Does the border matter in a time of recession?

[This is taken from A Note from the Next Door Neighbours, the monthly e-bulletin of Andy Pollak, Director of the Centre for Cross Border Studies in Armagh and Dublin]

One just can’t avoid the economy these days. By now it is old news that at the end of September and in early October the world was on the edge of a financial precipice not seen since the Wall Street Crash in 1929. The government of the Republic, whose banks and building societies were among the most exposed because of excessive and foolish lending to property developers, was forced to step in to provide an unprecedented blanket guarantee to protect their deposits and loans. Two weeks later the British government introduced a more measured package which involved taking a significant equity stake in the major UK banks.

Similar government interventions all over Europe had the temporary effect of calming the markets. But as Britain’s ‘real’ economy follows Ireland’s into recession, the only question now being debated is how long will it last, with pessimists predicting as long as four years before any significant recovery.

In the aftermath of the dreaded ‘hard landing’, does the border matter any more? In Belfast it might appear that the answer is ‘yes, thank you’. There is a strong temptation for Northerners to gloat quietly (and not so quietly) about the Celtic Tiger coming to a bad end, with the much maligned Northern public sector looking less like an albatross and more like a safety cushion every day. There is a widespread belief that things won’t be as bad in our highly-subsidised little province as in the South, with its huge exposure to the now harsh vagaries of the international economic climate.

Indeed the border is providing something of an opportunity for the North at the moment, especially for its retail sector in the wake of the strong euro of the past 18 months. Recent news stories have pointed to the number of shoppers crossing the border and benefiting local retailers. This is particularly the case in Newry, where Southern shoppers are up 40% in 2008, and in Derry, where the rise is 35% (1).

Inevitably the losers here are the Southern border towns. The success of Newry and Derry (and Belfast and Banbridge) means large losses for retailers in places like Letterkenny, Dundalk and Monaghan (and Dublin and Drogheda). A lack of comparable statistics means that we don’t know exactly what the losses are. However unemployment figures in early 2009 from the Southern border counties could make for grim reading.

It needs to be forcibly pointed out, however, that it is not only the South that is now much more open to the global economy. The closure of a dominant employer like Seagate is considerably more damaging to the North than the departure of one major foreign firm in a more developed and diversified economy like the Republic’s. In terms of future prospects for both foreign direct investment (FDI) into and exports out of Ireland, it is unfortunately very easy to see a worldwide sneeze causing an extremely unpleasant cold all over the island.

Another point which is usually ignored is that the inter-connections between North and South, generally welcomed, could make recession in one jurisdiction largely unavoidable in the other. Official figures show that levels of cross-border trade in 2006-07 rose again by 8% to over €3 billion. Such trade might only account for 2% of total exports from the Republic (given the influence of FDI), but in sharp contrast 30% of Northern exports go to the South (2).

Other surveys show that 40% of firms across the island do some trade with the other jurisdiction. For two out of five of these companies, less than 5% of their turnover is tied up in this trade, though for 11% of Northern firms it accounts for more than half their business(3). This is where the recession may really start to bite for Northern Ireland’s small and medium firms in particular. And this is without mentioning the close and varied connections between the construction and property development sectors across the island – witness the collapse of the Belfast-based Taggart brothers’ property empire in late October.

So what can be done to make cross-border cooperation work for the two Irish economies during these hard new times? InterTradeIreland’s initiatives to promote cross-border trade (such as Acumen or MicroTrade) will become more significant as firms look closer to home to find new markets. Making the €15 billion all-island public procurement market more open to SMEs would help. Companies will also want to be able to offer new products when the upturn eventually comes around, helped by schemes like the Innova cross-border collaborative R&D programme. At a time of hatches being battened down everywhere, continuing to think globally and acting locally – including across the local border – is as good a business slogan as any.

Andy Pollak

1 See ‘Fleeced shoppers break for the border’, Irish Independent, 7 August; ‘Strong euro ensures Newry escapes downward trend’, Irish News, 24 September.
2 Figures taken from InterTradeIreland’s statistical website and DETI’s Manufacturing Sales and Export Survey 2006-07
3 North/South Business Monitor, September 2008

  • An interesting analysis.

    Two things come to my mind initially. Firstly, the fact that there has been a large increase in southern shoppers in the north, and northern exports to the south, seems to be closely linked to the strength of the Euro. But while the Euro can go up, it can also come down – and then the flows might be in the opposite direction. In a sense the border gives us all a safety valve (apart from the poor people who live in Munster) – we can take advantage of lower prices wherever they might be, north or south. This applies to businesses as well as private consumers. This allows us to keep our costs to the lowest possible, by buying either north or south according to the best price. We are relatively unique in having this possibility – most of the Eurozone does not have an easily accessible border with non-Euro countries in the EU. I wonder if anyone is looking at the effect of this particular issue on the economies on either side?

    The second point I would make relates to what you say about Seagate. It is true that its closure represents a greater part of NI’s high tech industry than a similar plant would have in the south, and this throws up a worrying thought for the future. Yes, the public sector is a safety-net in times of trouble, but its sheer scale makes private enterprise, especially high-tech industry, rare in the north. Because of this skills are rarer than in the south, and when (inshallah!) the good times start to roll again, the north will not be able to compete for new investments. There simply will not be the pool of skilled labour that there is in the south. So the safety-net starts to stiffle the economy. A higher dependence on the private sector may make the slow-down worse, but it makes the recovery quicker.

