" id="SPELLING_ERROR_4">option</span> for stimulating economic activity would come through the old Keynesian approach whereby the Government would directly increase its own spending in certain selected areas. However there is a problem for Ireland in all this in that we no longer have our own economic destiny in our hands. So whatever measures we take have to receive the broad approval of our EU masters and international financial markets. And given that state finances are out of control at present with expenditure greatly exceeding revenue, Keynesian prime pumping (however well <span class="blsp-spelling-corrected" id="SPELLING_ERROR_5">intentioned</span>) might not meet the necessary approval.<br /><br /><br />Above all Ireland has to tackle a severe loss in competitiveness due in large part to the excesses of the Celtic tiger. It would be better if we took <span class="blsp-spelling-corrected" id="SPELLING_ERROR_6">the</span> necessary courageous steps here in a voluntary manner. Failing this it will indirectly be forced on us in any case through a continued long contraction in our economy.Peter Collinshttp://www.blogger.com/profile/03702540376694818466noreply@blogger.com0tag:blogger.com,1999:blog-3744532793058612955.post-32935021967008498642009-10-01T12:25:00.000-07:002009-10-02T04:29:23.142-07:00Tentative RecoveryIt was fascinating following the three BBC Money Programmes on the financial crisis following the collapse a year ago of Lehman Bros.<br /><br />My gut instinct at the time was that the situation was gravely serious. I indeed considered for how long money could be withdrawn from bank deposits and whether the Government here would be able to maintain payment to public sector workers. Then when the system survived I began to wonder whether my initial fears represented an over-reaction.<br /><br />Viewing however the re-enactment of the Lehman collapse and the great uncertainty which followed, I can now see that my fears were indeed well grounded with the international financial system literally hanging on the edge of a precipice and the very real threat of total collapse a genuine possibility.<br /><br />Now a year later we are beginning to hear optimistic noises regarding the prospects of economic recovery. Today for example the IMF has forecast an overall drop in world output of just 1% for 2009 with a return to a very respectable 3% in 2010. Even here in Ireland - where <span id="SPELLING_ERROR_0" class="blsp-spelling-corrected">the</span> recession has been <span id="SPELLING_ERROR_1" class="blsp-spelling-corrected">especially</span> deep - unemployment figures have unexpectedly stabilised with one stockbroking firm predicting a 4% growth rate in 2011.<br /><br />While such upbeat news is indeed welcome after the doom and gloom of the past year, I think we should remain extremely wary. In effect once the seismic events of September 2008 unfolded, the <span id="SPELLING_ERROR_2" class="blsp-spelling-corrected">international</span> banking system was placed on life support by governments around the world with no guarantee of survival. Now, though showing welcome signs of recovery, the patient still remains on life support. So even if the recovery continues, considerable damage has been already done to health with the possibility of all sorts of future <span id="SPELLING_ERROR_4" class="blsp-spelling-error">complications</span> arising.<br /><br />I have long maintained that <span id="SPELLING_ERROR_5" class="blsp-spelling-corrected">the</span> <span id="SPELLING_ERROR_6" class="blsp-spelling-corrected">fundamental</span> weakness of the capitalist system as we know it is the manner in which an attempt is made to treat it purely in mechanistic terms thus divorcing economic events from the moral responsibility of <span id="SPELLING_ERROR_7" class="blsp-spelling-corrected">those</span> <span id="SPELLING_ERROR_8" class="blsp-spelling-corrected">involved</span>.<br /><br />One manifestation of this problem is the manner in which short-term decisions based on immediate economic benefits greatly outweigh wiser longer term consideration of what is truly in the collective interest.<br /><br />Thus we have seen <span id="SPELLING_ERROR_9" class="blsp-spelling-corrected">the</span> rapid <span id="SPELLING_ERROR_10" class="blsp-spelling-error">growth</span> of a deregulated financial <span id="SPELLING_ERROR_11" class="blsp-spelling-corrected">system</span> based on greed and <span id="SPELLING_ERROR_12" class="blsp-spelling-corrected">fuelled</span> by speculative profits.<br /><br />It is generally <span id="SPELLING_ERROR_13" class="blsp-spelling-corrected">believed</span> that the sub-prime crisis was the <span id="SPELLING_ERROR_14" class="blsp-spelling-corrected">direct</span> cause of recent financial problems. However the problem is much deeper than this.