Ireland as a model for other European States?

Following on from Re-visiting his previous article, Tom Friedman in the NYTimes, has another go at the same point.. Follow the Leapin’ Leprechaun. He argues that Ireland [and the UK] have an social-economic model that German and France should adopt – “One of the first reforms Ireland instituted was to make it easier to fire people, without having to pay years of severance. Sounds brutal, I know. But the easier it is to fire people, the more willing companies are to hire people.”

Interestingly, the CEO he quotes lists his reasons for investing in Ireland in a somewhat different order than Friedman did, and misses the free education angle –

Harry Kraemer Jr., the former C.E.O. of Baxter International, a medical equipment maker that has made several investments in Ireland, explained that “the energy level, the work ethic, the tax optimization and the flexibility of the labor supply” all made Ireland infinitely more attractive to invest in than France or Germany, where it was enormously costly to let go even one worker.

But I can’t help questioning Friedman’s seeming reliance on quotes from current Irish Government Ministers –

The goal, added the minister for enterprise and trade, Micheal Martin, is to generate more homegrown Irish companies and not just work for others. His ministry recently set up an Enterprise Ireland fund to identify “high-potential Irish start-up companies and give them mentoring and support,” and to also nurture mid-size Irish companies into multinationals.

And by the way, because of all the tax revenue and employment the global companies are generating in Ireland, Dublin has been able to increase spending on health care, schools and infrastructure. “You can only do this if you have the income to do it,” Deputy Prime Minister Mary Harney said. “You can’t have social inclusion without economic success. … This is how you create the real social Europe.”

Perhaps he should include a comparison with the refusal to countenance a review of the Common Agricultural Policy at some point?

  • Scott MacMillan

    “it’s either the leprechaun way or the Louvre.”

    Argh. Leave it to Tom Friedman to make a perfectly good point sound like a boondoggle for idiots.

  • Occasional Commentator

    Tom said:

    His ministry recently set up an Enterprise Ireland fund to identify “high-potential Irish start-up companies and give them mentoring and support,” and to also nurture mid-size Irish companies into multinationals.

    This won’t help Ireland in the long term. Why should state funding follow some civil servant’s or politician’s idea of what makes a good investment? Even if we ignore the obvious possibilities for corruption, the idea that the state knows best should have been laid to rest a long time ago. The funding ends up going to whoever gives the best presentation, not whoever has the best business.

    If the government wants to invest in business, it should cut taxes and/or red tape. Let the politician’s argue about the levels of taxation and how much to spend on health or education or whatever, but there should be a level playing field for each industry and company.

  • Eagle

    I agree with OC. There are some things that governments can do competently, although we have to keep them on their toes. However, I totally reject the notion that government can be a good judge of start-up investment opportunities. The very qualities that make entrepreneurs successful – single-mindedness & risk-taking – are anathema to civil servants.

  • vespasian

    It is easy for Govcernments to back winners, they can match REAL spend on marketing and product development and give bank guarantees to reduce a bank’s risk (not remove it). They are therefore able to support market forces and private industry without making judgments.

    Over regulated employment practices are the death knell of a free economy and should be removed. Employment is a not a right it is a priviledge.

  • Duncan Shipley Dalton

    Its easy to be blasé about firing people but we are talking about peoples families and livelihoods. The evidence is not entirely one way on this and whilst it has been a staple of the likes of Friedman and the Economist to constantly suggest that all you need is easy labour market rules to free up growth the evidence doesn’t entirely support that. What is actually important is the productivity of labour and its how you best harness that productivity that really matters not whether you can keep Damocles sword hanging over peoples heads as a motivator. Essentially the only reason to hire and fire is to expand production in response to changing market demand, unless the suggestion is that it’s the mere threat of being fired that acts to stimulate fear and create better productivity. I would suggest that its got a lot more to do with good innovative and flexible management than easy hiring and firing. As an example Toyotas is the most profitable and successful car company in the world it has a policy of rarely if ever firing its staff. It also doesn’t pull in new labour when it gets an upturn it just ramps up production with what it has and only expands when it knows it can sustain the jobs long term. It works for them.

