Thursday, 23 September 2010

Chinese savings and Irish jobs

I am in Hong Kong this week on my first mission as Chairman of IFSC Ireland. Hong Kong is the third most important financial centre in the world, after London and New York, and is catching up fast.
China has built up huge savings in its corporate sector. If these funds are invested internationally they can gain a bigger return for the Chinese people and help revive the world economy, and thus the market for Chinese goods.  This activity is likely to be channelled through Hong Kong.
My job is to work with the various industry associations and state agencies in Ireland, like the IDA and Enterprise Ireland, to  bring more international financial services firms to Ireland.
Already Ireland   has 25000 people employed , and over 1000 firms, in international financial services. By establishing close links in Hong Kong, Ireland can use these strengths to maximise the returns on Chinese savings, while creating additional employment .
Dublin is already the 9th largest international banking market in the world, and 6th largest for the issue of international debt securities.
The administration of 49% of the worlds hedge funds takes place in Ireland, and 350 fund promoters from 50 countries have chosen Ireland as the base from which to service their funds.
The international insurance sector has a big presence in Ireland, writing 26 billion euros worth of  non Life and reinsurance business, and  28 billion worth of Life insurance business .
3000 international investment funds are listed on the Dublin Stock Exchange. These originate from 40 different countries.  There are over 2700 UCITS funds in Ireland with investments of 682 billion euros, and 1245 Qualified Investor Funds (QIFs) with investments of 135 billion euros.  Both types of fund operate under EU rules. UCITS are the more conservatively managed of the two types of fund.
These activities have been attracted to Ireland because the country has a well educated, young,  English speaking, and  flexible, workforce. Ireland has a higher proportion of graduates with finance skills than competing locations. Rents, house prices, wages and consumer prices are falling in Ireland, which reduces costs for firms coming to the country. The 12% corporate tax rate, which was introduced by the Rainbow Coalition Government in 1997, is also a big help.

Monday, 13 September 2010

THE IRISH ECONOMY.......Focussing on the future, while learning from the past.

