OPINION:Employment forecasts by Fás and the IDA show a misplaced faith in foreign investment, writes MICHAEL HENNIGAN
POLITICAL SPIN on jobs is a dangerous game in these perilous times when the imperative should be to prepare for a changed post-recession world, built on a realistic assessment of the challenges. However, the habit of spin has been long engrained in the enterprise policy area and is apparently a hard one to kick.
Last week, IDA Ireland issued a strategy document with a headline target of 105,000 new jobs by 2014, but on closer analysis, there may not be any additional jobs added to the current total. The Irish Timesrecently reported that the draft report of the Innovation Taskforce says almost 120,000 new jobs could be created if Ireland transforms itself into an innovation centre. Using international survival rates for high tech firms, this target is also unrealisable, absent an unprecedented real economic miracle.
During the recession, ministerial announcements on new jobs, as few as 20 over a five-year period, have coincided with huge job losses – where there is no competition for bragging rights. In the policy area the “smart economy” concept has been promoted, and Taoiseach Brian Cowen has spoken of a desire to locate what he has termed a “European Silicon Valley” in Ireland. However, there is no evidence of fresh thinking at policy level in response to the emerging global changes.
The world’s advanced countries are facing years of adjustment to reduce public debt; the International Monetary Fund (IMF) says these countries are fooling themselves in believing foreign export demand will drive their recoveries from the global recession, because their expectations are well above forecast import demand from other countries; the IMF says debt adjustment in Europe will take 10 to 20 years, and the recovery in the US and Europe so far has been driven by emergency central bank and government stimulus measures.
The US economy is vital for Ireland, but economists expect job gains to be tepid there in coming years. US investment bank Morgan Stanley says the US unemployment problem has become increasingly chronic. Two statistics document that fact: the median duration of unemployment has reached 20 weeks, more than twice the peak in the deep 1981-82 recession, and a record 41 per cent of the unemployed have been jobless for six months or longer, for the first time since 1948.
The New York Times reports that during periods of US economic expansion in the 1950s, 1960s and 1970s, the number of private-sector jobs increased about 3.5 per cent a year. During expansions in the 1980s and 1990s, jobs grew just 2.4 per cent annually. During the last decade, job growth fell to 0.9 per cent annually. Before 1990, it took an average of 21 months for the economy to regain the jobs shed during a recession, according to an analysis of Labor Department data. After the recessions in 1990 and in 2001, 31 and 46 months passed before employment returned to its previous peaks. The economy was growing, but companies remained conservative in their hiring.
Lawrence Summers, President Obama’s principal economic adviser, said last January: “What is disturbing is the level of unemployment. This is not just a cyclical – though it is heavily a cyclical phenomenon – but a structural phenomenon as well. Just to put it in a way it’s not usually put, one in five men in the US between the ages of 25 and 54 is not working right now. A reasonable extrapolation would be that following a reasonable recovery, it will still be one in seven, or one in eight, who are not working. That is in contrast to the mid-1960s, when 95 per cent of men between 25 and 54 were working.”
Compounding the challenges is that the global recovery is being powered by emerging economies where Ireland has little clout. Trade with the key emerging economies, China and India, is very low, and overwhelmingly dominated by the multinationals. Goods exports to China in 2008 were lower than to Switzerland, while shipments to India were valued at €161 million, less than exports to Hungary, and 0.19 per cent of total merchandise exports.
Last month in Dublin, Craig Barrett, former chairman of chip giant Intel, Ireland’s largest industrial employer, said while Ireland experienced its economic boom and the whole world went property-crazy amid a flood of easy credit and questionable banking, another revolution was unfolding. With the collapse of the Soviet Union and the abandonment of socialist principles in nations like India, for example, an estimated three billion additional people entered the free world economic system. “And guess what – they also want good jobs, and have a rich educational heritage. You have three billion new customers, you also have three billion new competitors.”
Barrett said the reality is that Ireland is now over-reliant on foreign direct investment (FDI) and needs to come up with a new economic blueprint for the next 20 years.
The first step would surely be to end the political spin that is toxic to development of policy based on the cold reality of the post-recession world. Lately we have had an example of spin on jobs and the projection of job gains based on an unrealistic scenario from two State enterprise agencies.