  • Henry94

    Duncan

    I think you are misssing the point. The reason for a flexible labour market is not to have people in fear of being fired. It is to have them in a position that they can get another job if they are.

    In reality flexible labour markets create jobs and leave workers is a better negotiating position. People in the south don’t fear the sack. In fact the economy will need 50,0000 immigrants a year to fill the jobs that they expect to create!

    Contast that to the 80’s when 30,000 people a year were leaving.

  • Occasional Commentator

    vespasian said:

    It is easy for Govcernments to back winners, they can match REAL spend on marketing and product development and give bank guarantees to reduce a bank’s risk (not remove it).

    I don’t see why marketing or product development should be prioritized in such a way. Let the business decide what the spending priorities are. What if the business wanted to simply sell the product cheaply but this strategy effectively forces them to spend it on marketing because it artificially cuts and distorts the cost of marketing. All these complex schemes are just a scam by the civil servants and the quango industry to keep themselves in business devising and implementing these schemes. If you’re going to spend money on business, just cut taxes.

    And I don’t see why we would want to decrease the bank’s risks. If anything, the bank are probably the best (I should say least worst) people to judge whether a product has a good chance of succeeding. A strong economy is based on killing bad projects as much as it is on funding good ones, and the banks can help with that as long as they have an incentive to loan to the better products and not to the failures.

    On the other topic which has developed this thread, about how easy it should be to fire somebody, I tend to think it should be easy, but I’m not very sure. I’m convinced that it leads to the strongest economy, and as far as I know there are more jobs available in jobcentres than there are people on the dole. And there are a lots of spongers, wasters and con artists on Jobseekers and Disability Allowances. If we could sort them out with a job or a prison sentence, then we might be able to investigate and tackle the problems of the genuine unemployed. Maybe it should be tougher to sack people, but it’s hard to know for sure given how screwed up the economy is at the moment.

    Duncan and Henry both make good, and contrasting, points. But Henry, not every employee is in a position where the flexible labour market works in their advantage. There might be many people, presumably the less well off, where the employer has the upper hand. Maybe the only reason why I support flexible labour markets is because I think it suits me as an employee.

  • Duncan Shipley Dalton

    Henry, I don’t miss the point I simply don’t accept it at face value. I have yet to hear a good empirically backed argument that persuades me of the benefits of a low protection labour market. I particularly fail to see how the flexible labour market creates new jobs.

    My assumption is that an increase in demand creates a supply response to match it as new companies enter the market or existing companies expand their production to meet that demand. These companies hire labour and a larger pool of labour supply makes that an easier thing to accomplish. I don’t see how the labour market is the creator of the new jobs though? I may be missing it as I took law not econ as an undergrad and have mostly self taught what econ I know. Minus the maths, god I hate econ maths and I love that man Galbraith, how much math is their in Wealth of Nations? Sorry about the tangent but this bloody obsession with creating a science of econ by sticking in maths is a real bug bear of mine. Anyway can anyone enlighten me on the mechanics of the labour market creates jobs assertion?

  • DCB

    Duncan

    Being a history graduate I’m another largely self-taught economist.

    Your right, the labour market itself isn’t an engine of job growth. But it is a massive facilitator of employment expansion.

    Job protection increases the cost of employment and therefore acts as a disincentive to invest and creates market inefficiencies.

    You assume that an increase in demand implies an increase in supply and a growth in jobs. But that only happens in an effecient economy.

    Your a pharm co and you want to invest in Europe. There’s a very good chance that your r&d will come to nothing. If you fail in the UK you can sack your staff and walk away, if you collapse in Germany you will have to fork out millions.

    It’s a simple trade off, do you want 10% plus unemployed (and in France the figure for under 25s is much worse) and great protection or would you rather have low protection and low unemployment. Seeing the rise of the far right and anti-immigrant hostility in France I know which society I would rather live in. Always fun to point out to the ever so PC French that nearly 1 in 5 of their fellow countrymen voted for Le Pen.

    Granted the Scandies have uniquely been able to marry a high degree of social protection with a decent economy. Though their rates of corporate tax are low and they are reforming their social policies in the face of immigration.

    Henry’s right people in the UK and Ireland don’t fear the sack. I’ve a friend who has just taken a job with a 50% chance of being made redundant in the first 6 months. But in France they are terrified of it.