  • Mack

    “However unemployment figures in early 2009 from the Southern border counties could make for grim reading.”

    Yes they will – largely due to lay-offs in construction. If the retail sector is suffering in Dundalk but booming over the border (in a zero sum game) the residents of Dundalk could get the bus to Newry to work there, it’s hardly a massive commute. And presumably retailers would rather hire workers with experience?
    Enterprising small retailers in the south should be looking at taking up retail space in the north. Certainly, this is what the petrol stations have long done as one juristiction becomes more profitable than another.

    We’ll not get rich selling each other groceries, however. Prices are lower in the north, because costs are lower there (wages and services). Services are expensive in the south at least in part because of high wages in the public sector. Benchmarking hasn’t been met with increased efficiency and we’re/they’re paying the price now. Brian Lenihan complains that it’s almost unpatriotic to shop in the north (denying money to be spent on services in the south). I disagree, it’s better that southerners improve their standard of living by shopping where it’s cheapest and force the rip-off Republic to become more lean, efficient & free of price gouging. In that context, the big winners are the border towns as it’s easiest for them to take advantage of the low nothern prices, and booming border economy just miles away. (Pity the poor souls in mid-lands commuter belt construction unemployment wastelands).

    If InterTradeIreland or any other public sector, gravy train Quangos were looking for away to improve efficiency & productivity in both states – they could open up the protected public sectors in both states to competition from the each other. ESB too expensive? Try Northern Ireland Electricity. NiR v Iarnrod Eireann, Bord Gais v Phoenix etc. etc.

  • Mack

    Horseman – if the price differential was merely due to exchange rate movements in the Euro / Sterling then prices of goods imported from the UK would fall in the south as the Euro rose. This would be most clearly visible in UK chains (for example NEXT or River Island) in the Republic that price their goods in both Sterling and Euro. The Euro prices have not dropped as Sterling have fallen. Instead the retailers have chosen to attempt to pocket the difference as profit. Fair play to the consumers who drive between 10 and 100 miles to deny this price gouging!

    Indeed such differentials would only open up at times of volatility in the exchange rates (Euro-GBP has been remarkably stable over the last number of years), but yet prices in the south have been consistently higher.

  • Yes, Mack, it’s our old friend the ‘rip-off republic’ at work again. Hence it is probably a good thing that we can shop either north or south if we wish. The drawback of being an island is that we cannot easily shop abroad. Even when we travel it is usually by plane so we cannot bring much stuff. On the continent that is not the case, and there is therefore much more scope for ‘shopping around’ to get better prices. This, plus the vastly different economies of scale in the European Megalopolis, means we’re always going to pay more.

    On the other hand, we are our own worst enemies. There is something in the Irish psyche (a memory of poverty, perhaps?) that makes us think that if we pay more for something it is better! So people will buy expensive clothes even though they are functionally the same as those available in the cheaper stores.

    Euro-GBP has been remarkably stable over the last number of years

    Up to September 2007, that is. Then the Euro started to strengthen.

  • Mack

    “On the other hand, we are our own worst enemies. There is something in the Irish psyche (a memory of poverty, perhaps?) that makes us think that if we pay more for something it is better! So people will buy expensive clothes even though they are functionally the same as those available in the cheaper stores. ” – Horseman

    I agree wholeheartedly with this. “Penny pinching” is an insult, prudence seems rarely praised. We make fun of stereotypes from Cavan (in the south) and Ballymena (in the north). The anti-European VRT stroke is on our statute books – thanks to our very own government in the south. Worse, the eejit who brought it into force is now the EU commisoner responsible for ensuring that European internal market functions without such government trade barriers! The VRT stroke keeps Cars, the second biggest purchase most of us make, far more expensive than in the rest of Europe. I’m not holding my breath for this situation to be resolved.

    Of course, with their tax incentives, lax regulations and now up to €5 billion bail out for property developers (via the home choice loan scheme) our government helps make sure we get ripped off making the biggest purchase of our lives too. Which also nicely lines their pockets with another rip off tax (stamp duty).

  • Brian Walker

    Andy as you say: “40% of firms across the island do some trade with the other jurisdiction. For two out of five of these companies, less than 5% of their turnover is tied up in this trade, though for 11% of Northern firms it accounts for more than half their business.”

    It’s remarkable that in spite of all the rhetoric and all the initiatives, the level of cross border trade is still so low and so disproportionate. I recall the Carter report in the 1980s which described the two economies as competitive rather than complementary. The only real change seems to be that the southern economy has grown dramatically faster than the north’s.

  • George

    It’s not just the southern border counties that will suffer. All those construction workers who crossed the border to work won’t be doing that any more while construction is also in decline in NI. It’s estimated that 30,000 construction jobs will go in NI in 2009.

    The latest inter-trade figures for 2008 are not that encouraging. Imports from the North are down 3.5% in the year to July while exports to NI are down 7.6%.