Friday 23 April 2010

The IRA destroyed the north's economy

Yes, they did – but not by bombs and bullets, those were just pin-pricks in comparison to the real destruction.

Yesterday's Northern Ireland 'Leaders Debate' on UTV confirmed that all the main parties agree that the economy is in a poor state, and all four agree that it is too highly dependent on the public sector – which provides around 50% of all jobs, according to Ritchie.

Why is this the case? Surely Northern Ireland had a tradition of ship-building, linen, engineering, agriculture, and so on – all 'serious' businesses that should have provided skills and infrastructure for growth. And yet, when these old sunset industries died out, nothing replaced them. Why not?

The unionist argument is that the IRA destroyed the economy by its bombs – but the IRA almost never touched the industrial sector. Harland and Wolff, Mackies, and all the rest – the linen mills, the animal feed mills, etc – were killed by simple technical progress and globalisation. The IRA never bombed an industry out of existence. When a town centre was destroyed by a bomb it was shops that were destroyed, but they bounced back. There is no shortage whatsoever of retail space in the north now. What is missing is creative industry – software, innovative technology, pharmaceuticals, leading R+D, and so on. Of course much of this can be 'bought' off-the-shelf if you have a low corporate tax like the south, but there is wealth creation in the south of England even with the same high rate of corporate tax as in Northern Ireland.

So why does the north lack a real private sector? Is it geographic isolation? No, because it shares the island with the successful southern economy (still a major exporter, despite budgetary problems), and is geographically privileged compared with Israel, one of the world's high-tech hotspots despite its isolation.

The real reason why the north lacks a private sector – and this was also alluded to in yesterday's Leaders Debate – is that the public sector crowds it out. The public sector – all those thousands of nice well-paid 9-to-5 jobs, often with inflated titles (and salaries), are simply too tempting. Why take risks, why spend years working 80-hour weeks with only a chance of making it, when for half the effort you can get a guaranteed regular income courtesy of the tax-payer?

So did the IRA's bombs really kill the private sector? The answer is a categorical no – Germany, completely flattened by the Second World War, with ruined cities, a lost generation of men, and its infrastructure destroyed, rebounded in less than 15 years to become a Wirtschaftswunder.

However, the IRA's campaign drew a whole generation of young Protestants into the public sector – often via the RUC and UDR, and led the British, in an attempt to smother discontent, to throw money at the problem, spawning what is probably Western Europe's most public-sector dependent economy. Jobs in the civil service, in quangos, and in all sorts of community organisations multiplied. For those who couldn't (or wouldn't) work, there was social welfare and public housing. And thus a whole generation found that it was possible to live relatively well without actually needing to create anything.

In its two-pronged approach to the IRA's war – military and welfare – the British government successfully killed entrepreneurship in Northern Ireland. There was no need to try, because London would always subsidise the place. Even 'loyal' unionists feel that the block grant is their 'right' – regardless of whether there are cuts in Britain. Disloyal nationalists have nothing concrete whatsoever to say about entrepreneurship beyond a hope that somehow they could persuade the British to grant the north a lower corporate tax rate.

The relationship between Northern Ireland and London is increasingly becoming like that between a junkie and his pusher – what matters most is the next hit, either through the block grant, or through the £800 million for devolving policing and justice, or through compensation for the PMS savers. Almost all of the parties, thought paying lip service to the need to 'grow the economy', are still more fixated on how much they can get out of London to pay for more and more public sector goodies – building a multi-sports stadium, building more social housing, investing in hospital construction, building new schools, and on, and on, and on.

But politicians – and certainly not those without fiscal powers – are not those who drive entrepreneurship. Entrepreneurship comes from individual greed, and the desire to become rich. And in economic terms greed is good – if it leads to people setting up businesses and working hard to make them successful. These businesses employ people and buy things, leading to a virtuous circle of wealth creation.

But in the north it remains so much easier to enrich yourself – in real terms – by getting a nice comfortable public sector job. When private enterprise either pays less than the public sector, or when public sector jobs are easier to get, or simply more comfortable, many people will be tempted into the public sector.

So the IRA did destroy the north's economy, but not directly. Its campaign encouraged the British government to increase the medication, in the hope of sedating the patient. And it worked, except that now Northern Ireland is a junkie-economy addicted to public money.

The only solution for Northern Ireland, as for all junkies, is cold turkey. In good times the cure could be put off – indeed it was put off for half a generation – but the good times are over. Regardless of who wins on May 6 the flow of money from London to Northern Ireland is going to slow down. Peter Robinson last night admitted that around £200 million a year was going to be cut – but it could be more. But until there is a systematic reduction in the public sector in Northern Ireland, and not just a short-term response to the budget deficit, Northern Ireland will remain addicted. Until the rewards of private sector enterprise, hard work and self-reliance become visibly better than the 'rewards' of public dependency, the north's economy will remain poor.

Let the cuts begin. It's for our own good.


Gerard O'Neill said...

