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History repeating itself
CONSTANTIN GURDGIEV



Alarmingly, the exodus of multinationals from Irelandmay see the country's economy return to the doldrums of the 1980s. But the problem is not the sky-high cost of living and running a business here.The problem is a deterioration in our performance - both in real terms and in comparison to our main competitors

TALKING recently to a friend employed in one of the countless state-sponsored bodies researching our economic policies, I asked him what he thinks of the multinationals starting to leave Ireland? His reply startled me more than anything that I've heard on Irish airways or read in Irish press.

"In our quango people are talking of a return to the 1980s."

He must be exaggerating, I told myself. It can't be.

Ireland should be immune to the diseases of the 1980s. These were the days of oppressive regulatory and institutional environments, sky-high taxes, arcane labour laws and powerful trade unions. These were the years when the state borrowed and spent like a mad gambler on his first night in Las Vegas. It was a decade of stratospheric interest rates and proto-socialist political elites with no vision.

At home, scrolling through the new data files for the 'Economic Freedom of the World' report copublished by the Open Republic Institute, I decided to map our progress toward competitive, open markets and economic and social policy institutions. At a first glance, all appeared to confirm my sceptical view of my friend's conjecture. Between 1985 and 1990, our global rankings in terms of economic freedom have slipped from 15th to 20th position. Then, by 1995 we have skyrocketed to fifth place in the world. Seven years later, we were down in ninth place.

In terms of the latest data in 2004 we are back in the game, ranked the sixth economically freest nation in the known universe. There was just one hitch - the index relies on Ireland's GDP as a benchmark for the national income. Yet, even an undergraduate student of economics knows that GDP overstates our real income by almost 16%.

GDP includes the transfer pricing by the multinational companies located here; ie all their creative accounting that lowers their domestic tax liabilities. When I took this simple correction, the results were shocking. Since 2001, the quality of Irish economic environment as measured by the 38 parameters that enter the Index of Economic Freedom has deteriorated from being the 10th freest economy in the world to the ranking of 17th today. In addition to the usual suspects - Hong Kong, Singapore, New Zealand, Switzerland and the US - the likes of the UK, Iceland, Luxembourg, the Nordic countries (less Sweden), Estonia, the United Arab Emirates, Germany, Canada, Iceland, Australia and Austria are all ahead of Ireland in terms of the quality of their economic policies and environment.

As illustrated in the figure above, this calls for some serious examination of our policies in the last six years. The index measures the degree to which institutions are supportive of economic freedom. The cornerstones of that freedom are personal choice, voluntary exchange, competition, and security of privately owned property.

The summary index, plotted above, measures five broad areas of performance: size of government, legal structure and security of property rights, access to sound money, freedom to trade internationally and regulation of credit, labour and business. It is closely correlated with income growth and other socio-economic parameters. Which brings us to the question of what is going on in Ireland.

Following the latest downsizing news from Dell, O2, Vodafone, Sanofi-Avensis, Motorola, Thompson Scientific, Alcatel-Lucent, Zomax, Pfizer, Procter & Gamble, Coca-Cola, Intel and other multinationals, the reality of our declined competitiveness can no longer be avoided. Yet, the real problem in Ireland is not the sky-high cost of living and doing business. The real problem is that between 2001 and today, our performance has markedly deteriorated in terms of the size of the economy claimed by the state, legal structure of the property rights, access to credit and regulatory burden.

This deterioration took place in both the absolute terms of our own past experiences and relative to our main competitors.

This is the real cause of high prices and costs. Wednesday, following the announcement by Sanofi-Aventis that it is considering closing its plant in Waterford, our minister for enterprise, trade and employment, Miche�l Martin, issued an official statement saying: "The job-creation agencies of the state will be providing assistance to workers in order to secure alternative employment in the months head (sic). The statement from the company makes clear the proposal to cease operations was taken purely on strategic grounds: it in no way relates to the performance of the workers in Waterford."

The minister is right. There is nothing wrong with our workers.

As the data cited above shows, they are the victims of the bad policy decisions consistently adopted by our anti-market political leaders.

Dr Constantin Gurdgiev is an economist and editor of 'Business & Finance' magazine (www. buisnessandfinance. ie) constantin@tribune. ie




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