Opinions & Ideas

Category: Economic Growth


The growth rate in Europe, in comparison that in the rest of the world, will be determined by the following nine factors

  1. the age structure of Europe’s working population. Most EU countries have more elderly populations than the global average and this, inevitably, reduces Europe’s relative growth potential. Older populations tend to resist the use of innovative technologies. The burden of large retired populations will lead to higher taxes on the working age population, which could lead to tax evasion or investment flight. An older population will tend to use Europe’s housing stock less fully, creating housing pressures for younger people.
  2. the educational level of its population. Generally speaking, the educational level of Europe’s population is above average and this increases Europe’s growth potential. Questions do arise as to the appropriateness, from an economic growth potential point of view, of some of the education provided. Digital skills will be very important in future, as will financial literacy. The educational efficiency of Europe’s universities will come in for scrutiny, as will the astronomical cost of university education in some elite universities in the US.
  3. whether the structure of the economy and of the labour and capital markets allows human, technological and financial resources to be reallocated relatively easily from low to high growth sectors. This is a problem that has been tackled in Greece. But some wealthier economies, like France and Germany, have a distance to go is clearing the arteries of their economies. Structural rigidities contribute to Germany’s historically low propensity to import, which has contributed to the imbalances in the euro zone
  4. whether there is a possibility of relatively easy technological “catch up” in a  particular European economy. A country, like Greece, which has been held back by financial problems, should have significant catch up possibilities. Central European countries are already experiencing catch up, but this will be limited by their demographic and emigration problems. Countries using mature technologies may face difficulties competing with new market entrants.
  5. a successful strengthening of the governance system of the euro zone could give a boost to confidence. Countries, like Germany and Netherlands, will only agree to this, if countries with weaker banking systems have either cleaned up their banking systems, or if the risk sharing is limited in a way that requires financial markets to recognise that some sovereign bonds are riskier than others.
  6. regional policy can help growth, but it can also inhibit it.  Tilting infrastructural spending in favour of more remote regions may lead to sub optimal use of limited resources. Younger people all over the world are tending to gravitate towards big cities for social reasons, and it may be that this trend cannot be arrested. This is reflected in expensive housing in some areas and empty houses elsewhere. Regional policy priorities will tend to be set on the basis of political priorities, which may not yield the best economic rate of return. On the other hand, more spending in more remote regions may have environmental and tourism benefits, which are harder to measure.
  7. transformative combinations of technologies ( eg. artificial intelligence, machine learning, enhanced connectivity, new forms of human machine interaction) may lead to a rapid spurt in growth in areas which can adopt them. But some existing jobs may be displaced and income inequalities increased. Simultaneously encouraging new technologies, while mitigating the inequalities they bring, will be a major challenge for states, given the ease with which capital can move from country to country. If one country increases its taxes to mitigate inequality, better off people will move to other countries with lower tax rates.
  8. future trade policy. Brexit has the potential to introduce major uncertainties and barriers within Europe. President Trump’s “America First“ policy could lead to a trans oceanic trade war, which is a symptom of the growing military competition between the US and China. Rejection of rule based international trade could stop economic growth in its tracks.
  9. migration pressures. Immigration can increase economic growth, but it can also lead to severe social friction and political upheavals. African agriculture needs new export opportunities in Europe, if Africans are not to seek to emigrate to Europe in increasing numbers. There is a trade off between trade policy and migration policy. Anti immigrant identity politics is a high emotional appeal, but could prove to be economically destructive for Europe

This list of factors that influence relative rates of growth shows that economic growth comes at a cost. Some societies may decide that they do not want to pay those costs, and opt for a lower rate of growth.



flag-1296283_960_720I am in India this week for a series of meetings.  I met the Minister of State at the Prime Minister’s office, Dr Jitendra Singh.

At the moment , India has the fastest growth rate of any major economy in the world…7.5% pa.

This is driven in part by the youthfulness of its population. Half of India’s 1.2billion people are under the age of 25.

Unlike China, which has been restricting birth rates for years, and will soon see a contraction of its workforce as more people reach retirement age, India will see its available workforce continue to grow for the next generation or more. This gives India almost limitless potential for growth.

But the key word here is “potential”. Unless India’s young people get the right skills for the modern world, they will continue to live in relative poverty.

