Whither Industrial Policy? The Future of Public Institutions and Economic Development

3-6 pm, Thursday April 25th 2013
Institute of Bankers, 1 North Wall Quay, Dublin 1
Sponsored by NUI Maynooth (NIRSA/ Sociology) and UCD Geary Institute

Globalisation, regional economic clusters, open systems of innovation, financialisation, legal restrictions on state aid and a range of other factors appeared to have consigned industrial policy and the developmental state to history. However, as economies struggle to restore growth and seek models of sustainable prosperity, there is renewed interest in the role of public institutions in promoting industrial and regional development. Moreover, recent decades have seen significant experiments with new forms of ‘old’ institutions – ranging across the industrial development agencies of Israel and Taiwan, the state investment banks of Germany and Brazil and the diverse network of agencies promoting innovation in the US.

This workshop explores the new forms of industrial and innovation policy that have emerged in recent decades. It examines their distinctive features, limitations and potential and asks what futures there might be for a developmental role for public institutions.

3-4.20 Public Institutions, Innovation and Growth in the Knowledge Economy
Chair: Seán Ó Riain, Sociology/ NIRSA, NUI Maynooth

Danny Breznitz, College of Business, Georgia Tech
“The Diverse Paths to Rapid-Innovation-Based Growth: The Strategic Role of the State”

Shiri Breznitz, School of Public Policy, Georgia Tech
“The Fountain of Knowledge? University Technology Transfer and Economic Development”

4.45-6 Round-table Discussion
The Role of the State in Development Strategies in a Changing Economic Landscape
Chair: Niamh Hardiman, Geary Institute and SPIRe, UCD

Short contributions from the following will be followed by discussion.
Seán Ó Riain, Sociology/ NIRSA, NUI Maynooth
Philip O’Connell, Geary Institute, UCD
Aphra Kerr, Sociology/ NIRSA, NUI Maynooth
Patrick Paul Walsh, School of Politics and International Relations, UCD

The workshop is funded by the European Research Council and the Irish Research Council for the Humanities and Social Sciences. It is sponsored by the ‘New Deals in the New Economy’ project at NUI Maynooth (NIRSA/ Sociology) and ‘The Political Economy of the European Periphery’ at UCD Geary Institute.

Registration is free but places are limited. To register please email geary@ucd.ie  with the subject line “Industrial Policy” before Monday April 22nd.

Information on Venue and Transport is available here

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Ireland’s four-year economic recovery plan and “job-shedding” growth in pharma

Ireland’s recently adopted four-year recovery plan promotes an export-led strategy. The idea is to introduce measures to assist the export sector. These measures will assist export recovery through enhanced competitiveness and sector specific initiatives. Export growth will in turn deliver high value employment and act to stimulate the domestically trading sectors of the economy. These developments will in turn boost consumption, reduce unemployment and increase tax revenue. Confidence in this strategy is supported by the recent performance of the internationally traded sector. The government estimates exports have grown by over six percent in 2010.

Given the importance of the pharmaceutical industry to Ireland’s economy and its large share in Ireland’s exports, it is useful to take a closer look at the developments of this sector and their implications for the recovery plan.

The Irish pharmaceutical industry is performing strongly throughout the economic crisis. CSO external trade data show that exports in the combined chemicals and pharmaceuticals sector (which is dominated by the pharmaceutical sub-sectors) grew from €44.2bn in 2008 to €49.4bn in 2009 (+12%). The most recent CSO release shows further export growth by 4% in the first eight months of 2010 (compared to the first eight month in 2009). This compares with falling exports in other important manufacturing sub-sectors, notably the office machines sector (computer hardware), which experienced a drop of 32% in exports. As a result the combined chemicals and pharmaceuticals sector now accounts for 60% of Ireland’s manufacturing exports.

Now let’s take a look at the employment figures of the CSO. Between Q4 2007 and Q4 2009 employment in basic pharmaceutical products and pharmaceutical preparations (NACE 21) dropped by 9%, from 30,800 to 27,900.  How can we explain this apparent paradox?

Part of the job losses are related to corporate merger activity and the concomitant reorganisation of global manufacturing capacity. Other job losses are related to pharmaceutical companies losing markets when some of their products reach the end of their patent life. I discussed the implications of this “patent cliff” issue for Ireland in a previous IAN post. These processes were responsible for the recent high profile job-losses and plant closures at Pfizer and GSK in Cork. But one would expect these processes to translate in a drop in pharmaceutical exports, not an increase.

