Tag Archives: economic development

What sort of Economy?  What sort of working class? (1 of 5)

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The following article is one of five which are slightly edited versions of an article published on the Socialist Democracy website in November 2007, almost twenty years ago, just before the dramatic downfall of the ‘Celtic Tiger’ and the worldwide financial crash. It is republished here, with some slight edits, just as the economy of the Irish State is again booming for similar, if not identical, reasons and with some in the financial press anticipating another crash. The debate on the left in Ireland has moved on and some remarks on it will be made in the final part of the series.

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Why is it important to understand what sort of economy exists in Ireland?

There are at least two answers to this.  Firstly the nature of the economy determines to a great extent the nature of the working class and plays a very important role in determining how that class thinks of itself.  Secondly the character of an economy is an obvious important starting point for any project for a socialist alternative and how that might be constructed.  This talk will focus on the first of these questions.

The economy of the Irish State is widely viewed as a success story and is held up as an example for other countries to follow. (1)  To answer the question – what sort of economy the Irish one is we can ask why it has been so successful.

One answer widely touted is that the Irish economy experienced a delayed catch-up with the rest of Western Europe.  Once policies of national self-sufficiency were abandoned and those of fiscal rectitude plus others were implemented the economy experienced the growth that was always possible.  The theoretical perspective informing this is that creating an environment for free market forces allowed them to combine to produce the growth that has occurred over the 1990s and to a lesser extent in this decade.  In this sense there was a certain amount of inevitability about such a process once the right policy choices by the Irish State were adopted. (2)

A second part of this explanation is that policies of low taxation, an educated and English speaking workforce, a business friendly environment and a helpful Irish State attracted the foreign direct investment that created the Celtic Tiger phenomenon.  There are differences among academics over the relative importance of the various elements but one objection is applicable to both.

The Irish State has pursued a policy of opening up to the world economy since at least the late 1950s. It has also offered tax incentives, a business friendly political and social environment and creation of an educated workforce since the 1960s.  Yet only in the 1990s did the economy take off.  In fact, in the 1980s the economy of the Irish State was in economic crisis, with most of the factors that supposedly led to success in place. (3)  It is not credible to argue that the growth of the 1990s and after was in any sense inevitable.

Explanation

It is quite clear that foreign direct investment by primarily US multinationals was the dynamic motor of the Celtic Tiger boom and is still the key foundation of current growth and success.  Decisions to invest in Ireland as opposed to anywhere else are obviously ones that require a global perspective.  It is therefore developments at the global level that must provide the starting point for any explanation of the development of the Irish economy.

This does not mean that domestic developments are unimportant, but they are secondary.  We have seen that similar policies resulted in different outcomes in the 1980s and 1990s and we can see that the key decisions – by multinationals to invest in Ireland – were taken outside the country.

One other consideration demonstrates this.  The open nature of the Irish economy (and others) has led to widespread emigration throughout the existence of the State up until the recent boom.  This has historically been determined by incorporation of the country into the British economy as a purely regional economy of the latter.  For most of its history the Irish State has effectively had no separate currency.  This has meant that it could not have industrialised in the 1960s in the way other less developed European countries did, such as Portugal, Spain and Greece, through production of low-wage consumer goods for export.  Wages could never fall low enough to allow this because workers would emigrate to Britain or even to the US before they did.  This is why the Irish economy had such a low productive capacity yet had relatively high living standards in world terms. (4&5) It also explains why recent growth could be so powerful and sustained, because untapped domestic reserves of labour (e.g. labour force participation rates) and external reserves of labour (including returning emigrants) could be deployed to keep it going.

To emphasise our point, what this demonstrates is that the Irish economy and its development has always been determined by external powers.  The much vaunted escape from the complete dominance of the British economy has been replaced by dominance from a combination of US multinationals and the Western European imperialist project of the European Union.