India has some great companies, but not enough. Only 10 million Indians are employed in companies with a workforce greater than 50 people. A large pool of people are still work in farming . Farming has had two bad years in a row because of drought, which has caused real hardship. That said, India has more internet users altogether than has the United States, and its city roads are clogged with cars.

India is a highly decentralised country, and policies vary widely from state to state. Some states have gone much faster than others in facilitation the setting up of a new business. The World Bank recently highlighted  this.

Of 98 recommendations to improve the business environment, there was  

  • a 70% implementation rate in Gujarat and Andra Pradesh,
  • a 36% rate in Delhi and Punjab but only a
  • 1,23% implementation in Arunchal Pradesh.

Divergences like this are also to be found between the states of the EU in respect of recommendations for economic reform.

Skill development is a key to the development of India, and a robust and reliable system for certifying training and skill levels could make a dramatic difference.

The current government of India, led by Narendra Modi is strongly in favour of opening up the economy. He is also determined to stamp out corruption, the black economy and tax evasion.

His action, this week, in taking certain large denomination bank notes out of circulation is designed to force people to exchange these notes in banks and thereby bring the money into the white economy and under the supervision of the revenue authorities.

Modi is in a strong position because his BJP party has an overall majority.

Relations with Pakistan over Kashmir remain exceptionally difficult ,with frequent incidents, involving deaths, occurring along the disputed border.


Keynote Speech at the Trinity Economics Forum ,  in the Long Room Hub, in Trinity College, Dublin on Saturday 15 February at 4.15pm

I propose to speak here today in a personal capacity, and not on behalf of any organisation with which I am privileged to be associated.
The recent economic crisis has been good for economists. They are in demand as members of panels of all kinds, to explain what went wrong. 

But it has not been so good for the science of economics, in the sense that so few people with economic training foresaw either the scale, or the timing, of the collapse.


It is possible to argue that foreseeing the timing of the collapse was a lot to ask. Sometimes a  random event can occur, which  will set off a chain of events that will topple an economic set up that was already unstable,  and it is difficult to know which random event will be the one to have that effect, or to predict when it will happen. Obviously the sooner   it happens the better, because a lesser adjustment will then be necessary.

But it is less easy to understand why the bulk of the economics profession worldwide, did not grasp the fact that the scale of the imbalances in the world had grown so great, that the  gradual “soft landing” , that most  seemed to have assumed would happen, was inherently unlikely. Virtually all the major international bodies expected a soft landing.

Given that everyone knew that paper money itself is based on confidence and trust (the paper itself is worth nothing), and that most money in use is actually bank credit, and that few banks anywhere are strong enough to resist a sustained bank run, it is hard to see how so many economists could have assumed that unsustainable positions could be unwound slowly, over a long period, without somebody panicking at some stage, and thereby precipitating a bank run.

 Yet, that seems to have been the general assumption.


In Ireland’s case, there was published data which showed   clearly to all who could read that, although we were part of a single currency which we had no power to devalue, we were running a large balance of payments deficit. In other words we were spending more abroad than we were selling. Ireland had a very large balance of payments deficit in 2005, 5690m euros, and been running a deficit in every year since 2000. Meanwhile, new house prices had risen by 64% since 2000, whereas consumer prices (excluding mortgages) had only risen by 18%. These figures were known at the time. Economists and others believed, mistakenly, that the balance of payments did not matter in a currency union, and the potential danger of private sector imbalances was ignored 

Some Irish economists, and non economists, may have sensed that there was something radically wrong here, but the consensus remained that the position would unwind slowly and relatively painlessly. 

But HOW was it supposed to unwind?

How were exports supposed to accelerate and catch up with imports, which was the only way the balance of payments could correct itself without a domestic recession being used to curb imports? 

How were incomes of households in Ireland   supposed to catch up with house prices, without a fall in house prices which would undermine the basis on which people were contracting mortgages, and without thereby creating a banking crisis(which is what happened)?

What economic strategy or projection was there for such a major increase in incomes in Ireland?  What economic strategy was there for an increase in exports sufficient to overtake imports and eliminate the balance of payments gap? Given that we were buying the imports on credit, surely this raised questions about our banking system?

I have no doubt that some economists were asking these questions, but they were not being heard. 

Why is this?