Good diagnosis. Your prescription makes sense too. The question, of course, is how to get to 'there' from 'here'. Public sector cuts will help at a macro level, but it's micro level changes (in the behaviour of individuals and firms) that matter most.

Here I think tax policy can play a key part. The problem, obviously, is that the discretionary influence of the North's administration over taxation (the ones that matter) is very small.

Ideally the North's political (and business) leadership would demand the opportunity for Northern Ireland to become a 'free trade zone' with the power to set its own tax rates and to provide more incentives for entrepreneurship and business expansion.

Not an easy sell when people are frightened about their own economic future. But then that's what leadership means: helping people see beyond the fear to a future that is fill with opportunity and a lot more certainty than the one they face now.

New times, New approach said...

I think you are perhaps laying too much blame at the door of the public sector and too little at the inherent non-viability of N. Ireland as an industrial powerhouse.

What budding N.I. entrepreneur would notice all the advertisements for civil service clerks and respond with, 'that'll do me; I'll be very happy with £20k yearly for the rest of my life; no need to look further'. Such a life would be a form of torture for the well-educated, dynamic, creative person, willing to work hard in return for commensurate reward.
You mention the old industries for which N.I. was once famous, but these were at their peak when N.I. was an integral part of an Irish economy, not a tiny offshore adjunct to a British one that saw it mostly as a drain on 'mainland' resources and charged extra for delivery of anything to it or collection from it.

You mention that N.I. 'shares the island with the successful southern economy (still a major exporter, despite budgetary problems)'. But to what extent has that been true since partition. What protestant industry has looked towards Dublin with affection and eagerly vowed to expand southwards where they would inevitably have to employ the variety of christian that they felt it so important to discriminate against at home. Britain was the export market they set their sights on and they accepted their poor competitiveness due to shipping charges. Southern Ireland and it's rapidly growing economy was a disliked foreign land.
How much of a ripple effect did the North enjoy when the South became Europe's tiger economy? Very little apart from pushing house prices to ridiculous levels. Their forward thinking on corporate tax was not the only reason major world industries queued up to expand to Éire, but not N.I. The fact that their management would have been terrified for their families to live there also had something to do with it. Anyway, who would want to leave a modern European country for a little land where a vengeful God wreaks his revenge on homosexuals and infidels who open public parks on Sundays?

In summary, N.I. was condemned from the start to be an economic non-runner. It's main market saw it as a perpetual parasite and felt no obligation to do business unless all additional shipping and logistical costs were fully covered. It's natural marketplace on the rest of the island was looked on with constant suspicion and a wish for disassociation. It's no wonder that so many of it's intelligentsia emigrated. They wouldn't have been clerical officers anyway.

Horseman said...

New times, New approach,

I agree - NI is crippled by the border, which artifically raises costs and divides markets. And that is even before you factor in unionist pig-headedness (though most 'unionist' businesspeople hate the border from an economic pov).

I doubt if many entrepreneurs set their sights on a low-level civil service job - but there are plenty of quango jobs that give a better salary, perks, travel, etc. And the problem starts much earlier - young people's choices of areas of study can be skewed by the labour market they see ahead of them. To be honest, but for the existence of a public sector would anyone really study sociology?

My point about sharing the island was that it shows that our island location is not, in itself, what holds us back. The south did (and does) very well in some areas with exactly the same constraints as NI.

THe best hope for NI (and the only hope apart from perpetual dependence on London) lies in removing the ridiculous border, reuniting the country, and pushing for business-friendly and public sector unfriendly policies. We've got the kill the idea that working for a quango is actually economically valuable. It usually isn't. We've got to get back to actually producing things (goods and services) that people want. The fact that we make it easy for large numbers of able-bodied people to chose to not work is a disgrace. I don't want to starve them (!) but we have to find a way of persuading them to actively seek work, or to become self-employed. Money usually works best - so if they can see a clear link between productive work and affluence, then more would go down that route.

The current budgetary problems in Ireland and the UK demonstrate clearly that the old ways must end. But too many in NI (including, regrettably, several of the parties) seem to think they can side-step the cut-backs. We cannot, and we should not try to. We should wake up and realise that 'state-subsidised' everything is unsustainable.

I want NI to be productive and efficient by the time of reunification. I do not want the south to be shackled to a millstone, but more importantly if NI is productive then it can provide a better quality of life for its people - and if both north and south are successful then we'll be on target to be one of the worlds great small countries. We won't get there if the north remains a backward dump.

Anonymous said...

The real problem lies in the mentality of the people.

hoboroad said...

New times, New approach said...

Horseman - see
I don't suppose it will make you vote U CUNF, but it seems David Cameron agrees with your analysis of the situation.
I bet Reg won't be too pleased. He was having enough trouble pretending the relationship was going anywhere!

Ronzer said...

Horseman, I think your analysis is pretty poor to be honest.

For instance you say "we have got to the kill the idea that working for a quango is actually economically valuable".

Well, regarding most quangos, nobody is claiming they are. For example, the Housing Authority in NI- I think most people know that the role of that is to House people, not to grow the economy. Yet it is still providing a obvious social need - perhaps a bit more lavishly than you think NI can afford, but it is hard to how housing could be provided to the poor without it.

