“break free of the chains of the IMF/ECB”, foster coherent island economy, indigenous manufacturing & demand (Dr. John Bradley)

Remarks by Dr John Bradley at Sinn Féin conference: Towards a new Republic,
June 18th, 2011

The island economy is a reality. But we still lack all island policy frameworks that will support and strengthen the SME sector and permit firms to grow and prosper. The real “partitionists” are the policy makers. Not the business people!

Dr John Bradley was formerly a Research Professor at the Dublin-based Economic and Social Research Institute (ESRI) and is an international research consultant in the areas of economic development strategies, with an emphasis on EU cohesion policy in all of the member states. He was responsible for the design and implementation of the system of models used by DG-REGIO to evaluate the impact of Structural Funds in the member states.
He regularly acts as a consultant to the European Commission and to government ministries in the EU and elsewhere.

For my allotted ten minutes, I want to focus on the role of “Irish” businesses in building an
all island economy. The parallel role of foreign businesses has been treated by Dr White.
Both topics benefit from some historical perspective since they have usually been in the
margins of discussions of the political future of our island. We need to understand better
how politics and economics are closely interconnected.

Partition after 1922 was an economic as well as a political disaster. In 1926, the first year
for which data are available, only 7% of total employment in the newly created Irish Free
State was in manufacturing. In Northern Ireland the figure was 30%, over four times higher.

By amputating the industrialised North, partition presented the southern government with
a massive challenge of industrialisation and modernisation.

From 1932 until about 1960 an “import substitution” approach was adopted where high
tariff barriers were erected to protect “infant” Irish firms whose ownership was restricted to Irish citizens. Since they faced almost no real competition, such firms were under no
pressure to improve quality or productivity and exported almost nothing. This approach ran out of steam in the 1950s.

After a series of economic crises and massive outmigration, the publication of Economic
Development in 1958 pointed the way to a switch to an export-led growth strategy. The
Control of Manufactures Act, used to prevent foreign ownership of Irish industry, was
relaxed. Governments started to use industrial grants to attract foreign activity into Ireland.

A tax relief scheme that exempted profits earned from new or increased manufactured
exports was put in place. The Irish economy emerged from the 1950s still in a weak state,
but at least was now equipped with a policy strategy that happened to be uniquely in tune
with the new international environment.

The iconic role played by high technology, foreign, multi-national companies, initially in
manufacturing but increasingly in services, concealed the less flamboyant role of indigenous Irish firms. But it should be noted that at the height of the Celtic Tiger boom in 2000, just before the property bubble almost destroyed everything, there were some 5000
manufacturing plants in Ireland. Of these, over 85% were Irish owned. Although the gross
output produced by Irish owned sector was only one fifth of total manufacturing output,
Irish-owned firms provided jobs and incomes to over half of the total manufacturing
workforce (130,000 jobs, compared to 120,000 in the foreign sector).

One reason why the indigenous Irish sector is overshadowed by the more glamorous foreign sector is that it is, quite literally, all over the place. Firms tend to be small. They are in the more traditional areas of manufacturing. We take them for granted. The foreign sector, on the other hand, is concentrated in a few modern, exciting areas (computers, software, pharmaceuticals, medical devices) and clusters mainly around the four largest cities (Dublin, Cork, Limerick, Galway). Both foreign-owned and local firms pump income into their surrounding region. But indigenous Irish firms generate considerably more spillover employment by way of purchases of local goods and services, particularly when they use local inputs (agricultural produce, wood, leather, textiles, etc.).

Why do I say that partition was a disaster for the indigenous sector of manufacturing? The
newly created Free State suffered because it was isolated from the industrial North, and
during both of its phases of development (protection, followed by outward orientation) this produced a distorted economy. Initially, this consisted of inefficient Irish firms that could never compete in international markets. This was followed by the domination of foreign firms whose structural links with the local economy were dominated by the supply of highly skilled labour. Of course, there could have been worse outcomes. Foreign investment is better than no investment! But one has only to look at – say – Denmark to see how distorted the Irish economy has become with its high dependence on a steady inflow of foreign investment and a low rate of innovation in its indigenous sector.