One reason is that people did not take the time to listen. They were too busy,  busy making money, meeting their quarterly targets, winning votes, or doing all the other things that make up a modern crowded life. Most people did not have, or did not make, the time to think things out.

Furthermore, I believe any economist who sounded a warning was not being heard, because of a good trait of human nature, which serves us well in normal times, namely optimism. If humans were not optimists, they would not have taken the risks which, after much trial and error, brought about advances in technology from the earliest times, from the domestication of wild animals to the invention of the world wide web. 

But lack of time, and optimism, were also present in other countries which did not have property bubbles, countries like Canada, and Germany.

There may thus be other factors to look at, principally the recent economic history of Ireland.


We had been blinded by success, a success we did not fully understand.

In Ireland’s case, we had had, from 1994 to 2000, a surge in economic growth, which was based on solid technological advance, and improved cost competitiveness and productivity. 

In fact this surge was the result of improvements that had been made long before, but that was not widely understood, and we thus drew the wrong conclusions from our growth performance in the 1994 to 2000 period. Our growth in the 1994 to 2000 period was, in good measure, a one off harvesting of the fruits of previous investment, a harvest that had been artificially delayed by extraneous events. 

Ireland had been held back relative to the rest of Europe in the post war decades, by poor education, by protectionism, by over dependence on one market and a few products, and by a neglect of technology. Up to 1970, we were a long distance from the “productivity frontier”, which could be assumed to be the levels of productivity being achieved in the United States.

In the 1966 to 1973 period, these defects were put right.  And in a sense, the Celtic Tiger should have happened in the mid 1970s, rather than in the mid 1990’s. Remember there was a big return of emigrants to Ireland in the 1970’s, many of whom were children, which was a good sign for the future.

But the Celtic tiger was then postponed by external developments.

In1974, we were hit by the oil crisis, which dramatically worsened our balance of payments and public finances.

In the 1980s, we were hit by the huge hike in interest rates, initiated by Paul Volcker of the Federal Reserve, to squeeze inflation out of the system. This rise in interest rates caused a crisis in the public finances of Ireland in 1981, because we had exposed ourselves needlessly, by unwise government borrowing  in the late 1970’s.

Then, in the early 1990’s, when we should have been recovering quickly, we were hit by renewed higher interest rates.  This arose from currency exchange rate instability in Europe. 

There was another factor at work, demography.

Ireland’s birth rate had been very high in the 1970’s and peaked in 1980. So we had a disproportionately large number of children in the country in the 1980’s. These children were too young to earn anything, and had to be provided for by a relatively small working population.

By the mid 1990s, some of these young people were entering the workforce, and furthermore women were taking up paid work much more than before, where previously they had worked outside the paid economy, at home. As a result of the combination of these two changes, the workforce in Ireland in the 1990s, was almost twice, what it had been in the 1980’s. 


So the exceptional growth rates, in the 1994-2000 period, were a form of one off, catching up. 

Once external constraints, like artificially high oil prices and interest rates, were removed, and the working population increased, all was set for a surge forward in economic activity. But this also meant that we came much closer to the global “productivity frontier”, beyond which further advance is only possible through profound technological advances. 

Looking at how we responded to the crisis, in the period from 2008 to date, it is important to stress that the fundamental structural advantages of the Irish economy, the base of high tech industry and services, and the flexibility of our work force, were preserved. 

Indeed competitiveness was improved quickly, and the success in negotiating pay reductions and economies in the public sector was remarkable. Some progress was made in reducing private debt , which had reached around 220% of gross disposable income in 2010. 

On the other hand, Government debt rose from 40% of GDP in 2008 to 125% today. While some of this was due to the cost of recapitalising banks, the bulk of the increase in debt was due to borrowing to bridge the gap that had suddenly grown between previously inflated spending levels, and presently depleted revenues.


Responsible finance is neither a left wing nor a right wing idea. It is common sense.

To escape from the debt situation we are in, we need to reach a point where our nominal GDP is rising faster than the rate of interest we are paying. 

The Department of Finance says that our nominal GDP growth rate this year is 2.8%, whereas our interest rate is 4 %, and our deficit to be met by Government borrowing will be at 4.8% of GDP. 