<br /><br />Success in the goods economy requires product offerings that may take a long time to develop. Thus a period of hard graft and initial loss often precedes the making of significant profits (where these occur).<br /><br />However the financial sector offers the opportunity for vast profits in a short time frame through purely speculative trading.<br />Thus in order to extend these speculative opportunities more widely, financial operators - greatly assisted by light touch regulation - have in fact been busily constructing, through complex financial products, a giant pyramid scheme. They were thereby creating the illusion that risk could be largely eliminated from <span id="SPELLING_ERROR_15" class="blsp-spelling-corrected">financial</span> decisions.<br /><br />Because financial activity has become so free of regulation, a virtual monster has been created, which through its voracious appetite, can gobble up the real economy. In other words no clear correspondence exists anymore as between the real and financial economies with the total nominal worth of <span id="SPELLING_ERROR_16" class="blsp-spelling-error">fi</span><span id="SPELLING_ERROR_17" class="blsp-spelling-error">nancial</span> products vastly exceeding the value of goods produced.<br /><br />Thus the financial system remains extremely vulnerable to further severe crisis. For example real interest rates were already too low before the recent crisis which in many ways served as the root cause of what eventually folded. Now in an attempt to deal with the credit squeeze that unfolded in the aftermath of the crisis, central bank interest rates have been lowered further to virtually zero in the major markets. And this is a sure recipe for future trouble. Given that confidence has already been so greatly weakened, the next great crisis could have even more damaging consequences.<br /><br />There is a related problem with respect to growing environmental problems on our planet. These have arisen through the manner in which short term economic concerns with profitability continually <span id="SPELLING_ERROR_18" class="blsp-spelling-corrected">override concerns with the</span> long run sustainability of resources. Oil reserves have now peaked though potential demand will undoubtedly increase for some time. Also climate change strongly related to Co2 emissions could among other effects have major consequences for future food production.<br /><br />It could well be that a significant environmental threat - with potentially vast economic implications - will coincide with the next great financial crisis.<br /><br />Perhaps then we will finally realise the fundamental weaknesses that were always inherent in our capitalist system.Peter Collinshttp://www.blogger.com/profile/03702540376694818466noreply@blogger.com0tag:blogger.com,1999:blog-3744532793058612955.post-84341803436289855522009-10-01T03:43:00.000-07:002018-06-03T16:29:22.056-07:00Ireland's Hidden Tax BubbleThe success of the Irish Celtic Tiger (1994 - 2008) can basically be divided into two main phases. The first more successful phase witnessed a tremendous expansion in multinational corporate investment in Ireland (largely of US origin). Exports were the main driver of growth during this period dramatically surging from less than €30 bl. in 1994 to over €90 bl. (current prices) by 2000. For anyone who studied these figures an alarming trend however was in evidence post 2000 with <span class="blsp-spelling-corrected" id="SPELLING_ERROR_0">merchandise</span> export growth completely stalling. So present figures are now lower (even in current price terms) than almost a decade previously.<br />
<br />
Though there were worrying signs in evidence by 2000 that the property boom had already grown out of control, such fears were quickly disregarded. So after a brief slowdown lasting a couple of years (2001-2002) - the second phase of the Celtic Tiger took off almost entirely fuelled by a hugely artificial property bubble.<br />
<br />
As we now are now slowly coming to terms with the dire consequences of such madness - greatly aggravated by the international financial crisis - potentially an even greater problem for the long-term stability of the economy lurks in the background. This relates to the nature of multinational activity in Ireland which is largely based on the artificial tax advantages that the country currently offers.<br />
<br />
It is hard to overstate the extent to which these multinationals dominate our economy.<br />
<br />
Ireland - as is well known - has one of the most open economies of the world so that when the value of merchandise and service trade is combined exports amounts to well over 80% of GDP (and nearly 100% of GNP). Over 90% of the total value of these exports comes from multinational firms. About 70% of these multinational exports in turn relate to US corporations with the vast bulk of activity in the IT and chemicals/pharmaceuticals sectors.<br />