Northern Ireland also suffered from its isolation within this island, initially in terms of
missed opportunities to play a role in Southern industrialisation in the early period, and in
more recent decades in terms of its reduced ability to engage with global competitive
markets. At the same time as Ireland embarked on outward orientation, Northern Ireland
started to descend into civil unrest and shed much of its remaining manufacturing
specialities, replacing them with public sector employment supported by subvention from

The current Irish panic at the thought that we might be obliged to forgo our low rate of
corporation tax illustrates how uneasy we are about our ability to sustain dependence on
inward investment. Of course, other issues are involved in attracting inward investment,
such as infrastructure, education standards, grants, and an effective development agency
like the IDA. Now that Northern Ireland may soon be able to set its own rate of corporation tax, it is interesting to observe the dawning realisation among policy makers there that much more by way of investment and policy decisions is needed to produce balanced development.

Locally owned businesses benefit from many of the same driving factors as inward
investment. But a key difference is that in contrast to foreign firms, they need sizeable,
local markets for their products at the early stage of their growth and before they gain
competence to penetrate into off-island export markets. The fragmentation of the
economy of the island of Ireland made this more difficult in the past. But the situation has
improved greatly since the Belfast Agreement and the island economy-creating actions of
InterTradeIreland and the IBEC-CBI Joint Business Council. I was impressed during a recent research project on the border economy to meet an innovative SME based in Downpatrick, which could supply daily deliveries that left their premises before mid-night and arrived in Cork by 06:00 using the new system of motorways. We may be battered by recession just now, but the island market of nearly 6 million has the potential to support many more such local firms.

The island economy and the continued joint advance of Irish businesses, North and South, are now firmly established, but will require sustained investment in infrastructure, human resources and other forms of direct assistance to the enterprise sector. Regional investment in roads, airports, rail links and other forms of communication infrastructure are needed to knit the island economy together. But the commitment to putting in place the physical and intellectual infrastructure to service the island economy as an integrated
geographical unit is still desperately weak. We often settle for comforting rhetoric rather
than reality.

Turning to broader economic issues, the main wealth creating parts of the island economy
must now generate the resources that will be needed to pull it out of recession and
regenerate growth and employment. Focus is likely to shift to the main “city” economies of
Dublin, Belfast, Cork, Limerick and Galway, and to their satellite major towns. In these “city” economies, the strong performance of mainly foreign multinational companies has at least kept growth rates at or about zero for 2010 and probably for 2011, following after a severe contraction in the year 2009.

But this essentially zero island growth rate conceals a situation where the performance of
locally-owned manufacturing (which tends to have a lower off-island export orientation
than the multi-national sector) and by most of market services (which is mainly dependent
on the local market) has been far weaker. These locally owned sectors are struggling to
survive as disposable income is slashed and demand for their goods and services weakens.
For the foreign-owned multinational sector as well as for internationally traded market
services, the recovery of the global economy – when it becomes more robust – will do much of the heavy lifting. For Irish locally-owned manufacturing and market services, domestic demand is likely to remain depressed until we break free of the chains of the IMF/ECB bailout loans and when the global recovery becomes stronger and more sustained. In Northern Ireland the public sector cutbacks within the UK will dominate recovery. So locally owned enterprises on the island will need to seek to increase their share of a declining domestic market and/or must export more of their output where this is feasible.

Against this “island” picture, the cross-border region, consisting of five Northern Ireland and six Irish counties, needs special attention if the island economy is to be strengthened.

During a recent research project on the border economy, carried out for the Armagh-based
Centre for Cross-Border Studies and supported by the SEUPB under INTERREG IVA, we
interviewed SMEs in the cross-border region, the area of the island economy that was, and
continues to be, most adversely affected by partition. We found some examples of firms
that excelled, even by high international standards. But there were too few to energise the
region. And they tended to be disconnected from each other.