After talking to some pharmaceutical company managers, I believe the answer to the puzzle lies in a parallel development which may be termed “fat pharma going lean”. Traditionally, because of obscenely high pharmaceutical prices, pharma companies’ main concern was to have a sufficient supply of product. Pharma companies paid little attention to production efficiencies. However, product prices have come under serious pressure due to increasingly stringent price controls in many markets, as well as increased competition. In addition, changes in the regulatory environment have significantly increased the cost of bringing a drug to the market. In response, following the example of the electronics industry, most pharmaceutical companies are now introducing more efficient processes. As a result, Irish plants are starting to produce significantly more output, while at the same time reducing their head count. In some Irish plants, staff numbers have been reduced by over 10 per cent, completely under the radar of the media.

One might argue that this development will make the plants more efficient and put them in a better position to attract future investments by the parent company. However, efficiencies are implemented globally, not only in Ireland.

The recent growth in Irish pharmaceutical exports has not been job-less, it has been job-shedding. At least in the context of the pharmaceutical industry, the Government’s export-led recovery strategy may be problematic. In this sector, in the short term, increased exports are unlikely to lead to significant number of new jobs. Without new jobs, there will be no boost to consumption, no boost to the domestic sector, and no boost to income tax. Pharma is, of course, a specific case. The increasingly important internationally traded services sector may lend itself better to the export-led recovery plan.

Chris van Egeraat

 

Ireland, Greece, Spain, Portugal: a same European ‘peripheral’ problem?

The financial and economic crisis that has hit the world and Europe since Autumn 2008 has had its most severe impact on a few European countries, countries that are often referred to as ‘peripheral’ from the standpoint of the geography of Europe or the EU: Greece, Ireland, Spain and Portugal. Does that mean that their geographically ‘peripheral’ position is at the heart of their current financial and economic problems? Not really. Or maybe, somehow. Maybe it was their location on the margins of Europe that played a part in their lagging economies compared to their EU partners in the 1970s and 1980s as they all joined the EU (1973 for Ireland, 1981 for Greece, 1986 for Spain and Portugal)? And maybe that explained to a certain extent the ‘fast-track’ paths to economic growth that some of them went for then, with the support of European funding for infrastructural upgrades in particular, but also based on what Henri Sterdyniak, from the OFCE research center, has called “macroeconomic strategies that have become illusory”. And that’s precisely what’s more important than their ‘peripheral’ location: the fragility of their respective economic development model. In the case of Ireland, that has been largely explained, discussed, documented through many posts on the Ireland after NAMA blog (since its creation at the end of November 2009, almost a year ago now) and other forums such as Politics.ie or The Irish Economy among others. But there hasn’t been too much discussion about how the Irish model compares to its ‘peripheral’ counterparts and what lessons Ireland could learn from them and their own crisis as it looks for a way to get out of the crisis and to rebuild its growth and a (hopefully) viable growth model. There’re a few things that I would like to highlight to that effect.

The Irish and Spanish experiences have been quite similar so far. Their public debt was quite low, their growth levels quite high, but in both cases growth was heavily reliant on real-estate and financial speculation. In Ireland, at the end of 2007, loans for real-estate development amounted to 250% of the GNP. That made for a huge real-estate bubble, the same kind of bubble that exploded in Spain a few months after the Irish one. While a large amount of the bursting of the Irish bubble is being cleaned up by NAMA, Spain has not created its own toxic bank to absorb the current 325bn euros of debts of the real-estate sector.

Portugal and Greece are in a different situation. Their major problem has been the lack of growth in the past decade or so (while Ireland and Spain were experiencing high levels of ‘growth’, but one that was highly illusory given its speculative nature). Their main problem is that their governments have been very keen on entertaining the idea that growth was happening: to international investors, to their own population, and to EU officials. They did so through rather irrational budget decisions. While Greece deliberately falsified and concealed its high levels of public debt and justified 4% annual growth since 2000 by emphasizing the performances of its real-estate industry and tourism (two sectors that are highly volatile), Portugal went overboard with public spending to stimulate domestic consumption while it struggled to boost the growth of its leading industries and main exports (e.g. textiles).

Among the four countries, Ireland is actually the only one that has developed a real and successful export-oriented economy, in particular in knowledge-based sectors such as (e.g.) pharmaceuticals, electronics, software …etc. But the problem is that the success of this strategy relies to a great extent on the very low corporation tax (12.5%, as opposed to 25.7% on average across the Euro zone, almost 30% in Germany, and over 33% in France). And this is something that may be challenged in the near future as part of the EU/IMF bail-out package that is currently negotiated. As noted in a post from yesterday by Rob Kitchin, the IMF has indicated in its position paper on structural reform in the Euro area that harmonization of macroeconomic policies should be a priority in the Eurozone, and an harmonization of the corporation tax across the area, or at least some degree of convergence, is not to be excluded. This does not mean that firms are necessarily going to massively flee out of Ireland if the corporation tax is raised by a few percentage points. While the potential short-term negative effects of raising the corporation tax has recently been discussed by Chris van Egeraat in another post on this blog, there are also a series of factors that make firms more locally-embedded than implied by the hypermobility of capital argument mobilized by those in favour of maintaining a low corporation rate in Ireland. I’ll leave that aside for the moment, and I will pick up on another point raised by Chris van Egeraat in his post and many others in the past few months, which is the fact that Irish recovery and a viable Irish economic model cannot be built upon a low taxation model. It needs to be rebuilt on strong foundations, including a proper industrial policy, that would send the right ‘signals’ to global markets and international investors, i.e. the image of an economy that is actually managed and doesn’t threatened to spiral out of control again.