The Tánaiste and Minister for Enterprise, Trade and Employment, Mary Coughlan, launched “Horizon 2020”, termed as IDA Ireland’s strategic blueprint for attracting FDI into Ireland in the coming decade. In what is much more a promotional brochure than a strategic document, a target of 105,000 new jobs by 2014 was announced, but it wasn’t what it at first seemed.
On the same day as the IDA launch, training agency Fás, which also reports to Ms Coughlan, issued a report which predicted that 250,000 net new jobs will be created by 2015.
At a press briefing on the “Horizon 2020” document, IDA Ireland chief executive Barry O’Leary said his agency is targeting 62,000 direct jobs from foreign companies, while the additional 43,000 making up the 105,000 would come from Irish support companies. There is no reference to the 62,000 direct jobs in the document, and to add a further twist to the story, neither is there any mention of job losses from existing foreign firms. In 2009 alone there were 18,000.
In 2009, total permanent jobs at IDA-supported companies fell below the 1999 level of 126,000, and this year, the total may fall below the 1998 level of 117,000.
In the boom years of 2004-2008, IDA Ireland companies added an average of 11,000 new jobs annually, with 60 per cent in financial services and software. It lost an average of 9,600 annually. So the IDA Ireland headline target of 105,000 new jobs by 2014 could end up at zero or below net jobs added, as the international backdrop to this period will be far less supportive than it was prior to the Great Recession.
As for the Fás forecast of 250,000 net new jobs between 2010 and 2015, the problem with this forecast is that it uses macroeconomic forecasts published by the Economic and Social Research Institute (ESRI) in May 2009.
Almost a year later, the outlook for the advanced economies looks over-optimistic, and average Irish gross national product (GNP) growth of 5.9 per cent in the period 2012-2015 appears to be unrealistic.
The Innovation Taskforce’s target of 120,000 new jobs from research means that as many new jobs would be created in the decade as the total of all jobs in IDA Ireland-supported companies in 2010.
In the US, the 10-year survival rate for start-up firms is less than 30 per cent, and it is just slightly higher in Europe. The five-year survival rate is less than 50 per cent.
Research at Imperial College, London shows that real technology start-ups tend to grow slowly, have a poor survival rate and contribute little to the wider economy in economic terms. Compared to the US, European start-up performance is poor. In Europe, after seven operational years, these new firms on average comprise 18.5 employees with revenues of £250,000 and a mere 36 per cent likelihood of surviving beyond 10 years.
In the UK there are over 2,900 of these companies that have been in business since 1991, and they provide only 40,000 jobs. “They don’t become the new Microsoft,” Prof Bart Clarysse who holds the Chair in Entrepreneurship at Imperial College said last year . “They just stay micro.”
If we had 1,000 such firms here, they would provide 18,500 direct jobs if using the European metric, but over 10 years there would be many failures.
There are no easy fixes for Ireland, but the current spin-dominated approach is a recipe for failure. Spin-outs from universities and research will produce few jobs over the next 10 years. Investment in research and education is of course important, but is unlikely to produce miracles.
As outlined above, employment in the foreign-owned sector has reached a plateau.
At 1.9 million, we now have 400,000 more in employment than in 1998 and 200,000 more in unemployment, but employment in the main growth engine of the economy – the foreign-owned sector – is at 1998 levels. Exports from the mainly US-owned chemical sector have boomed in recent years and while the trade figures have been flattered, employment in the sector has been almost static.
We may pick up some FDI projects from emerging markets in coming years but in an illustration of the challenges, a non-European country, Egypt, is pitching for China to build an industrial zone at Suez, and is highlighting its trade agreements with the EU.
Improved competitiveness will help us, but with foreign-owned companies responsible for 90 per cent of our goods and tradable services exports, it will not be easy to become a trading nation. We have also neglected our food sector, and the advantage of trading in a big common currency area has not been exploited. Nevertheless, Europe remains our best opportunity.
For example, one New Zealand company controls more than one-third of global trade in dairy products, and is responsible for one in every four dollars of New Zealand’s export earnings. Also, we don’t even have a category for education in our service export data, but this same category is Australia’s third biggest export earner.
People in comfortable armchairs can talk easily about opening new markets, but most of them have never sold a bean. Meanwhile, every country today is in search of a USP – unique selling point – for its non-commodity output. A reality check is long overdue from political leaders and State enterprise agencies with backbone to present inconvenient truths, with a big input from exporters.
Michael Hennigan is founder and editor of the financial website Finfacts (www.finfacts.ie)