Economy

By Sinead Pentony ‘Employment in construction is now just 37.5% of its June 2007 level but increased by 51,300 over the last six years in the areas of health and social work, information and communication, and education’. ‘The main policy measures aimed at increasing employment include the Action Plan for Jobs which aims to have 100,000 more people in work; the Ireland Strategic Investment Fund which is to be funded with €6.4 billion from the National Pension Reserve Fund; and JobsPlus’. As we prepare to exit the bailout and wave goodbye to the Troika in mid-December, they have highlighted three big issues that have yet to be resolved – elevated levels of unemployment, high public debt, and banks’ growing non-performing loans. I will take a closer look at the first two issues over the next two editions of Village. The Troika may be leaving Ireland but the unemployment crisis is on-going. Unfortunately, unemployment crises are nothing new to Ireland. The unemployment rate currently stands at 13.9% (200,700 people). Over the last 30 years (1982-2013) unemployment has averaged over 11%, which represents a huge loss to the economy, lost opportunities for thousands of people and enormous social costs for society. Ireland experienced one of the biggest increases in unemployment of the 34 OECD countries between 2007 and 2012, as shown in Figure One. Long-term unemployment (unemployed for over 1 year) is currently 8.1% (175,000 people), which means the long-term unemployed make up almost 60% of the total number of people who are unemployed. There are signs of improvement. The number of job losses appears to have levelled off and there has been a modest increase of 33,700 people in work over the last 12 months (June 2012 – June 2013). While this is positive, it still represents a decline of 277,400 jobs from June 2008. Ireland experienced the third largest fall in employment levels over this period, after Greece and Spain, as shown in Figure Two. The sectors most affected by the crisis are construction, industry, and administrative and support services. Employment in construction is now just 37.5% of its June 2007 level. Industry and administrative and support services have fared better, with employment levels of 79% and 73%, respectively, for the same period. In contrast, employment increased by 51,300 over the last six years in the areas of health and social work, information and communication, and education. While any improvement in the employment figures is to be welcomed, this is not at a level that is going to solve the unemployment crisis in the short term. The employment rate in Ireland currently stands at 60%, which falls far short of the EU Commission’s Europe 2020 Strategy employment target of 75%. The biggest issue is that there are not enough jobs available. Ireland adopted a mid-range 2014 employment rate target of 69-71%. This was combined with a commitment to focus policy on addressing weak labour demand; putting in place incentives and stimuli to increase employment within enterprises; addressing long-term unemployment; and improving the levels of skills and education in the working-age population. The main policy measures aimed at increasing employment include the Action Plan for Jobs which aims to have 100,000 more people in work over the life-time of the plan; the recently announced Ireland Strategic Investment Fund (ISIF) which is to be funded with €6.4 billion from the National Pension Reserve Fund; and a range of initiatives aimed at incentivising employers to take on unemployed people e.g. JobsPlus. These are important measures to boost economic growth and job creation, but many of the initiatives are relatively new, which means it will take time for the effects to be seen in the employment figures. The policies aimed at increasing growth and jobs are also not sufficient to deal with the scale of the unemployment crisis, nor are they sufficient to off-set the damage that has been done by a budgetary strategy that has taken €28 billion out of the Irish economy since 2008. Policies aimed at increasing employment are complemented by policies that support unemployed people back into work and ensuring the workforce is equipped with the skills and training required in an advanced economy. These policies, commonly referred to Active Labour Market Programmes (ALMPs), are crucial to reducing structural unemployment (an over-supply of skills in the construction sector and an undersupply in the ICT sector) and achieving a high rate of employment. Pathways to Work sets out the programme of reform. The central element of these reforms has been the establishment of Intreo. This merges employment services and benefit administration into one-stop-shops, providing a single point of contact for all employment and income supports. A key aspect of the Intreo service is its case management approach and the development of a personal progression plan, which is in line with international best practice. Unfortunately, the new Intreo service only covers new jobseekers, which means that the vast majority of unemployed people have no access to Intreo supports. While the number of caseworkers is increasing, the average caseload currently is approximately 800 jobseekers, which is very high by international standards. This raises serious questions about the quality of service that can be delivered. A person-centred approach to labour market activation also requires highly skilled case workers. There are challenges relating to the skills and training of case workers who need extensive knowledge of the social welfare system, employment opportunities, education and training, work programmes and how to provide guidance to people with a varied range of skills and qualifications. An active labour-market service that supports a move towards a high level of employment also needs to develop tailored supports for people who often find themselves at the back of the jobs queue because employers perceive them to be less productive, or because they cannot easily combine work with their other responsibilities. This includes people from ethnic minority backgrounds, those with long-term health conditions, people with disabilities, younger and older people, mothers, and people with few or no formal qualifications. The EU