Obviously there are some quangos that could easily be abolished without much social or economic impact, (such as road safety campaigns, or development boards, etc.) but really, the amount of people employed in such quangos compared to the amount of people employed by the state to teach, nurse, and police the populace is tiny.

Also, your idea of treating NI as a separate region from the UK for tax purposes is a non-runner. At the moment NI is hugely subsidised by the central UK government. If they went financially independent that would stop. I cannot imagine why any the electorate could be persuaded to vote for this on the basis of arguments you seem to be implying ("well, after ten or fifteen years of paying 500 a year for water charges and paying to see your GP and for health insurance and enduring 20% unemployment, the economy should start to grow 1% faster a year than it would otherwise". Good luck selling that one.)

Obviously if NI was in a Greek situation the population could be convinced ("we will go bankrupt if we don't do this") but in a situation where unless the UK government actually expells NI unilaterally from the Union, they will always be subsidised, I cannot see it happening.

I can see why a budget-slashing UK government might cut down the spending in NI (and Scotland and Wales) to be, on a per capita basis, level with England, but I cannot see them going below that, which is the equivalent of a subsidy to NI.

I mean, can anybody sanely claim that the Greek government would be doing what it is currently doing if it had no other choice? As long as the Union exists, Stormont never will be that desperate.

And it underscores a central problem with your thesis. The Republic in the 1980's was able to grow from a low base because it was very cheap (as a result of a weak punt and a long recession) and it was able to offer very low corporation taxes. This was as a result of a desperate economic situation. But NI can avoid this level of desperation as long as it is in a tax union with south-east England. To sever this unilaterally would be like turkeys voting for Christmas.

You deride the likes of Margaret Ritchie as subsidy junkies. But the current position of NI politicians is just a logical reaction to the position of NI within the Union. The poorer parts of a developed country are ALWAYS subsidised by the rich.

Can you really imagine a situation where the likes of Mary Coughlin starting agitating for less money to be spent by Dublin on Donegal on the basis that if Donegal was poorer, the resulting desperation would eventually make the economy better in the long run somehow?

I cannot.

Ronzer said...

Also, Horseman, I am not convinced about this "crowding out" argument.
You seem to be suggesting that the problem in NI is that there is a shortage of qualified people who are interested in working in business. But i think it is the other way round. There are plenty or young people want to work in business, just not enough jobs for them. I know a Ulster guy who studied sociology (along with economics) in university and he ended up a banker. He works in London rather than Belfast. I do not think, despite his education, that he EVER wanted to be a social worker. But when he left university the problem was that there were too few opportunities in the province for a well paid job for an an ambitious lad like him.

NI has some of the best educated young people in Britain (above average A level scores, I believe). But they have tended to go to mainland Britain to seek work rather than scratching around on the dole, waiting for their entrepreneurial idea to strike. Short of introducing border controls between Belfast and London, I do not know what can be done about this.

Mack said...

Ronser -

Also, Horseman, I am not convinced about this "crowding out" argument.

It's public investment that crowds out private, by keeping wages, rents (commercial & private), prices etc much higher than they otherwise would be, thus making investment much less attractive to private companies.

Mack said...


Obviously if NI was in a Greek situation the population could be convinced ("we will go bankrupt if we don't do this") but in a situation where unless the UK government actually expells NI unilaterally from the Union, they will always be subsidised, I cannot see it happening.

NI is Greece on steroids, the principle difference being NI has a well established sugar-daddy, Greece is furtively making eyes at Germany.

The poorer parts of a developed country are ALWAYS subsidised by the rich.

True, but almost NEVER in this manner.

Can you really imagine a situation where the likes of Mary Coughlin starting agitating for less money to be spent by Dublin on Donegal on the basis that if Donegal was poorer, the resulting desperation would eventually make the economy better in the long run somehow?

Think of it in different terms. Mary Coughlan or any other Donegal TD could agitate for investment in Donegal. They could look for incentives for private business or they could look public investment. Within a given set of resource constraints they could ask for resources to be reallocated from one sphere to the other. Still don't believe a rural Irish TD might prefer private investment over public?

In Northern Ireland if expensive public functions are scaled down the money saved could (initially) be diverted to provide startup capital, and / or fund grants for businesses setting up or expanding in Northern Ireland.

There's a virtous cycle here. If you are dependent on public investment then the government is the market - it's the main buyer for local business, and it has a fixed budget. A private business on the other hand with a product or service successfully marketed locally might decide to expand - become an exporter - in the process they may purchase other services or goods locally - the budgets are much more elastic than fixed. In addition private companies tend to produce stuff that people actually want (otherwise they go bust) - rather than stuff that a central planner / mandarin thinks they might want (and specifically what people he is tasked with servicing want - making the development of exportable products and services in client companies that much less likely). In the long run (and we have much evidence from recent daliances with communism across the globe) much more wealth is produced under market conditions than via central planning.

hoboroad said...