Irish investment lowest in EU

VILLAGEApril/May 

T is timely to take a closer look at the area of invest-

ment, in post-bailout Ireland. Investment is an

essential ingredient for economic growth and recov-

ery. The economic picture remains mixed.

The positives include growing employment and fall-

ing unemployment. Capital investment increased by

.%. However, this is an increase

from an incredibly low base. The neg-

atives include a fall in GDP by .% for

. Domestic demand remains ﬂat,

with virtually no improvement over the

last three years.

The OECD highlighted two key areas

where medium-term risks remain for

Ireland. The ﬁrst risk is high unem-

ployment, which the OECD suggests

may lead to structural unemployment

even as the recovery gathers momen-

tum. The most recent data show a

welcome decrease in unemployment,

with the rate falling from .% to

.%. However, almost two thirds of

these people (.%) are long-term unemployed. This

does point to structural unemployment.

The second risk is associated with persistently weak

investment. This has slowed capital growth and risks

impeding productivity growth during the recovery. It

serves as a further drag on the domestic economy. There

are on-going challenges associated with households

and businesses accessing credit and this has certainly

impeded growth.

A comparison with other EU countries puts our under-

investment in context. In , Ireland had the lowest

level of investment as a proportion of GDP (. per

cent), compared to a European average

of . per cent. Ireland is an extreme

outlier compared to the other  EU

countries (see Chart ) and our level of

investment is signiﬁcantly lower than

that of the other countries in receipt

of a bail-out. Even before the crisis,

Ireland’s productive infrastructure

lagged behind that of our European

neighbours in a number of key respects.

During the boom there was a failure to

apply suﬃcient rigour to lending prac-

tices. Investment was allowed to favour

property at the expense of productive

activities. This resulted in Ireland’s

greatest opportunity for a major leap

in industrial development being wasted.

Public and private investment is essential for short-

term stimulus and medium-term economic growth. Our

low level of investment is a constraint on the economy’s

current and future potential for growth in output and

employment.

At 10.7 per cent

versus an EU

average of 17.9%

it’s dragging

down medium-

term economic

growth

Irish investment lowest in EU

OPINION SINéAD PENTONY

There is clearly no

diﬃculty in identifying

investment options for

Ireland. Financing is

the key problem. The

establishment of the ISIF

of €12-15 billion is a step

in the right direction

“

April/May VILLAGE

Broadband infrastructure provides a good example.

The cost and quality of our broadband infrastructure

does not compare well with other European Union coun-

tries. Broadband is of par ticular importance to economic

growth and employment because it is a General Purpose

Technology (GPT) that boosts productivity and innova-

tion across a wide range of diﬀerent economic sectors

including, crucially, the R&D sector. Renewable energy,

education (especially early-years education) and health

are other areas where investment in human capital and

infrastructure could boost the productive capacity of

the economy in the medium-term.

There is clearly no diﬃculty in identifying investment

options for Ireland. Financing is the key problem. This

is compounded by the fact that the government must

operate within the ﬁscal constraints imposed under the

Excessive Deﬁcit Procedure agreed with the European

Commission.

The establishment of the Ireland Strategic Investment

Fund (ISIF) is a step in the right direction. Such a fund

could have provided a much needed stimulus to the

domestic economy when public and private investment

collapsed in the aftermath of the crisis. The ISIF will

invest €. billion in commercial projects that are of

beneﬁt to the Irish economy. The ISIF will be managed by

the NTMA and it is envisaged that ISIF investment will

occur in tandem with private-sector investment. The

total invested as a result of the creation of the new fund

is expected to be in the region of €-€ billion.

As part of the preparations for the establishment of

the fund, an investment of €. billion has been made

across a range of sectors and projects, including Irish

Water. This investment was matched by €. billion

in third-party capital. However, the manner in which

some of this investment has been spent in the start-up

phase of Irish Water has been the subject of controversy

in recent times.

The ISIF was launched with much fanfare and included

reference to being open to “transformational type” ideas

and “thinking outside the box”. With this in mind, Seán

Ó’Riain’s research in the areas of enterprise policy and

innovation should be used to inform the shape of the

ISIF. Ó’Riain suggests that the role of the ISIF could go

beyond funding large scale projects and work through

local banks to provide working and development cap-

ital. This would form part of a process of reforming

the organisational practice and culture of the banking

organisations. This is the practice in Germany’s State

Development Bank, the KfW.

We should now have an opportunity to tackle some of

the fundamental issues within the Irish innovation sys-

tem. The close engagement of state agencies with ﬁrms

should not necessarily involve ‘picking winners’ but

should involve ‘making winners’. This could be achieved

through three main mechanisms – the production of

new industry capabilities; the creation of space where

diﬀerent actors can network their capabilities and cre-

ate new projects; and the promotion of practices that

are favourable to industrial development.

Transforming the way we invest should help us to move

away from the ‘speculative society’ to an ‘investment

society’. This, as described by Ó’Riain, is where invest-

ing in skills, knowledge, organisations and innovation

builds sustainable prosperity rather than temporary

booms. The litmus test of an enterprise policy driven

and supported by public and private investment will

be its success in generating employment of suﬃcient

quantity and quality.

The tangible beneﬁts for society as a whole from such

investment must include improved incomes and living

standards. •

Source: Eurostat, http://epp.eurostat.ec.europa.eu/portal/page/portal/national_accounts/data/main_tables

Romania

Czech Rep.

Slovakia

Estonia

Austria

Latvia

Bulgaria

Belgium

Poland

France

Finland

Italy

Greece

Portugal

Ireland

EU 27

Spain

Luxembourg

Slovenia

Sweden

Germany

Hungary

Lithuania

Netherlands

Denmark

Cyprus

Malta

CHART 1: Total investment in EU member states in 2012 (% of GDP)

NORDIC economies have been resurgent in recent

years based on innovation across a range of

industries (‘high tech’ in Finland, but ‘medium

tech’ in Denmark, for example). But these

innovation economies have been driven by a

set of factors that extend well beyond a model

that relies heavily on the commercialisation

of science. Public and private investments in

human capital and research are among the

best in the world but these investments are

supported by two further sets of factors:

(1) an ‘experimentalist’, networked system of

governance that has produced a diverse set of

institutional mechanisms for policy formulation

and implementation and (2) an enabling

welfare state system and active labour market

policy that supports high rates of labour force

participation and utilisation of human capital.

Seán Ó Riain Industrial Policy

Discussion Paper for Tasc, 2013

Engagement of state

agencies with ﬁrms

should not necessarily

involve ‘picking winners’

but should involve

‘making winners’

“