  • Biffo

    “Henry’s right people in the UK and Ireland don’t fear the sack. I’ve a friend who has just taken a job with a 50% chance of being made redundant in the first 6 months. But in France they are terrified of it.”

    But surely people in the UK and Ireland should fear a/ a rise in interest rates and b/ the sack.

    From what I can gather both economies are vulnerable to a bust equally as dramatic as the boom. Hopefully not, but is it possible?

    Are the French exposed to the same level of risk?

  • Henry94

    Duncan

    My assumption is that an increase in demand creates a supply response to match it as new companies enter the market or existing companies expand their production to meet that demand.

    An increase in demand will lead to an increase in supply but the supply can come from imports. For example as the population of France ages there will be an increase in demand for walking sticks.

    So should we build a walking stick factory in France? No we’ll build it in China and export the walking sticks to France.

    Thus demand creates jobs but not necessarily where the demand is.

    And of course high unemployment reduces demand whereas a job creating economy becomes a virtuous circle creating more and more jobs to supply the demand created by extra workers.

    Nor do you have to do away with all protection to do it. Ireland has a high minimum wage, unfair dismisal legislation etc. It’s certainly not a sweat shop economy. It’s just relatively easy to set up and, if necessary, close down a business.

  • Henry94

    Duncan

    My assumption is that an increase in demand creates a supply response to match it as new companies enter the market or existing companies expand their production to meet that demand.

    An increase in demand will lead to an increase in supply but the supply can come from imports. For example as the population of France ages there will be an increase in demand for walking sticks.

    So should we build a walking stick factory in France? No we’ll build it in China and export the walking sticks to France.

    Thus demand creates jobs but not necessarily where the demand is.

    And of course high unemployment reduces demand whereas a job creating economy becomes a virtuous circle creating more and more jobs to supply the demand created by extra workers.

    Nor do you have to do away with all protection to do it. Ireland has a high minimum wage, unfair dismisal legislation etc. It’s certainly not a sweat shop economy. It’s just relatively easy to set up and, if necessary, close down a business.

  • George

    Personal experience for what it’s worth.

    Having lived in Germany many years and working for a Germany company now which upped sticks to Ireland to save themselves from extinction I agree with Henry.

    The company saved millions simply by moving to Ireland (health, pensions etc.) and got rid of long-term employees who spurned the option of the emerald isle. Otherwise they could never have got rid of them.

    Everyone I know in Germany is absolutely terrified to move job because then they’ll be first out so instead they stay where they are, even if this means total stagnation.

    If you stay in a job too long, you become institutionalised, incapable of change, afraid to take chances or challenge yourself. The economy as a whole also stagnates as a result.

    In the two-and-half years my company has been in Ireland, there has been a 50% turnover in staff as people move onwards, upwards or simply to tour the world, taking their experience with them. The Germans are running to stand still trying to figure out why this is happening and why they can’t keep their staff.

    There is a hunger to succeed and a confidence you can achieve it in Ireland that isn’t present in today’s Germany and I don’t know about boom and bust but the economy has been growing around 3 times as quick as the rest of the eurozone for over a decade now and it is an awful long time since the Irish economy was in recession.

    The Economist predicted the big bust 7 years ago as the economy had expanded by 40% between 1993 and 1997. Instead the Celtic Tiger just moved into second gear.

    It now looks like it will find third. If there is going to be a bust, it will have to be of gargantuan proportions to take us back to even 1997 levels.

    Having said all that, I don’t know if the ruthlessness of the current Irish economy would be suitable for a huge economy like Germany where you can’t implement the same radical changes that took place here so easily but they definitely could learn a couple of things as we could from them. If you are sick hope it’s in Germany, for example.

    But on a positive note, Eurozone manufacturing is doing better than British at the moment and the German jobless figure has been falling for three months in a row.

    Germany does so many things right, as evidenced by the fact it is the world’s largest exporter, bigger than the US or China, and it even has a trade surplus with China.

    They’ll be back to paraphrase Arnie and when they are Ireland will probably be small and nimble enough to adapt.