But by 2018, they expect our nominal GDP growth rate will be in 5.4%, as against an interest rate of 4.4%, and that we will have a budget surplus of 0.5% of GDP. Thus, we should, in 2018, be in a position where our Debt/GDP ratio will be falling, rather than rising. 

Obviously, if the Department has over estimated our like nominal growth rate, or if we fail to meet the targets for reduced borrowing, that happy outcome will not happen. We are not in complete control of any of these variables.

The one we have most control over is our gap between spending and revenue, but even that can be affected by international trade and interest rate conditions, which can increase spending or reduce revenues.

Interest rates could be raised above the expected level, as they were in the early 1980’s, if either Central Bankers start worrying about rising inflationary expectations, or if lenders are hit by a sovereign default somewhere else, either in the euro zone or otherwise.  This could become a problem when we have to roll over existing fixed rate borrowings. Conversely, if deflation sets in, the real value of our debts would start to rise, even though we had not increased them in nominal terms.

Nominal growth can be raised in two ways, by inflation, or by real increases in output.

Inflation, which would also reduce the real value of our debts, seems unlikely.

So we will have to rely on real output increases, which we can either sell abroad as exports, or sell to ourselves.

Some see a boost to domestic demand as part of the solution, but that would be counterproductive if it meant that we stopped reducing our very high household debts, or increased salaries and wages in a way that diminished our ability to compete on export markets. We rely on export performance to bring in the money that will enable us to get our debts under control. Much of any “stimulus” to domestic demand would seep away into imports very quickly. We would be stimulating someone else’s economy. 

In the longer term, we are also bound by a Treaty, approved in a referendum by the Irish people, to reduce our debt/GDP ratio at a steady pace, down to 60% of GDP, from its present level of 124%. 


This will mean running primary budget surpluses year after year. A primary surplus is a surplus of revenue over all expenditure, except debt service. This will not be an easy sell in an ageing society, where demands for more spending, especially on health, will be very strong. 

It is important to reflect on the present inbuilt tendency of Government spending to rise, even when no policy decision to raise it, is taken.

As Brendan Howlin TD, Minister for Public Expenditure , pointed out in his budget speech recently, with no policy change since 2008, the number of  people of pensionable age  increased by 13.5%,the number of medical card holders by 40%, and the numbers in schools and universities by 8%. 

This year alone, Social Welfare pension costs will increase by 190m euros and public service pension costs by 77 million. Meanwhile next year, some of the Haddington road pay savings will expire, when the agreement itself expires.

So even if there are no tax cuts, and no new spending ideas, keeping spending down to the level required to meet the deficit targets will be hard work.

Indeed it will be important that election manifestos are compatible with the Treaty obligations we have undertaken.  One suggestion is that Election Manifestoes should be costed in advance by the Fiscal Advisory Council.


Matching the pressures of national politics, with mutual Treaty obligations to control debt for the sake of our shared currency, will be a challenge in every democracy in euro zone, including in countries like Germany, France and Italy, which have a lower long term growth potential than we do. 

Indeed it will be in our interest that others are seen to respect their Treaty obligations too, because doubts about the viability of sovereign borrowing in any euro zone country could have an immediate knock on effect on the interest we would pay on our sovereign borrowing, and that could throw our plans off course.

Our future is, of course, inextricably linked up with the future of the euro, and thus of the European Union. Worries about the future of the euro have diminished, but have not disappeared. 

The fragility of the EU lies in the extent to which, as new items have  come on the agenda, for which inadequate provision has been made in existing Treaties ,  power has gravitated back to the big member states at the expense of the common EU interest, as expressed through the  Commission, Council of Ministers, and Parliament. Power has been renationalised, and that suits big states, not small ones. 

Ireland’s rejection of previous EU Treaties has, entirely unintentionally and indirectly, contributed to this process, by making EU leaders reluctant to propose Treaty amendments that might restore more initiative to the traditional EU decision making process, which works better for small countries. . 


Economists understand the power of incentives.

In the European Council, where the real power now lies, no member has a strong political incentive to put the collective interests of Europe, before the interests of his/her own country.

Even the Commission, because of its method of appointment, has an incentive to consult  the interests of the big states first. 

That is why I believe, if the EU is to succeed, it needs some form of supranational democracy, that will create a political mandate, derived from all the people of Europe, that will be large enough to take precedence over even the biggest state. Improving scrutiny of EU policies in 28 national parliaments is not enough.