Bourgeois economists term all this as an example of a regional economy and point out that understood in these terms Irish growth rates have not been exceptional.  ‘If Ireland had been a US state its population growth in the 1990s would have ranked it twenty-third of the fifty US states, while no fewer than nine US metropolitan areas with populations of over 1 million grew faster than Greater Dublin.’ (6) The problem with this perspective of course is that the Irish State is a State and not a region and that this introduces elements into the analysis that a purely regional perspective could not allow.  For example, competition between the US and EU leaves the Irish State at the sharp end of any conflict and particularly riven by these conflicting forces. (7)

What all this demonstrates is that the internationalist politics of Marxism is vindicated from the start by the need to adopt an international analysis.

International economy

Following the Second World War international capitalism underwent an unprecedented boom accompanied by rising working class living standards.  By contrast the Irish State in the 1950s, in the middle of this boom, incurred acute balance of payments crises and massive and rising unemployment and emigration.

This world-wide boom was built upon defeats of the working class by fascism in a number of important countries and by incorporation and subordination in others; by a renewed wave of capital accumulation based on the physical destruction of much of fixed capital in the war, and the reduction in value of much that remained.  These factors combined to boost the profitability of capitalism which fuelled rapid accumulation on a new technological basis, including electrification and the car, and upon a new capitalist order based on US hegemony and the growth of world trade and investment.  By being inserted into the world market mainly through Britain, which was in relative decline, many of these factors did not apply to the Irish State.  By the time it had opened itself up fully to the world market the latter was approaching renewed problems of profitability.

The exhaustion of the technological changes that had initially propelled growth, rising working class demands, and reduced growth in productivity combined to reduce the rate of profit and thereby the rate of capital accumulation and economic growth.  This resulted in the economic crises of the late 1960s and 1970s. (8) The latter led to a severe economic crisis in the Irish State with the latter facing bankruptcy through a rising national debt and weakening of the foreign investment that had been attracted in the 1960s and 1970s.  In the 1980s significant parts of the indigenous capitalist base was bankrupted by outside competition with no offsetting increase in outside inward investment. (9)

The capitalist class reacted to the worldwide decline in profitability by attacking the working class and taking other steps to reduce costs by shifting production geographically and eliminating the least profitable companies so that overall capitalist profitability could be increased. (10) In this the capitalist class has been successful.

The Stalinist states of the Soviet Union and Eastern Europe plus China have been reincorporated into the capitalist system (11), and the working class has incurred defeat after defeat in many countries symbolised most poignantly by the defeat of the yearlong British miners’ strike in 1984 -1985.  National liberation struggles were defeated, including in Nicaragua and Palestine, and the cause of socialism has been discredited in the eyes of millions of workers.  On the basis of increased levels of exploitation, increased availability of cheapened capital and new markets plus the application of new computer based technology the capitalist class has been able once again to increase profitability.(12)   This process has been described as globalisation, witnessing once again renewed growth of a financial sector that disciplines industrial capital and taxes the working class through expansion of debt, assisting the shifting of capital to more profitable locations. Defeat of the Soviet Union in the cold war has also allowed the US to once again seek to confirm a world hegemony upon which the rest of world capitalism may develop.  Its wars against Iraq are the most obvious manifestation of this new expansive role.

Notes

(1) Productivity in the Irish State was 29.2% higher than the EU average in 2005, being the second highest among all EU States, with a per capita Gross Domestic Product of 138.9 compared to an EU 25 average of 100 and ahead of the UK which had a figure of 117.5, ‘Measuring Ireland’s Progress 2006’ Central Statistics Office (CSO) p. 18. Of course GDP figures are grossly inflated by the reporting for tax purposes of economic activity in Ireland carried out elsewhere.

(2) See presentation by Patrick Honohan, TCD, 12th June 2007,’Ireland’s economic miracle: A story of delayed catch-up.’

(3) Unemployment reached a high of 17.6% in 1987; inflation reached a high of 20.4% in 1981; economic growth was negative in 1982 and 1983; the current budget deficit reached a high of 8.3% in 1986 and the public sector borrowing requirement reached 20.3% of GNP in 1981. Government debt rose to 129% of GNP in 1987, debt servicing reached 12.5% of GNP in 1985, debt servicing swallowed up 93.5% of income tax receipts in the same year; an average of 14,000 (net) emigrated each year in the first half of the decade and 27,000 each year in the second half – over 200,000 over the decade. ‘The Macroeconomy of Ireland’ Anthony J Leddin and Brendan M Walsh, second edition, pp. 20, 122 & 123.

