Ireland: export boom or import bust?
from Merijn Knibbe
According to Olli Rehn, EU economic commissioner to Ireland, export led growth is leading Ireland out of the doldrums. According to Hans-Werner Sinn, special advisor of Angela Merkel, this growth is caused by the decline in ‘Unit Labor Cost’ (ULC, or the share of wages in total income). Lower ULC leading to higher exports show that austerity is the way to follow, which makes Ireland a shining example, once again. But are these people, who should know better, right? They do seem to have impressive evidence: the Irish current account shows a spectacular improvement (graph 1, larger version here).
But this improvement is not caused by an increase in exports of goods. Ireland is in fact an example of ‘how not to do it’, when it comes to exporting. When we look at intra-European Union exports we see that exports of the other ‘GIPSD-countries'(Greece, Ireland, Portugal, Spain, Denmark) increased only a little less than German exports (graph 2, larger version here) – the 2010 level was about 25% higher than the 2001 level. 2010 Irish exports, to the contrary, were in fact lower than in 2001 and still (Juli 2011) do not show much increase.
When we look at extra-European Union exports (graph 3, larger version here) a somewhat comparable pattern surfaces. Total increase in higher, but Ireland comes last (and Germany is surely not first).
As the current account consists of the trade balance (imports and exports of goods) plus the ‘invisibles balance'(services, income from abroad) the improvement of the current account might have been caused by an increase of the net ‘exports’ of invisibles. The ‘invisibles balance’ deteriorated between 2008 and 2010 (from minus 34 billion to minus 36 billion) – which means that the current account improved despite the deterioration of the invisibles balance… The inescapable conclusion is that about the entire improvement of the current account between 2008 and 2010 is (over!) explained by a slump-induced decrease in imports, and not by an increase of exports. An increase in exports did not lead to recovery – crisis led to a decrease in imports. In the first seven months of 2011, import growth however was slightly larger than export growth.
Olli Rehn shows considerable economic insight. When he talks about the recovery of Sweden and Finland from the crisis of the nineties he states: ““Both of these countries put the banking sectors on a sound basis by very unpopular bank support measures and in the case of Finland brutal restructuring: half of the 50 000 jobs in the banking sector disappeared.”. We all should learn from that one. But he should have taken a harder look at the Irish data. Just like Hans-Werner Sinn, who does not even seems to understand that the current accounts deficits of the non-core countries can only disappear when the surpluses on the EU-“core” (Germany, Netherlands, Belgium, Austria, Finland and the like) current accounts also disappear. If the deficit countries have to pay back their debts, the core surpluses even have to change in deficits, for quite some years. Basic accounting. German incomes have to increase (they are, at the moment, by the way).
Surces: Eurostat and http://www.cso.ie/releasespublications/documents/economy/2011/bop_q22011.pdf
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Real-World Economics Review Blog 
Did domestic production replace imports, ot is it all down to a decline in domestic consumption?
I do not really know, at the moment, one has to check the National Accounts on this. But it’s a very important question. Austerity in one country might have quite different consequences than austerity in another countries.
An example of a difference: on the macro level, only Greece and Ireland experienced an epic post 2000 consumption boom (non-transition countries) – but the Greek bust was much larger than the Irish one.
This bust-difference (hmmm, lets change that into boom/bust difference) might to an extent be explained by relatively fast population growth in Ireland (about +5% against +18%, from memory). This, of course, is an argument in favor of import substitution – but we have to go back to the data to investigate if this was the case.
Growing populations like those of Ireland and Spain are, of course, a much better hedge against long term loan risks than declining poulations, like the German one.
Ireland could be used as a good example of a country where economic austerity worked. Unlike some other European countries it does not lack discipline on the fiscal side and that, I think, is the best approach to paving its way out of the crisis.
Dear moderator,
It appears there are two Alices because I did not post this post at #3 and futhermore I do not believe austerity worked for Ireland. I hardly think Ireland has recovered and Im sure the average Irish person would agree with me. Can anyone let me know the current Irish unemployment rate?
14.3% Alice. Austerity has not, will not work. Austerity, believe it or not, was a popular idea among the media and politicians with then Finance Minister, the late Brian Lenihan referring to public finances as a “household budget.” The economically illiterate media (not surprising in that they conspicuously failed, with a few exceptions, to see the crisis coming) latched on to this notion. It is only now are questions being posed whether austerity actually works. We’ve already cut €20 Billion to negligible effect.
Lenihan’s Budget Speech 2009: Note the last sentence: You could actually pick through it and weep:
http://www.irishtimes.com/indepth/budget2010/speech/
Current unemployment stats:
Click to access lreg_sep2011.pdf
It is not discipline on the fiscal side that is needed to help refloat these economies that are failing in Europe. It is discipline on the monetary side that is needed (for central banks are now spending sums bailing and propping sick banks far in excess of any fiscal monies spent building bridges, dams and schools).
There is something very sick about the entire call for fiscal austerity given the sobscene amounts being thrown at banks in the interests of what – saving insitutions from their own self purcahsed systemic risk?
Such a protected industry in the age of no protection???/ Pure hypcrisy. The banks always try to win. The banks won in the decade of the 30s impoverishing many. Never thought Id live to see such ugly wrong policy playing out again.
Commissioner Rehn is not the only one whose use of data on Ireland is being severely questioned. See Michael Taft’s two posts this week on the Irish Fiscal Advisory Council’s first report:
http://notesonthefront.typepad.com/politicaleconomy/2011/10/a-poor-start.html
http://notesonthefront.typepad.com/politicaleconomy/2011/10/in-my-post-on-the-irish-fiscal-advisory-councils-first-report-i-pointed-out-they-made-a-blunder-in-short-they-claimed-t.html