Ireland’s political economy is on the verge of a double dip recession. Statistically we are in the midst of an economic depression. Since 2007 the Irish economy (measured by Gross National Product – GNP) has contracted by 17 percent. That is, it has shrunk by 17 percent. Inevitably, this has had a significant impact upon jobs and tax revenue. Thus, it impacts upon the budget deficit; diminishing the money available for government to spend. What has been the response by government? Firstly, it is argued that the economy is stabilising and more austerity is required. But, more austerity means more cuts in public expenditure and hence reduced economic growth. This increases the contraction. We are stuck in a vicious cycle. The public policy response to the economic crisis, by all indicators, and regardless of one’s political preference, is simply not working. But, a deeper question remains: what growth model will a) get us out of the crisis and b) put us on sustainable path to full employment? This type of question requires an analysis that looks at the historical evolution of Ireland’s system of capitalism over time.
Firstly, dealing with the present crisis; what does a contraction in economic activity actually mean? Most economists will over complicate a relatively simple reality. Capitalism is a system that attempts to produce, exchange and distribute goods and services within a market economy. Markets are an ensemble of institutions that vary across time and space. Combined, it is an economic system that by its very design requires expansion. It requires a compound rate of growth of around 3 percent per annum. If it stops growing and stops expanding it is in crisis. When it begins to contract it is in an even bigger crisis. Ireland is the only capitalist system (and firmly within the more liberal-market oriented model) that has yet to recover growth within the European Union. Since 2007, it has cumulatively shrunk by 17 percent. It is like a plant deprived of sun and water. The question therefore is who can provide the sun and who can provide the water? That is, what strategies will stop the rot? But, the long-term question is; what type of soil is require to institutionalise sustainable growth? This is a deeper question that requires moving beyond crisis analysis. And, for some, beyond the market as a means of economic-industrial development.
To date, the policy response by private-market actors (firms, financiers etc) has been to introduce wage freezes and job cuts. This reduces the amount of money available for expenditure in an economic system premised on consumption. Small employers have been deprived of credit and (given Ireland’s flexible and institutionally weak labour market regime) have opted to shed jobs rather than introduce a reduction in working time to save costs. But, broadly speaking, the economy is like a desert deprived of sun. It has dried up. The availability of accessible money has decreased; workers cannot be paid for their labour and unemployment has soared. But, the extreme level of joblessness we are experiencing is institutionally specific to Ireland. Many EMU countries (with extensive levels of collective bargaining coverage and trade union density) have opted to sustain the level of employment and reduce costs through the reduction of working time. The type of policy response to the jobs crisis will be mediated by country and sector specific industrial relations regimes.
The lack of accessible money in circulation is directly related to the global financial system. Those with capital have stopped lending and started hoarding. Thus, there is an investment strike taking place amongst capitalists. If there is an investment strike by private capital some would argue that the state should fill the gap. But, politically and ideologically, there has been a huge shift over the past 20 years away from the state actively intervening to create growth or jobs in the economy. However, empirically, the state, semi state and public sectors are deeply embedded in-the-economy as a means of socio-economic development.
Across all varieties of capitalism the state plays a crucial role in both providing the conditions for capital accumulation but also expenditure for productive investment. The state does not just ‘intervene’ in markets, it socially constructs market activity and is a key player in a whole variety of market transactions. Just think of the level of ‘productive investment’ in Ireland over the past 15 years. Most private investment (by private owners of capital) was poured into real estate activity. The state (custodians of collective capital) focused its investment on infrastructure; roads, water sewage, electricity etc. Both the state and private actors facilitated the emergence of construction as the key driver of employment. In the absence of construction, arguably, full employment would not have been secured. Full employment and cheap credit in turn enabled the creation of more money for disposable expenditure and the rise of the domestic service-retail economy (and hence more jobs).
This investment graph illustrates the centrality of real estate activity in Ireland’s growth model. It highlights where private owners of capital invest their resources. But, more importantly, it highlights the centrality of real estate (and deductively its knock on effects) as a means of economic growth from the early 1990’s. The Celtic Tiger period (a short hand for Ireland’s export economy) peaked around 1999. But, even in 1998, unemployment was almost 8 percent. Might it be the case that construction and real estate activity emerged as a structural means to generate full employment? And, it is this latter metric that is most important when measuring a successful economy. The European Union, and Ireland in particular, has no real strategy for generating employment other than a vague hope that private market activity will generate enough growth for employers to start creating jobs. But, what jobs and given the current strategy of austerity – what growth?
There are deep internal contradictions in Ireland’s economy (and its policy response to the crisis). There is a significant sectoral divergence between a) the foreign owned export sector b) domestic owned export sector c) domestic service economy d) domestic construction and e) the state sector. On the one hand we have a relatively successful MNC sector that is immune from the recession. But this has never been large enough to cover the entirety of Ireland’s economy. Hence, traditionally, Ireland expanded its public and community sector to facilitate employment or, as in the last 15 years, became dependent upon construction. If construction did not emerge as a means of job creation would we have maintained high levels of unemployment? State or ‘public sector jobs’ were historically viewed positively as a means to create jobs. This era is long past and unlikely to emerge as a strategic choice by any political party entering government. The fiscal rules of the EMU alone make it impossible for demand managment as a strategy for public investment. But, it is a choice (with deeper questions about fiscal democracy).
Since 1990, with the opening up of financial markets, the employment and investment problem appeared to be solved. Finance and credit availability enabled the domestic economy to shift toward service based employment. High levels of liquidity lubricated the system but masked structural problems of institutional capacity and industrial development. More money in the system meant more fluid labour, product and financial markets. Government policy was to ‘free’ up these markets as much as possible, make them flexible to respond to external market forces. This enabled greater integration into the world market which was significantly ‘liberalised’ through active public policies. Money was channelled into sectors of the economy that were dependent upon consumer expenditure. This, coupled with a massive housing boom (fuelled by moronic pro-cyclical fiscal policies), enabled full employment for a short period of time. When the bubble burst, credit dried up and people stopped spending it became obvious that deep structural issues in Ireland’s political economy had not been overcome. It had not built an economy based on production but an economy based on consumption. The use of consumption taxes as a means of government revenue meant that the public finances collapsed along with the investment strike by private capitalists.
What is the ultimate moral of the story? There are deep structural contradictions in Irelands model of growth. The policy emphasis on the smart economy, R&D etc is premised on the assumption that the MNC sector will solve our problems. These sectors (pharmaceuticals, ICT, electronic engineering and healthcare etc) make a great contribution to the economy but they will not and cannot replace the collapse in Ireland’s domestic economy. 480,000 people will not automatically be employed in these sectors for obvious reasons. The only way this will occur is if the state starts to invest huge sums of money into enterprise and link public policies to sectoral development. Or, if private investors decide to turn Ireland into a Finland (i.e. massive investment in building start-up companies that ultimately lead to the Nokias of the world). So, if the state will not create direct employment and very few want to go back to a credit fuelled binge (hence lower levels of service based employment) does this mean that we have to continue our reliance upon construction as a the core aspect of domestic growth (i.e. capital accumulation)?
There are no easy answers to any of these questions but one thing is for sure; a narrow-minded and short-term focus on cutting public spending and introducing more austerity to tackle the fiscal deficit will make zero impact upon the real problem at hand; building a new Irish economy that can generate long-term sustainable employment.