<br />
When one examines closely the precise reasons why Ireland is so attractive for these firms, artificial tax considerations loom large. For example research based activity is very important with potentially huge profits to be made from a successful new product (e.g. software or drug). Though most of the research in many cases is carried out by the parent company in the US, <span class="blsp-spelling-corrected" id="SPELLING_ERROR_1">because</span> of the much lower corporate tax system in Ireland, a considerable incentive exists to shift much of these profits to the research division in Ireland (so as to avail of the lower tax rates).<br />
<br />
Also license fees would comprise the major bulk of earnings for a software company such as Microsoft. As there is no tax on such fees in Ireland, again <span class="blsp-spelling-corrected" id="SPELLING_ERROR_2">this</span> offers a <span class="blsp-spelling-corrected" id="SPELLING_ERROR_0">reason</span> to route most profits - made on earnings throughout Europe - through Ireland. As mentioned before on these blogs, <span class="blsp-spelling-corrected" id="SPELLING_ERROR_3">Microsoft</span> uses little known subsidiaries Round Island One and Flat Island for such purposes. Though these now enjoy an unlimited status, Round Island One in all likelihood remains by far the most profitable company in Ireland (operating from the offices of a South Dublin legal firm).<br />
<br />
When one looks at the level of profits and license fee income transferred from Ireland, the figures are truly staggering. With profits repatriated currently running close to $30 bl. and licence fees at over €20 bl. per <span class="blsp-spelling-error" id="SPELLING_ERROR_1">annum</span>, a combined total of about €50 bl. is <span class="blsp-spelling-corrected" id="SPELLING_ERROR_5">thereby</span> generated in this manner (representing close to 30% of current GDP).<br />
<br />
Ireland is officially listed as the No. 1 software exporter in the world. However again this is a <span class="blsp-spelling-corrected" id="SPELLING_ERROR_6">largely</span> artificial ranking due to the manner in which so much of Microsoft's income is transferred from other countries (mostly European) back to Ireland.<br />
<br />
Also, as long recognised a considerable amount of transfer pricing is used by multinationals here artificially reducing costs so as to inflate reported profits. The combined effect of these procedures therefore, together with the sheer magnitude of what is involved makes it extremely difficult to assess the true nature of many Irish statistics e.g. exports, imports, balance of payments, taxation, productivity etc. For example a considerable amount of the corporate profits tax collected by the <span class="blsp-spelling-corrected" id="SPELLING_ERROR_2">Government</span> relates to income diverted from higher tax jurisdictions in Europe!<br />
<br />
Another damaging feature of all this is that the domestic indigenous sector has been able to hide in the shadow of the success of such multinational activity. The Government and other economic bodies have been pointing to the recent comparative success of "Irish" exports during a time of deep recession (making favourable comparisons with Germany). However this "success" is almost entirely due to the dominant multinational element involved (where again much artificial pricing is involved). In truth there has been a significant collapse of Irish indigenous exports over the last year especially with respect to its key market i.e. the UK.<br />
<br />
<br />
Therefore the success of Ireland's economy owes a great deal to the fact that it is operating as a very efficient tax haven (especially for US firms). Indeed along with the Bahamas, Ireland currently serves as the largest tax haven in the world for such firms. It is true that we differ from the Bahamas in the sense that these firms have genuine production facilities operating here. However it could be argued that such facilities in fact offer even better cover for tax <span class="blsp-spelling-corrected" id="SPELLING_ERROR_7">diversion</span> opportunities.<br />
<br />
Paradoxically as the Obama regime attempts to tighten up on the tax diversion activities of its own national companies it could even offer a short term advantage to the Irish economy, as it is likely that the pure tax havens will be tackled first. This could then lead to a further shift to partial tax havens such as Ireland (where more seemingly legitimate reasons can be offered for hiding profits). However ultimately these tax havens will be also tackled which could then have very big repercussions for the Irish economy.<br />
<br />
Huge mistakes were made due to the failure to act in time to deal with the property bubble.<br />