(4) In European terms for example, in 1960 the EC average was 100 while the Irish State’s was only 60% of this while that of Greece was 39%, Spain’s was 59% and Portugal’s was 38%. ‘The Context of Economic Development’, Kieran A Kennedy in ‘The Development of Industrial Society in Ireland’, edited by J H Goldthorpe and C T Whelan, p. 12.

(5) In 1950 88% of exports went to the UK of which 80% were food and drink, ibid p. 11.

(6) ‘Future Irish Growth: Opportunities. Catalysts, Constraints’, Frank Barry, ESRI Quarterly Economic Commentary, Winter 2005, p. 3.

(7) An additional weakness is that regional models of growth argue that gains from the boom will be concentrated in the growth of asset prices, including property, because property and infrastructure are the only factors of production in ‘quasi-fixed supply.’  This however assumes what needs to be proved – why has their supply remained relatively fixed and why should it?  Has the growth in property prices reflected an imbalance between growing demand and less expansive supply and is the former not inflated by speculation?  Is not the real reason for this not tied to property rights, class structure and the traditional incentives in Ireland to make money from parasitic activities such as property ownership rather than in directly productive investment, despite the supposed transformation of the Irish economy and society?

(8) Average annual growth in GDP in the world fell from 4% between 1950 and 1973 to 2.9% between 1973 and 1996.   The net profit rate for manufacturing between 1950-70 and 1970-93 fell from 24.4% to 14.5% (US), 23.1% to 10.9% (Germany), 40.4% to 20.4% (Japan) and 26.2% to 15.7% (G7).’The Economics of Global Turbulence’, Robert Brenner, p. xxvii & 5.

(9) Permanent full-time manufacturing employment in Irish owned firms fell from 143,300 in 1980 to 110,918 in 1988 while those in foreign owned firms fell from 88,400 to 82,381.  ‘The Revival of Irish Indigenous Industry 1987-1997’ Eoin O’Malley,in ESRI Quarterly Economic Commentary, April 1998, p. 37.  It should be noted that this led to a number of workplace occupations by workers attempting to defend their jobs, e.g. Clondalkin Paper Mills.  This has not happened when multinational companies have folded.

(10) The geographical shift in production can be seen in the increase in foreign direct investment (FDI) over the past 15 or so years.  The outward stock of FDI in the world has increased from 1,791,092 million US dollars in 1990 to 10,691,889 million US dollars in 2005.  The stock of FDI as a percentage of GDP in the world has increased from 8.5% in 1990 to 22.7% in 2005.  The share going to the EU has increased from 37.2% in 1980 to 51.3% in 2005, of which the Irish State has received a disproportionate share. ’World Investment Report 2006’, United Nations Conference on Trade and Development, pp. 7 & 303.

(11) That is their productive assets have become capital and their workers subject to capitalist exploitation and the production of surplus value– i.e. both have been employed to earn profit, as opposed to the diktats of a Stalinist plan upon which a bureaucracy enriches itself by more or less naked corruption.

(12) The US rate of profit rose from 16.4% in the first quarter of 1982 to 30.1% in the second quarter of 2007. .’The recovery in profit rates is the strongest in more than fifty years, with 15 successive quarters – until the second quarter of 2007 – of double digit profit growth, pushing profits to their highest levels since the late 1960s.’ ‘The SWP’s Economics’, ‘Permanent Revolution’ number 5, http://www.permanentrevolution.net.

‘Sins of the Father’ by Conor McCabe – a book review

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downloadThis book sets out to explain why the banking crisis in the Irish state developed the way it did and how property and financial speculation has been so prominent a feature of its economic development.  It is therefore an argument against the view that the crisis has been the result of some sort of moral collapse in certain sections of society.

