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Dr Esmond Birnie: Why harsh diagnosis is needed to cure the Northern Ireland economy

Economy Watch


The failure of political institutions have had an impact on the Northern Ireland economy

The failure of political institutions have had an impact on the Northern Ireland economy

The failure of political institutions have had an impact on the Northern Ireland economy

At the risk of spoiling the Christmas office lunches, let's ask: "What's wrong with the Northern Ireland economy?"

Was everything moving along pretty nicely in the local economy until we were struck by, first, Brexit and then the collapse of Stormont?

While not underestimating the importance of those two issues, that narrative underestimates the extent to which the NI economy had underlying problems long before 2016 or 2017: a competitiveness challenge has existed for decades (possibly for at least a century).

Of critical importance is that we don't invest enough, as was recently pointed out by two Dublin-based economics Professors John FitzGerald and Edgar Morgenroth.

Rates of investment per person in NI are about half those in Great Britain and one-third those in the Republic.

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When an economy invests so little its long run growth potential is seriously reduced.

A low investment economy means a low productivity economy and that translates into relative decline in living standards.

Comparing 1998 with 2017 gross value added per person in NI declined from 80% of the UK average to 78%.

During the same period NI was overtaken by "developing" countries such as South Korea and the former communist Czech Republic, Slovenia and Estonia.

In a few years we will probably fall behind Poland, Malaysia and Hungary.

But what's causing this situation? An obvious culprit is our predicament of "no government" but that cannot be the full or main explanation - our economic problems long pre-date January 2017. NI's economic performance lagged behind the UK average throughout much of the last century (1920s-2019) - this has happened during periods of devolution and during periods of direct rule. Most recently, when we had a decade of devolution (2007-January 2017) NI's growth remained lower than the UK average - 2010-17 1.7% compared to 2%, the first few years of devolution are excluded from that comparison because of the banking crisis and recession.

So, what explains chronic under-performance? I think it is partly our mindsets, sometimes allied to the pattern of incentives.

1: Bias to short-termism

Hence consumption is favoured over investment. For example, through the limits on domestic rates relative to Great Britain, absence of domestic water charges, the loading of the fixed costs of electricity generation towards the industrial (rather than the domestic) sector, movements of money within the Northern Ireland government budget away from the capital budget into everyday spending.

2: Reliance on UK Government as the backstop funder

There is a widespread belief throughout private, voluntary and government sectors, that no matter how bad policies or performances, HM Treasury will always rescue us. Economists term this soft budget constraints leading to moral hazard: if irresponsibility is rewarded people will be incentivised to be even more irresponsible. The renewable heat incentive crisis was only one example of how this mindset about "free money" has damaged economic performance.

Whenever we have a problem of funding infrastructure or public sector pay, or if there is a threat to a major business, the cry goes up, "We need more money from London".

3: Belief in the all-powerful policy lever that can transform everything: the "silver bullet"

We might wish such levers did exist but, alas, most of the time they don't. Over the last 30 years there have been various economic policy "game changers" - a single island economy with the Republic in the early 1990s, the peace dividend after 1994, reduced corporation tax after 2010 and now the proposal of a bridge to Scotland.

The point is not about whether these things might be desirable, the problem was one of exaggerated expectations.

Economic prosperity is a complex matter, it usually depends on getting a mass of small things right.

But isn't my approach here too negative?

No, economic analysis shouldn't be therapy which tries to generate an unwarranted feelgood factor but instead a harsh diagnosis is sometimes needed to get to a cure.

Of course, we could recount the various good things about the NI economy - there are some - but that might be missing the point. We have some world-class businesses, schools and civil servants but we also have "long tails of under-performance".

My emphasis on the negative comes from an appreciation that there has been chronic under-performance: "better" is both desirable and doable.

A major reason for why the Northern Ireland economy has under-performed over the last decade, and indeed the last century, is the way our political and administrative institutions have worked (or not worked).

The power of vested interests have sometimes captured the policy makers. To say that may not be very popular and may involve challenging some conventional wisdoms.

As the great English economist of the 1930s John Maynard Keynes said in 1919, sometimes the economist who wishes to wisely advise on public policy and serve the common good should provide, "ruthless truth telling". And sorry for the indigestion.

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