I should start by saying that the views I am about to express are  entirely my own and  do not purport to  represent any body with which I am, or have in the past been, associated.
It is important to keep a sense of proportion about the difficulties facing the Irish economy. It is true that these difficulties have been aggravated by the international credit crisis, but that crisis really  did no more that  bring to the surface  an entirely home grown series of mistakes. Essentially we have been borrowing too much, and spending  much of it on the  wrong things, for the  past  ten years. 
While it may have been difficult for financial regulators to quantify the risk involved in banks  buying collateralised  debt obligations, it is not difficult at all to see that for the private sector to be   borrowing ever larger amounts to invest almost exclusively in a  notoriously volatile  economic sector ,namely  building  construction, was bound to be  wrong. 
Any student of economic history, and national economic history was part of my first year economics course in UCD, knows  full well that the construction sector in Ireland has  lived through a series of booms and busts in the twentieth century.   Any family that worked in the building trade knows that too, even if they never went near a university.
Equally one did not have to  have a  degree in  higher mathematics to  know that  setting ever higher levels of public spending and  Government employment, and paying for them  with  revenue that depended  on the ups and downs of  the  same  volatile  economic sector,  building construction,  was bound to lead to  disaster sooner or later. You cannot responsibly pay for an ongoing liability, with revenues that are not ongoing.  
These obvious mistakes, by both the private and the  public sectors since 2000,  were not sufficiently criticised at the time.  Group thinking just went in one direction, unquestioning acceptance that present  conditions would  continue indefinitely,  or at worst , that there would be a soft landing. No other possibility was seriously entertained.   This unwillingness to hear  contrarian views about the economy existed   because  there  is a general tendency in Ireland to form one consensus view of things   and to leave little space for dissent.  Social partnership, which had delivered many benefits, also stifled critical debate on economic policy in the interests of consensus.
There were other deeper reasons for the failure to have widespread questioning of what, on the face of them , were pretty obvious mistakes that were being  made by the Irish public and private sectors.
Democratic dissent is not something we value enough in Ireland, perhaps because we have had to put up with too much undemocratic and violent dissent in the past.  When people say something that questions the consensus view of any topic, the first reaction in both media and private commentary is not, as it should be, to ask whether the dissentient has something valuable to add, but rather to look for  his or her to hidden ulterior motive for saying what he is saying, or to search for some   inconsistency or hypocrisy by reference to what  he or she  said years  before.
We also failed to learn the right lessons from the last recession of the 1980s.   The  view  became accepted  that the recovery in the late 1980s was due to our own efforts, when in fact the improvement in our financial position  after 1987 was  mainly due to a sudden  fall in international interest rates,  and to a dramatic one off fall in  our dependency ratio in the 1990s by comparison with the 1980s.
Thus,  even those who knew  in their hearts  that there was something wrong with the way we were borrowing and spending after  2000, felt that, somehow or other , against all logic, everything would  turn out right in the end, as it had  in the late  1980s.  Or, alternatively, they just kept their views to themselves, because they did want to be invited to commit suicide.
I hope that one positive outcome of the current problem will be that we will be that we will in future  allow more  space for debate and argument about options and risks before we take big decisions.
Equally, we must now ensure that we do not form a new national consensus of despair.  Just as, between 2000 and 2007, we looked only at the bright side, we must not now only see the dark side of things.
Looking at our national economic situation now, I feel we are focussing rather too much on the liability of the banks, and too little on the ongoing huge gap between the Government’s daily spending and its daily revenue. 
The net liability of the banks will be a finite amount, even if we do not have an exact figure yet.  It will be a one off liability for the taxpayer, probably about 15% to 20% of our annual Gross Domestic product. That is a huge figure, but we should be able to spread it over a number of years, if we manage things properly.  
The much more vital issue to discuss is the gap between spending and revenue, which is running at 10% of our GDP, every year...year after year.  That is not a one off figure. It is something that could require us to add the difference to our debt  year after year,  inexorably multiplying  the total amount we owe. 
I would prefer if the energies of our lively economic  “commentariat”  were devoted as much to   how we can bridge  that  recurring gap, as it  is to the one off banking liability. I imagine that it is really the gap between ongoing  spending,  and ongoing revenue,  that worries the  more thoughtful participants in the financial markets  more than  the one off banking liability. 
The recent Quarterly Economic Commentary of the ESRI draws attention to the fact that income per head in Ireland is now back to what it was in 2000. That is quite a drop from the unsustainable heights it reached in 2006, but nobody can seriously suggest that Ireland was a poor country in 2000. 
We had a solid economy in 2000, something we did not have in 2006.  I accept that averages, like  income per head , do not tell the whole story.  There are a lot of people who are worse off than they, or their equivalents, were in 2000. But that also means that there are also a lot of people who are much better off than they were in  2000!
Furthermore there are things, that are not measured in income statistics,  that are better than they were in 2000. Our roads, our accessibility to hotels and cultural facilities, our public transport...these are all better than they were in 2000.  But, of course, we tend to be much more concerned about things we personally have that we might now lose, than we are with the bigger things that have  got better for the community as a whole. That is normal human psychology.   
If we look for positive signs in the Irish economy, they are there before our eyes. 
Exports are buoyant this year, rising faster than in most European countries. In fact, Irish exports fell much less in the recent downturn in global markets, than did the exports of most European countries. The pharmaceutical sector has been particularly strong.  This general trend in exports shows that Ireland is invested in   economic sectors for which there is consistent demand, whereas other European countries are heavily into sectors, like cars, where demand is much more volatile.
While the Irish public sector still has unresolved debt problems, Irish households have paid down a lot of their debts.  The private savings rate is now 10% of GDP as against 2% in 2007. According to the ESRI,  in  2009 there  was an  increase in net financial assets of Irish households of  almost 25 billion euros ,  due to a reduction of  personal debt of 4.6 billion euros and  an increase in financial assets  of 20 billion  arising from an improvement in the  value of pension funds and insurance policies. Of course, this improvement starts from a very high level of indebtedness, and it is unevenly distributed.   
Some sectors have come through the crisis very well. The international financial services sector, which is quite separate from the  domestic banking sector, has done remarkably well. It is spread all over Ireland and is creating and sustaining highly skilled jobs, especially for young Irish people with good mathematical skills. 
Our competitive position has been greatly improved, as a direct result of the recession, unfortunately.  House rents and new office rents, wages costs and prices are down more  here in Ireland  in  the last  two years , more  than they  are in other  European countries. Staff turnover is much less than it was , so a new employer finds it more worthwhile to train recently recruited employees in Ireland.  The legacy of our investment in  education in the 1970s  and 1980s is still there.   Irish people  are still inventive and adaptable.  The industrial society, with its emphasis on disciplined repetition of tasks, may not have suited the Irish character all that well. But  the information society, with its emphasis on adaptability  and innovation, is ideal for us 
Ireland is an open society and has handled the transition to a multi faith, multi ethnic , society much better than have some of  our European neighbours. That will be a big help to us in attracting foreign investment  here, especially from the emerging economies where the  predominant  ethnicity is not European.
I will be going to China this month, and to the Gulf States later in the  year, to seek  investment from those rapidly growing  countries in the Irish  financial services industry.  The fact that Ireland has welcomed immigrants from those same parts of the world will make it easier for me to suggest that Ireland is a good place  for those countries to invest in  financially too.
Irish people have also proven themselves to be more sensible about accepting the need to make the painful changes needed  to adapt to our reduced  economic circumstances than have  other societies.  The contrast between Irish reactions and the street theatre in France and Greece is stark. 
While the tendency towards too much consensus may have blinded us to some realities during the boom,  it is now working  to  help us deal with our problems in a  practical way.
Yes, we have a deal to learn from our mistakes.  Yes, we will have to make some painful changes. Government services will be reduced and the direct and indirect tax base  may have to  widened. But the fundamental human resource base of the Irish economy is stronger than ever.  That is what is really important.