<br />
Potentially even more damaging consequences may flow from a failure to react to this hidden tax bubble in our midst. Even while enjoying its benefits for some more years we should be formulating new economic directions to deal with economic life after this bubble.Peter Collinshttp://www.blogger.com/profile/03702540376694818466noreply@blogger.com0tag:blogger.com,1999:blog-3744532793058612955.post-11225021112518973612009-09-29T08:47:00.000-07:002009-12-04T02:54:40.129-08:00No ConsensusI was looking at Pat Kenny's "<span class="blsp-spelling-error" id="SPELLING_ERROR_0">Frontline</span>" Programme last night.<br /><br />It was dealing with the forthcoming budget and the need to achieve dramatic cuts with respect to Government expenditure. As things stand the deficit will be about €20 bl. with revenue set to <span class="blsp-spelling-corrected" id="SPELLING_ERROR_1">exceed</span> €60 bl. and tax revenue not much more than €40 bl. So this gross excess of expenditure over income is clearly not sustainable and therefore needs to be controlled.<br /><br />The audience was largely made up of public and private sector workers arranged in two separate groups. However it quickly became apparent that they were simply unable to address the overall financial issue. <span class="blsp-spelling-corrected" id="SPELLING_ERROR_2">Everyone</span> seemed completely locked into their own particular perspectives made even more rigid by a perceived sense of injustice with respect to the present situation.<br /><br />Therefore there was no appetite anywhere for either a reduction in Government expenditure or alternatively for further increased taxation (as a means of closing the gap).<br /><br />Based on the evidence of such reactions there is little scope for the Government to introduce major spending cuts in the budget through reducing public sector pay (which is the major component). So what is most likely to happen is that most of the cuts in practice will fall on capital expenditure.<br /><br />This of course makes very little sense from an economics perspective where potentially the most productive expenditure is cut whilst the least productive - due to sectional pressures - remains largely untouched.<br /><br />In the circumstances there would seem to be no likelihood of the Government's meeting its target of reducing the budget deficit back to 3% by 2013 (as required by EU rules).<br /><br />On the <span class="blsp-spelling-error" id="SPELLING_ERROR_3">contrary</span> we are likely to see once again - as in the 1980's - a steep rise in the National Debt. Though the cost of financing this debt may not seem unduly prohibitive at present (due to the low <span class="blsp-spelling-corrected" id="SPELLING_ERROR_4">climate</span> of interest rates) this is not likely to remain with rates set to rise in coming years. On top of this - though technically the Government may be allowed to treat it as an off balance sheet item - we will face <span class="blsp-spelling-error" id="SPELLING_ERROR_5">further</span> <span class="blsp-spelling-corrected" id="SPELLING_ERROR_6">increases</span> in debt due to the <span class="blsp-spelling-error" id="SPELLING_ERROR_7">NAMA</span> proposals.<br /><br />Due to the excesses of the Celtic Tiger, Ireland has become a very uncompetitive economy. We fooled ourselves into believing that there was an inherent strength to what was unfolding when in actual fact it was largely due to strongly artificial factors. One of these has now collapsed i.e. the property bubble. However the other artificial factor is perhaps of even more <span class="blsp-spelling-corrected" id="SPELLING_ERROR_8">significance</span> relating to the use of Ireland by multinational companies for tax diversion purposes. We are in fact - along with the Bahamas - the top tax haven for US multinational investment. It is no accident therefore that we have such <span class="blsp-spelling-corrected" id="SPELLING_ERROR_9">strong</span> company representation in the IT and chemicals sector (as these sectors can especially benefit from tax diversion through locating here).<br /><br />At a deeper level we are seeing the futility now of trying to detach economic decisions from the moral <span class="blsp-spelling-corrected" id="SPELLING_ERROR_10">behaviour</span> of those making them. The present crisis is indeed revealing huge social injustices in the way our economic business is carried out and this in turn makes any attempted efficient mechanism to deal with such problems impractical.<br /><br />Ultimately we cannot deal with economic without genuinely addressing moral issues for they are inseparable. Much of the injustice that festers throughout the system has arisen through ignoring this simple fact.Peter Collinshttp://www.blogger.com/profile/03702540376694818466noreply@blogger.com0