    A perfect example of Ireland’s advantage to adapt because it is so small is the SSIA’s which took 15 billion out of the economy in 2001/2002 to stop it exploding as ECB interest rates stayed low and McCreevy introduced tax cuts while the Irish economy was roaring at 11% growth.

    I would not like Europe’s paymaster general to be risking the European economy with stunts like that but it worked fine in Ireland and will add up to a percentage point on the growth rate in 2006 and 2007 as that cash comes back online.

  • George

    Personal experience for what it’s worth.

    Having lived in Germany many years and working for a Germany company now which upped sticks to Ireland to save themselves from extinction I agree with Henry.

    The company saved millions simply by moving to Ireland (health, pensions etc.) and got rid of long-term employees who spurned the option of the emerald isle. Otherwise they could never have got rid of them.

    Everyone I know in Germany is absolutely terrified to move job because then they’ll be first out so instead they stay where they are, even if this means total stagnation.

    If you stay in a job too long, you become institutionalised, incapable of change, afraid to take chances or challenge yourself. The economy as a whole also stagnates as a result.

    In the two-and-half years my company has been in Ireland, there has been a 50% turnover in staff as people move onwards, upwards or simply to tour the world, taking their experience with them. The Germans are running to stand still trying to figure out why this is happening and why they can’t keep their staff.

    There is a hunger to succeed and a confidence you can achieve it in Ireland that isn’t present in today’s Germany and I don’t know about boom and bust but the economy has been growing around 3 times as quick as the rest of the eurozone for over a decade now and it is an awful long time since the Irish economy was in recession.

    The Economist predicted the big bust 7 years ago as the economy had expanded by 40% between 1993 and 1997. Instead the Celtic Tiger just moved into second gear.

    It now looks like it will find third. If there is going to be a bust, it will have to be of gargantuan proportions to take us back to even 1997 levels.

    Having said all that, I don’t know if the ruthlessness of the current Irish economy would be suitable for a huge economy like Germany where you can’t implement the same radical changes that took place here so easily but they definitely could learn a couple of things as we could from them. If you are sick hope it’s in Germany, for example.

    But on a positive note, Eurozone manufacturing is doing better than British at the moment and the German jobless figure has been falling for three months in a row.

    Germany does so many things right, as evidenced by the fact it is the world’s largest exporter, bigger than the US or China, and it even has a trade surplus with China.

    They’ll be back to paraphrase Arnie and when they are Ireland will probably be small and nimble enough to adapt.

    A perfect example of Ireland’s advantage to adapt because it is so small is the SSIA’s which took 15 billion out of the economy in 2001/2002 to stop it exploding as ECB interest rates stayed low and McCreevy introduced tax cuts while the Irish economy was roaring at 11% growth.

    I would not like Europe’s paymaster general to be risking the European economy with stunts like that but it worked fine in Ireland and will add up to a percentage point on the growth rate in 2006 and 2007 as that cash comes back online.

  • Young Fogey

    Hopefully not, but is it possible?

    A short, nasty, crash is entriely possible, but the decades long sclerosis and mass unemployment of France, Belgium and Germany aren’t.

  • Brian Boru

    The Irish economy succeeds where the Franco-German-Italian model fails because we have the lowest corporation-tax rates in Western Europe, and because we don’t strangle business in costly red-tape. The French are determined to hold onto their outdated social-model – a model in which people are discincentivised from searching for jobs by overgenerous social-welfare payments. They have an excellent health-service but all of these advantages are paid for by a deficit that is 4% of GNP – exceeding the Stability-Pact rules which are not really enforced anyway.

    The German economy looks likelier to get the necessary reforms to allow it to return to strong growth as the CDU is likely to win in the September elections. The SPD have already started the process though there remains much to be done – especially making it easier for companies to sack workers. Regarding Italy, members of the Berlusconi government are trying to blame the Euro for that country’s economic failure. The Euro is not to blame. If it were, why is the Irish economy performing so well? The problem is not the Euro but the same failed socialist experiments mentioned above. Berlusconi should have stuck to his guns and passed the reforms he proposed after coming to office e.g. making it easier to sack workers. Instead, he caved in to 1 million trade unionists. France and Germany need a Thatcher methinks.