A major problem here is that it is going to be very difficult for Ireland, but also Greece, Portugal and Spain to build the foundations of a strong economic model with the austerity plans that are currently being designed or implemented because the priority being the reduction of national deficits through major cuts in levels of public spending, this leaves close to nothing to support these sectors that could create a solid base for these economy (e.g. textiles in Portugal, food industries in Spain and Greece, new technologies in Ireland). That includes, for example, continuous funding for education to keep training indigenous youth, mentoring and internship programmes to help graduates enter the workforce, financial and structural support for start-ups to create jobs ….etc (as discussed in this post for example). If their respective economic bases do not solidify in the next few years, all four countries are likely not only to be prone to future crises of the sort that we are dealing with right now.

Delphine Ancien

 

Corporation tax debate misses the point

In the context of Ireland’s banking and fiscal crisis and the impending bailout by the EU and IMF, the finance ministers of Austria and France have suggested that the bailout should be made conditional on Ireland raising its 12.5% corporation tax rate. This would help squeeze Ireland’s budget deficit and resolve what has long been a bone of contention between Ireland and its European partners.

The Irish government has been quick to rule out any such move and most commentators (in Ireland) tend to support this on the basis that such a move would make Ireland “less competitive” and would lead to foreign multinationals leaving the country. Although these comments make a lot of sense, they do miss a more important point – in the short term, raising Ireland’s corporation tax rate is unlikely to have strong positive effect on the corporate tax take from foreign operations.

We must realise that Ireland’s 12.5% corporation tax rate is only one aspect of Ireland’s constellation of incentives to attract foreign direct investments. Other important pillars include, amongst others, recent legislation for holding companies, taxation of patent royalties, double taxation agreements and the (US) legislation for cost sharing arrangements.

All these elements together have made Ireland an attractive location for foreign “headquarters”, notably for “managing” intellectual property (IP). In addition to their traditional involvement in manufacturing and services operations, many multinationals such as Pfizer and Google have established separate headquarter subsidiaries in Ireland for the management of IP and other intra-firm financial services. The US parents have licensed large shares of their IP to holding companies in Ireland. Although, in some cases, the royalty income is again re-allocated to genuine tax havens such as Bermuda, the Irish subsidiaries do pay 12.5% over some of the profits. Because we are talking about billions of royalty income, this is a substantial source of revenue for a small country like Ireland. One example of such carefully designed corporate structures was recently outlined in the context of Google.

It is not difficult to imagine what would happen were Ireland to raise its corporation tax rate to the level of its European counterparts. Because most of the manufacturing, and even services, operations are relatively inert in the short term, the corporation tax take from such operations would rise. However, the situation is different in relation to holding companies involved in IP management and other intra-firm financial services. In reaction to a hike in corporation tax rate, IP can relatively simply be relocated to other jurisdictions using buy-in payments. This would result in a serious loss of corporation tax revenues from foreign companies in the short term. Thus, in the short term, raising Ireland’s corporation tax rate is unlikely to have strong positive effect on the corporate tax take from foreign operations and is unlikely to help squeeze Ireland’s budget deficit. This point has been missed in most of the current commentary on corporation tax. Raising the corporation tax rate would, of course, also affect the indigenous sector. I am in no position to estimate the effect of this on the corporate tax take, but, given the embattled state of this element of the Irish economy and the limited profit margins, I expect that this will not have a strong positive effect on the tax take either, while many indigenous companies will simply call it a day – a double whammy.

So, this does not appear the right moment to raise the corporation tax rate. This is not to say that Ireland should not raise its corporation tax rate at some stage – quite the contrary, in fact. The low level of corporation tax rate has done wonders for Ireland’s economic development. But we had reached a threshold level that would have allowed us to divert to a more sustainable economic development trajectory, both from an economic and social point of view. If we want to develop a sustainable economy we will need to adopt a strategy that will eventually involve a proper level of taxation. Very few equitable societies are built on a low taxation model. In the short term, it would clearly be counter productive to touch the corporation tax rate. But I don’t buy this idea that, even in the long term, Ireland can only be competitive on the basis of a low level of corporation tax, or other taxes for that matter. What is so special about Ireland?

Chris van Egeraat