The border region urgently needs a new policy framework that will encourage and support
the creation of clusters of small firms that can focus on core capabilities and partner with
other firms for complementary capabilities. For example, the inability of the furniture
sector based in the mid-border region to evolve in this way may result in its collapse and
disappearance. Our examination of previous cross-border programmes, including
INTERREG, suggested that few, if any, succeeded in moving in this direction. Yet this is
exactly the approach that is needed, and one that made Northern Italy one of the most
prosperous regions of the EU, based almost entirely on closely interacting clusters of small
family firms.

Current cross-border policies and INTERREG programmes have been based mainly on what I might call “soft” co-operation between governments, state development agencies, Local Government and Third-Level Educational Institutions. However admirable these initiatives are, and however good they make us feel, the reality is that they are not working very effectively. A fresh look at how regions on the island can be regenerated and stimulated is needed, both in the EU and in Ireland. And the new initiatives must be firmly grounded on a better understanding of the likely benefits, North and South, of a dynamic and entrepreneurial island economy.

For example, the North-East region of the border is closely integrated into the Belfast-
Dublin (or East Coast) Economic Corridor, with its excellent physical infrastructure linking the large cities at either end, with further links to Cork, Limerick and Galway. The midborder region is less advantaged, but is still well positioned with improved infrastructure to act as an efficient supply-region to the large northern and southern markets. However, the North-West region, centred on Derry city, is particularly disadvantaged and vulnerable.

The North-West region faces daunting challenges due to its geographical peripherality, the
loss of its main manufacturing specialisation (clothing), factors that were exacerbated by
historical circumstances. This is where partition caused most damage and prevented Derry
City from realising its potential as the engine of NW regional development. This is where
the chickens of partition came home to roost. Each of the two sub-regions of the North-
West essentially holds the other hostage, if I may use such language. Co-operation is
essential if a positive sum game is to be played and won. Otherwise the outcome is likely to
be a zero sum at best, and possibly a negative sum.

So, as Lenin said in a different context: “What is to be done?”.

First, we have to admit that the remit of the state development agencies on this island
effectively stop at the border. No amount of rhetoric, subterfuge or self delusion can hide
this fact. Just try to get Enterprise Ireland to engage deeply with businesses in Northern
Ireland – as I have – and the point will become clear! Watch how jealous these agencies are of the efforts of InterTradeIreland to engage with businesses on both sides of the border!

Second, the state development agencies need to redefine their missions in terms of the
benefits of the island economy, and not engage in a zero sum game that ignores these
benefits. Back in 1992, Sir George Quigley and Liam Connellan put the concept of the islandeconomy on the policy table. But it has not yet become a primary motivating force for policy makers on the island. Our governments and agencies still think about the island
economy in “partitionist” terms.

Third, after ten years of operation, the cross-border bodies set up under the Belfast
Agreement need to be re-evaluated in terms of their effectiveness and relevance to the
challenges that we face in 2011, rather than in terms of the fraught political situation of
1998. Why is it that the institutions of the European Union could evolve organically as new
challenges had to be met, but the institutions of the Belfast Agreement seem to be frozen in perma frost?

Fourth, the fact that locally owned businesses tend to be small and have difficulties moving into export markets calls for very specific policy frameworks that are not currently on offer from the state development agencies and are beyond the competence of the small, fragmented local government bodies who are left to pick up the loose ends of regional strategy.

When some colleagues and I embarked on our research into the cross-border region, we
expected to find that businesses would be obsessed with the “border”. What we found was
dramatically different. Competent firms in the post-Belfast Agreement era simply traded
across the border. The island economy is a reality. But we still lack all island policy frameworks that will support and strengthen the SME sector and permit firms to grow and prosper. The real “partitionists” are the policy makers. Not the business people!

Dr. John Bradley, EMDS (Economic Modelling and Development Strategies),
14 Bloomfield Avenue, Portobello, Dublin 8, IRELAND
Tel: (353-1) 454 5138 Mobile: (353-86) 829 8799
Fax: (353-1) 696 1007
This entry was posted in Budget, ECB/IMF, Economy, EU, History, Ideology, Independence/Nationalism, ireland, Solutions and tagged , , , , , . Bookmark the permalink.

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