I believe that either the President of the Commission, or the President of the European Council, should be directly elected by the people of Europe. 

If something radical like that is not done, I fear that the EU and the euro will continue to be blamed for the consequences of failures of national policies, failures that will have only a slight connection with the euro. If that happens, the permissive consent of citizens, which allows the EU to exist and grow, will disappear.

That would be an economic and political disaster, for the EU and its neighbours, far greater than the crash of 2008.


The issue of growing inequality in some western economies is different from the issue of whether or not we should live within our means.  Yet they are often confused in public debate by people who want to be popular, and dodge the true implications what they are demanding. 

We need to look at the factors that are driving inequality, because if the outcomes of economic policy create unduly wide divergences between winners and losers, the whole system will be undermined. 

Taxation is one factor that can aggravate inequality, but in Ireland we already have a relatively progressive tax system. We are also beginning to tax property, which is only fair.  We have to remember that people can move residence to avoid unduly progressive taxes. Some high earners, coming here from abroad, bring jobs for others into the country, and we would like them to stay here.

It is arguable that quantitative easing, by boosting share prices, has added to inequality, because only the better off tend to have a lot of shares and financial instruments and are thus in a position to benefit from the increase in their nominal value 

It is also arguable that systems of executive compensation, which reward short term gains in share prices, encourage business managements to favour the buying back of shares over investment, add to inequality, and depress long term growth.  Pay systems that reward short term results are particularly noxious in the financial sector. 

The celebrity factor has also added to income inequality, because all sorts of businesses, like football clubs, recognise the importance of holding on the celebrity managers or players, as a means of boosting stock prices, match attendances, or TV revenues.

Given that we live in a globalised world, it is difficult for one country to deal with these issues on its own, without provoking a flight of capital and talent to other countries. Imagine what would happen to the success rate of football clubs in a country that decided unilaterally to cap the pay rates of players in the interests of equality!

To address some of the causes of the growth of inequality, international understandings will be necessary. The OECD and the EU are the venues in which some of the causes can be tackled, but it will not be easy.


I will turn, finally, to the things we might do to boost economic growth. 

As far as I can see, this is not an area in which economists have reached a final consensus. 

The prevailing view is that the best way to promote growth is to encourage labour and capital to move freely from one activity to another, so as to find the activities with the highest rate of return.  High legal costs, restrictions on entry to professions, state monopolies of particular activities, and big barriers to redundancy of workers, all work against freedom to allocate resources efficiently, and thereby inhibit growth. In Ireland’s case we still have high legal costs, and a problem of monopoly pricing in the energy sector.

But it is also possible that markets can be TOO efficient, at least in a short term sense. For example, banks were too efficient in lending money here during the boom!

Returns to pension funds have declined, notwithstanding the additional sophistication of the independent fund managers used by the funds. UK pension funds earned a 5% return on capital between 1963 and 1999. But between 2000 and 2009, they earned only 1.1% return. That’s not financially sustainable. Why did this happen? Low interest rates promoted by Central Banks are part of the problem.

Incentives to unduly rapid turnover of investments are blamed by some for this decline in the return on investments by pension funds. To remedy this, suggestions for reform of the incentive structure of fund managers have been made. Worries have been expressed about bonuses earned from artificially rapid turnover in shares held on behalf of pension funds, and about “momentum trading,” where an attempt is made to make gains by anticipating the momentum of the market, rather than by focussing on underlying returns.

I do not feel able to judge these matters, or to say what, if anything, we should do about them in this jurisdiction, but the fundamental point I would make is that capitalism works best when it is subject to good, clear and simple rules, which strike the right balance between promoting lively competition in the here and now, the taking a long term view of investments that will yield the best returns over time. 

The international financial service sector is part of Ireland’s export success story. Exports of services now make up 52% of all Irish exports, with financial services, software and business services making up the bulk of this. Opportunities are enormous.

The global middle class, the class that saves for a private pension, is set to treble by 2040. This is a major market opportunity for the Irish Funds Industry.

The urban population of the world is set to increase by 75% by 2050. This will require huge infrastructural investment in roads, water treatment, electricity, and other forms on infrastructure. As a centre of excellence in both finance, and sustainable technology, this is also an opportunity for Ireland, and particularly for the Green IFSC.

