Northern Ireland is Caught in a Low-Level Equilibrium Trap…

In the 1950’s US economist Richard Nelson, who later became an advisor to President Kennedy, asked why underdeveloped economies failed to improve. His answer, published in 1956, was the low- level equilibrium trap.

The theory suggests that poor countries, with low wages and profits, can’t afford to invest so growth is slow. As the economy gradually expands average wealth per person improves. However marginal increases in prosperity also increase population. As more people come onto the labour force the average wealth per person declines and a return to subsistence living reduces the population / workforce. The cycle then repeats itself and the economy remains trapped at a low level of equilibrium.

So, what has this got to do with Northern Ireland? Well unfortunately there is a similar dynamic at play. We are a low wage, low growth economy, trapped at this low level of equilibrium while the rest of the UK and Ireland powers ahead.

To illustrate what I mean lets first look at our output. A few months ago, the Office for National Statistics released the 2018 regional results. These found that N Ireland was the only one of 12 UK regions where real GDP declined, falling 0.5% since 2017 while the rest of the UK increased by 1.4%. According to NISRA our gross value added per head is only 78.7% of the UK figure, down from 81.1% in 2017.

There is no doubt that Northern Ireland operates at a low level, and while there have been some positives in recent years’ we delude ourselves if we think these illustrate the success of the region as a whole. The reality is that the income gap with the rest of the UK is getting worse every year. Figures on the ONS website going back to 1998 – to the start of what was supposed to be the economic dividend of the Peace Process – tell the same story of relative decline.

And as for the Republic of Ireland? Well it’s difficult to get a like for like comparison with ONS data, but both the World Bank and IMF rank the Republic as the fourth highest GDP per capita in the world. And although there are distortions caused by global companies headquartered in Dublin, it is no exaggeration to say that the average person south of the border is at least twice as rich as the average person north of the border.

What is causing such poor performance and what steps does N Ireland need to take to improve? There are many factors, ranging from poor productivity, low and poorly targeted capital investment, and a dysfunctional regional government – for more evidence on the latter see my previous post https://sluggerotoole.com/2020/04/14/no-change-is-not-an-option/

But this issue goes beyond government to the level of firms and individuals themselves. In a research document published in 2017, Paul Mac Flynn from NERI looked at the issue in relation to skills – which is the key that unlocks higher productivity and wages.

Northern Ireland already suffers from well-known problems, including the 16.6% of adults – twice the UK average – who have no skills qualification at all (NISRA, 2017). At the other end of the spectrum we suffer a high level of brain-drain as our most talented students leave for better prospects. However, Mr Mac Flynn also highlighted that low skills in the workforce are matched by low demand for skills from organisations. Survey data suggests that both employees and employers have broadly accepted this equilibrium and have little incentive to change.

This is an important insight because when you are in an equilibrium trap there is no easy way out. For example, from an employer point of view firms cannot move up the value chain because the skills are not there – any attempt to invest in higher value work simply creates a skills deficit. Workers in turn do not invest in skills because they will not be rewarded with higher paid employment – any attempt to better themselves will simply create a skills surplus. Northern Ireland is caught in a low skills and therefore low productivity and low wage economy.

Credit: Paul Mac Flynn, adapted from Green et al (2003).

The Northern Ireland Executive has at least recognised there is a problem and have invested in a number of programmes guided by a 10-year strategy “Skills for Success” launched in 2011.

Unfortunately, the strategy has asked the wrong questions and made inaccurate assumptions about what is required. For example, all four strategic goals focus exclusively on supply side issues (i.e. improving employee skills) not demand side problems (i.e. lack of demand for skills from employers and lack of company investment in higher value activity). The strategy has not been implemented consistently, so its core mission to increase workforce skills is far from certain. However, even if skills improve this will not magically create higher paid jobs or more complex export products and services. The outcome will simply be a skills surplus, which will in turn prompt highly trained workers to leave Northern Ireland in order to seek higher value employment.

Moving to a higher level of equilibrium is challenging and the solution may require a level of existential change that is beyond Northern Ireland’s limited capacity to deliver. It will certainly need to start with a massive programme of sustained investment (what some economists refer to as “the big push”). This programme needs to impact both supply side and demand side issues, which requires effective co-ordination between government, academia, business, and labour (trade unions or works councils). A top down Departmental solution is unlikely to succeed.

In addition, the economy does not act as a single unit but as a complex agglomeration of activity, so a properly executed skills strategy cannot take a one size fits all approach. It requires segmentation and strategic choices – for example looking at higher value sectors and geographical areas. Concentrating on financial services in Belfast might be a good start, while the wider knowledge economy and high growth areas like tourism should also qualify. And because equality is fundamental to the overall success of society, we must also put in place effective programmes to reduce the high level of our workforce with no measurable skills at all.

The next 10-year skills strategy from 2021 -2030 is currently in preparation. Now would be a good time to ask the right questions and reflect deeply on how we release Northern Ireland from the trap that we are in.

“Unstable equilibrium” by ManelTor is licensed under CC BY

Hugo

My aim is to let the facts tell the story and encourage a shared debate. My ideology is to support sustainable policies which deliver the best outcome. Happy to be corrected when wrong.