With employment rising, property prices on the mend, mortgages arrears stabilising, Exchequer returns surging and business and consumer confidence regaining pre-crisis highs, Ireland might easily be mistaken for an Asia-Pacific economic dynamo. Alas, once the official hullabaloo about the return to growth is stripped back to the bare facts, it becomes clear that Ireland is entering a new age, the Age of Great Stagnation. The reasons for this are two-fold. First, we are still facing a long-term debt crisis. No matter what statistics are pulled out of the hat, this crisis, embodied in high levels of debts carried by our households, non-financial companies and the Exchequer, is going to be with us for many years to come. Second, we are still in a structural growth crisis. Neither our own development model, heavily reliant on Foreign Direct Investment and transfer pricing by the multinationals, nor our core trading partners’ growth models, reliant on fiscal and financial repression to drag themselves out of the crisis, are sustainable in the long run. In our leaders’ dogmatic adherence to the past (a behavioural fallacy that economists call path-dependency), our official growth theory suggests that economic recovery in our major trading partners will trickle down to Ireland’s national accounts. Alas, in the longer run, a lot is amiss with this thinking. For starters, the exports-led theory of growth is simply not valid. 2000-2013, Ireland led the euro area both in growth and in recession. Since the onset of the crisis, cumulative real GDP across the euro area has contracted by 2.1 percent. In Ireland, over the same period, GDP fell by 4.7 percent as domestic drivers for the crisis overpowered external factors. As for the recovery period: unlike in the early 1990s, the improving economic fortunes abroad have not done much good for Ireland’s exports so far. Over the last four years, the volume of imports of goods in euro area countries grew by almost 15 percent. Irish exports of goods over the same period of time rose just 2.2 percent. The reason for this is structural. Tax arbitrage only works as long as there are profits to move through the Irish tax system. Once the profits dry out, arbitrage ends. The pharma sector is a good example of this dynamic. Replacing goods-driven exports with services-driven Information and Communications Technology exports is decoupling our external balances from the real economy. Worse, much of our trade balance improvements in 2009-2013 was down to a collapse in imports. This presents a serious risk. To fund our public and private liabilities, we need long-term current-account surpluses to average above 4 percent of GDP, over the next decade or so. We also need economic growth of some 3-3.5 percent in GDP and GNP. Yet, to drive real growth in the economy we need domestic investment and demand uplifts. These require an increase in imports of real capital goods for consumption. Should our exports of goods continue the pattern, any sustained improvement in the domestic economy will be associated with higher imports. A corollary to that will be a deterioration in our trade balance. This, in turn, will put pressures on our economy’s capacity to fund its overwhelming debt. And given the levels of debt we carry, the tipping point is not that far off the radar. In the first half (H1) of 2013 Ireland’s external real debt (excluding monetary authorities, banks and FDI) stood at almost USD1.32 trillion – the highest level ever recorded. Large share of this debt is down to the Multinationals. However, overall debt levels in the Irish system are still sky high. At the end of H1 2013, total real economic debt in Ireland – debt of the Irish Government, excluding Nama, Irish-resident corporates and households – stood at over EUR492 billion: down just EUR8.5 billion on absolute peak attained in H3 2012. Which brings us to the second point raised in the beginning of the article: our economic, regulatory, monetary and political dependency on the euro area. Instead of charting our own course toward sustainable long-term competitiveness, we remain attached at the hip to the euro area. The latter is now gripped by Japanese-style, long-term stagnation with no growth in new investment and consumption, and glacially slow deleveraging of its own banks and sovereigns. Financial, regulatory and fiscal repressions are now dominating euro-area agendas. All of the trade growth in the euro area today comes from the emerging and middle-income economies outside the euro bloc. And competition for this trade is heating up. Even Portugal, Greece and Spain, not to mention Italy are posting positive trade surpluses and these are projected to strengthen in 2014. Meanwhile, we remain on a slow path to entering new markets, despite having spent the better part of the last 6 years talking about the need to ‘break’ into BRICS and the emerging- and middle-income economies. In the first three quarters of 2012, Irish exports of goods to BRICS totalled EUR2.78 billion. A year later, these had dropped to EUR240 million. We are also missing the most crucial element of the growth puzzle: structural reforms. Since 2008 there has been virtually no change in the way we do business domestically, especially when it comes to the protected professions and state-controlled sectors. Legal reforms; restructuring of semi-state companies and the sectors where they play dominant roles, such as health, transport and energy; and reductions in the costs and inefficiencies in our financial services; are just a handful of areas where promised reforms have not been delivered. Instead of reducing the burden of monopolistic competition in key domestic sectors, we are increasing it. In banking, the oligopoly of three domestic players is being reinforced by exits of international banks and a lack of new entrants into the market. In line with the dearth of transformative changes in state-controlled sectors, there is little innovation in the ways the Government approaches fiscal policies. Taxes and charges are climbing, while spending continues to run ahead of pre-crisis trends. On a cumulative basis, 2008-2013