The International Financial Services industry needs to make a big investment in IT and social media. For example, Ireland is getting a leading position in IT through the design, by Intel in Ireland, of the Quark X 1000 chip. 

If a country is able to host the designers of big technological breakthroughs like this, it is breaking through the “productivity frontier”, to which I referred earlier. Again this is an opportunity for Ireland to connect its financial service expertise with its IT expertise, and it’s hosting of firms like Google, Facebook, and Paypal.

This is, I believe, the key to promoting economic growth….making new connections. Economic growth is about a state of mind, in individuals and in society. About failing, and still trying again.



Ireland’s new Minister for European Affairs, Paschal Donohoe TD, gave an interesting speech last week.

He made the point that globalisation, of which many people complain, is not something “done to us, but is a consequence of the human desire to communicate, share, and exchange”.

He is right. 

He could have added that humans also want lots of variety, and choice in their lives, sometimes to an excessive degree, and that this drives globalisation forward as people go to the ends of the earth to find elusive “highs” in their lives.

He went on to say that the European Union gives us an opportunity to “positively mediate the consequences of globalisation”. He is right here too. A small country on its own, like Ireland, could have little impact on global trends, but the EU, as a block, can make a difference.

Globalisation has been facilitated by the internet, skype, containerisation, cheap air fares, and plentiful energy sources.

All these took investment to generate, and would not have happened, if people did not want them or were unwilling to pay for them. These technologies cannot be “uninvented” now. So Globalisation cannot be reversed. It is here to stay.


But all this variety, all this communication, and all this exchange, does not necessarily make us happier. 

In fact, the more choices we have to make, the more discontented we can often become. This is especially so, if we feel we have to make these choices to keep up with neighbours or others with whom we feel we must compare ourselves.

Choices are hard to make. They require an effort. They involve saying No, as well as Yes. And the more choices you have, the more are the things you have to say No to. The more options you have, the more regrets you may have about the choice you could not make. The more choices we have the more we expect of life, and of ourselves.

“The Paradox of Choice”, by Barry Schwartz, had the sub title “How the culture of Abundance robs us of satisfaction”.

People are shopping more now, but enjoying it less.

Increased choice may actually contribute to the recent epidemic of clinical depression. 
Depression has tripled in the last two generations, despite all the treatments now available, that were not there 60 years ago. 

The culture of” more choice” undermines institutions, like churches. Because choice is the priority, people do not want to regard religious teachings as commandments, about which they have no choice, but as suggestions about which they themselves are the ultimate arbiters.

The over estimation of the value of choice may also have something to do with the increased divorce rate, because, as Schwartz puts it, “establishing and maintaining meaningful social relations requires a willingness to be bound and constrained by them.” But constraints are exactly what the ideology of choice rejects!


“Studies have estimated that losses have twice the psychological impact as equivalent gains” says Schwartz. In other words, people hate losing 100 euro, a lot more than they like winning 100 euro. This may explain why people in modern well off societies are so anxious, and why, in the face of recent economic losses, many are regressing to old dead end ideas, like nationalism, class warfare, and xenophobia.

Happiness is, at last being measured by economists, as well as the Gross Domestic Product

It seems that once a society’s per capita wealth crosses a threshold from poverty to adequate subsistence, further increases in national wealth have little effect on happiness. You may find as many happy people in Poland as in Japan, even though the average Japanese is much richer than the average Pole

This should make us stop and think.

Economic growth is a good thing, but it has physical limits, as we are discovering with climate change and pollution. Economic growth also has psychological limits, in the sense that some forms of growth increase anxiety by offering people a bewildering array of choices that they do not feel competent to make. Markets only work well if people are informed enough, and have the time and mental energy, to make wise choices.

Laws and government subsidies will never be enough. Societies need a strong value system, if they are to be happy. These values must put human respect, ahead of material things, and put human relations ahead of maximising choice.  The science of economics is only beginning to recognise this. 

If the European Union is to positively mediate the consequences of globalisation, it must ask itself whether the values of more choice, and more material abundance, imported from economics, are sufficient to build a good society. I believe they are not, but I do not have the sense that that a discussion of alternative and better European values is  yet taking place.

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