Along the way the author, Conor McCabe, disposes of some common beliefs about the role of property in the Irish psyche, convincingly demonstrating that property ownership is not hard-wired into the Irish but has been consciously and repeatedly promoted by the state and employed as a means of strengthening particular class interests.  Thus the first Cumann na nGaedeal government promoted – as a solution to the notorious condition and shortage of decent housing for the working class – better housing for the middle class!

In an earlier version of the recent bailout of the banks he notes that helping the middle classes and property speculators with state money was the way the first Government decided to deal with tenements and slums.  As if proving there is truly nothing new in the world he notes the development of Dublin suburbs in the 1930s with little or no infrastructure or amenities.

The effects of this over the decades was to create a situation in which if you wanted a house you needed to buy one.  Public housing was neglected, a choice of last resort, and the earlier desire of workers to rent was blocked.  Even so the relatively recent and rapid rise in the proportion of home ownership is surprising, rising from 25 per cent in 1961 to 75 per cent in 1986. So much for property ownership being in the DNA!  In fact, as the author shows, it has been consciously promoted as a means of preventing “social unrest”, “revolutionary change” and because “there is no greater barrier against communism.”

McCabe points to the argument that the property boom at the turn of the century crowded out investment in productive activities and shows that State tax breaks helped fund the speculation that fuelled it.  Just as the State helped pump up the bubble it then stepped in to prop up the same interests that were behind it when it burst.  In this sense the State’s response to financial collapse was no turning point.  He effectively shows that British landlordism of the 19th century was replaced by a native version for the 20th and 21st.  Government policy helped create huge overproduction: in 2010 the number of empty housing units was counted as 302,625 – excluding holiday homes!

Conor is aware that all this is a description of the property boom and bust but is not an explanation (see page 56).  To do this he then presents a fuller history of Irish economic development.  It is not the case however that further, fuller and more complete description is explanation either.

If particular and contingent historical factors are not the explanation of the deeper causes of the boom and bust, but rather the concrete form in which the underlying contradictions played out, then it is only these fundamental processes which can provide a satisfactory explanation.  Or at least one that seeks to advance an argument that the causes of the crisis were in some way more than accidental.  Being more fundamental they can explain similar phenomena in more varied, concretely different circumstances – in countries as different as Japan, Spain, the USA and UK.  In fact the very variety of situations giving rise to similar symptoms of crisis point to systemic contradictions.

What the book does do very well however is show the particular features of Irish economic development, including the weakness of an economy which was governed as if it was still a region of Britain but which was cut off from the potential supports that this might have involved.

Nor did this change with the election of a Fianna Fail government in 1932, which introduced tariffs: at this point the State was described as virtually the last free-trading economy in the world.  There was no introduction of a separate currency or Central Bank and parity with Sterling was maintained.  In important ways the economy remained a region of Britain no matter the declaration of a Republic after World War II.

The resulting failure led to the new policy of promoting multinational investment, which was seen by the State as the least disruptive way of responding to international pressures to develop while protecting the existing class structure and minimising economic change.   McCabe emphasises the limits of multinational investment and the fact that money flows from it enter and exit the State with relatively modest impact. He quotes an assessment that this foreign investment did not develop a manufacturing base ‘comparable’ other small countries and argues its real importance lay in the opportunities provided to native property developers and financial and banking interests which service the investment.  This process fed into a property bubble in the 1960s which burst in the 1970s, again fuelled by state tax incentives but also state demand for the property developed.

He gives examples of the extraordinary tax incentives given to foreign investment and how State policy allowed the companies involved to do more or less what they wanted including at Bantry Bay where, in 1979, over 50 lives were lost in an oil explosion.  It transpired that the necessary safety measures had not been implemented and Gulf Oil had been allowed to regulate itself.  The Treaty Ports had been returned from the Brits but the Irish State had connived in the creation of another; all under the banner of economic development.

The policy was held up as a success but it was still recognised that it was a qualified one and accepted that indigenous industry had failed to create self-sustaining industrialisation.  Foreign investment remained largely divorced from local industry and the government sponsored Telesis report noted that only 8 per cent of components and sub-assemblies in the foreign engineering sector were sourced locally.  However, like inquiries and reports before it (and after) the Telesis Report was “greeted with fanfare and followed with silence.”