Speech by John Bruton, former Taoiseach, to Wexford Rotary  Club on Monday  13th September 2010

Monday, 6 September 2010

The Policy Choices for the next Ten Years

The effects of the recession are not being felt equally by everyone. Those who lose their jobs are much more severely hit, than the majority who keep their jobs. Those who invested in bank shares or property, are harder hit than those who invested in bonds or left their money on deposit in a bank. 
Inequalities like these create political difficulties and make it harder to forge consensus around difficult but necessary decisions. 
Even before the recession hit, it is clear that there has been a widening of income disparities in Europe in the past forty years, although the number living in absolute  poverty  and want has dramatically  diminished. 
In terms of welfare improvement, the reduction in absolute want is much more important.  But some psychological research suggests that people become more unhappy, if they fall behind other people with whom they like to compare themselves, even though in absolute terms they are better off.   For example, if your brother in law gets a big pay rise, and you do not, that can cause you more anguish than if neither of you had got a pay rise. 
My own sense is that Europe’s rate of growth, relative to that of most the rest of the world, will fall over the next twenty years,  because Europe’s population is ageing . As people age they become less productive of the limited range of things that statistics on economic growth measure. 
Economic growth involves the consumption (sometimes irreversibly) of resources that are in limited supply. Europe has used up more of  its limited resources already than  has been the case in other parts of the world.   For example, Europe’s supplies of coal, gas, and  oil are limited, and have been consumed more fully, than those in other parts of the world. 

What is going to happen next? 
Will Europe’s accumulated wealth form the good years be enough to see us through?

I fear the accumulated resources of the “fat years” will be run down quite quickly , because the political structure favours this. Older people are more likely to favour running down resources quickly because they will not be around in the longer run. Older peoples interests get  disproportionate weight in politics , because   all older people  have votes, whereas only a proportion of younger people have a vote.  A parent of young children has no more votes than do  those who have no children at all, so there is a bias in the system in favour of the interests of adults, who, by definition,  have less interest in  the long term future than children do . As individuals, children are unrepresented.  The tension here will be aggravated to the extent that it is minority on non influential groups, like immigrants, who have more than one child, and elites who have fewer children.
Whether or not politics becomes more polarised depends on whether political leaders develop a  narrative for the future that  convinces a majority of the people that sacrifices, and  the gains to be  achieved by those sacrifices, will be shared fairly . 
The question that has to be asked is whether European states are capable of developing such a narrative. In some senses, the states in Europe today are too small, with too limited taxing capacity, to guarantee a fair sharing of burdens and rewards.  Free movement of people and money also allows individuals who are making gains to pay less tax by moving themselves or their money to another country. Urbanisation has reduced the instinctive sense of solidarity that people have with their “neighbours”, and thus their willingness to pay taxes for the benefit of “neighbours”.
Given that it is impossible to manage national economies in isolation any more, it is arguable that the EU, rather than individual states, is an entity of a better size to organise and implement a consensus policy to distribute the sacrifices necessary to achieve growth, and rewards of growth, more fairly.  But the EU has no mandate to do this, and the public feel they have little or no direct means of influencing EU policy making.

Thursday, 2 September 2010


Finola, our daughter Mary Elizabeth, and I spent a very enjoyable 10 days on holiday in the province of Lecce recently.  Finola’s sister, Caroline, joined us for some of the time. Lecce is at the very tip of the heel of Italy and is part of the region of Apulia.
 We spent most time in the city of Lecce itself, which is known by many as the “Florence of the South”.  The baroque churches are magnificent and the local white stone lends itself to the most intricate decorations. Otranto and Gallipoli are also well worth visiting. The y mosaic on the floor otthr  cathedral in Otranto  is a remarcrently had the approval of the Pope at the time.e same timemosaic on the floor of the cathedral in Otranto tells a pictorial story of how our 12th century ancestors viewed the world.
The coast of the province is dotted with forts of all kinds, reminding the visitor that this was once a frontline in warfare between east and west.  The Byzantine, Greek speaking and Orthodox Christian, Empire once held sway here, and Greek is still spoken in some parts of the area.  The Byzantines were driven out by the Normans, at around the same time as the Normans were also conquering Ireland. Both expeditions apparently had the approval of the Pope at the time. Lecce was later invaded by the Turks. It was part of the Kingdom of Naples and Sicily before being conquered by a united Italy in 1861.
The scale of church building and decoration, in this relatively poor part of the world, is amazing.  The investment of time and money testifies to the existence in past times, of a very different sense of what was important, to the one we take for granted today.  What people build tells you what they regard as their priority. Wealth was displayed in the fifteenth and sixteenth centuries in Italy through collective religious investment in churches, as much as through commercial, nationalistic or personal expenditure. The building of grandiose palaces for rulers, like the one in Caserta for the King of Naples which we saw on our way home, came later, during the eighteenth century   “Enlightenment”. This palace is a copy of Versailles and must have cost a fortune.