The major innovation came instead in the financial services sector where State policy had always been to maintain the parity link with sterling.  For Conor McCabe parity also meant poverty: the value of the Irish currency was maintained at too high a level to facilitate the development of competitive industry.

He does not delve into what a lower level would have meant for Irish workers as a lower valued currency would also have meant lower wages and a lower standard of living, all else being equal.  All else not being equal would have depended on the Irish State having a successful policy of state-led industrial development, not just throwing tax breaks and grants at private capitalists. In part his history is designed to show the strength of those class interests in the State who made their money through agriculture, property and banking and for whom all this would have been, at best, an unnecessary experiment.

That this ultimately was a feature of continuing imperialist domination – expressed in the relatively weak native capitalist development; in state institutions and policy and in other cultural traits – is not developed in the book.  The book is relatively short so this is not a criticism.  This subject raises political questions that have bedevilled an understanding of the relationship between ‘national oppression’ and capitalist exploitation and it is no criticism that this is not gone into.  It was not the purpose of the book. The State maintained the link with sterling until joining the Exchange Rate Mechanism but devaluation drove home the lesson that the link was more than just a policy decision but reflected a deeper economic relationship.

The book repeatedly shows the linkage between State policy and class interests.  Conor shows that the setting up of the Irish Financial Services Centre (IFSC) represented no exception to the state’s patronage of banking and financial interests, or a radically new economic development, and accepts the case that the IFSC is a tax haven, reporting its reputation even before the crash as the “wild west of European finance.”

He records the almost forgotten fact that the bank bail-out of 2008 was not the first and that tax payers had already bailed out Allied Irish Bank (AIB) before – in 1985.  While it has become fashionable to excoriate Anglo-Irish Bank at least it only went bust once.  The Fine Gael led Government of the time included Alan Dukes who, in the latest banking disaster, reprised his role by impersonating a Director of Anglo-Irish supposed to represent the public interest.  In 1985 AIB was saved from going bust by the tax payer who then watched seven days later this same bank announce unchanged dividends to its shareholders!  There followed years of law-breaking by the whole banking industry for which not one banker paid any penalty.  Put into context, the bail-out of 2008 becomes both more shocking and less surprising.

The book pulls together the various aspects of Irish economic development to show how the State’s policies, especially tax breaks and almost non-existent regulation, came together in the 2008 crisis. Property speculation fed on a limited boom partly fuelled by foreign investment which, boosted by state policy, became super-charged by credit speculation.  It was, in this sense, not at all new but rather the culmination (until the next time?) of the sins of the father. And the sins were many.

The book ends too summarily and in doing so appears to endorse more state spending on infrastructure as part of the solution: a liberal, Keynesian answer to the crisis.  One is compelled to ask in what way this is an alternative to what has gone before.  In so far as construction paid for by the state is designed to boost private capitalist investment there appears no major difference. (This is by no means the only similarity.) It is yet another tribute to the forces and policies described in the book, the power of the existing system and status quo, that those who are popularly viewed as its most vocal critics often simply echo it.

In the conclusion Conor McCabe notes that the new state did not have an independent economy.  What he has done is give a good account of the internal structure of this subordination and the class and state that constituted its structure.  But this is obviously only half the story.  If the economy was not independent a full description or analysis would have to describe and explain the much stronger international forces on which this subordination rested.

This itself would only be possible by recognising, as we have said, that the Irish State was not the only one to suffer a financial crisis and that, whatever its peculiarities might be, other crises in the US and Spain and before that in Japan, and perhaps tomorrow in China and Britain, point to a systemic crisis; in other words a crisis of capitalism.  Explaining how the Irish crisis took the form it did is impossible to do fully without also explaining why there was a crisis in the first place, one shared with other countries with a very different historical development.

Although beyond the scope of the book it is nonetheless a necessary task for Irish socialists.  Conor McCabe is not to be criticised for not doing what he did not intend and which others have not done.  Rather it is to be hoped that he can play a significant role in this collective task.  It will therefore be interesting to see what he writes in future because while the bad news is that the first edition of ‘Sins of the Father’ has sold out the good news is that the second is on its way.