The Entrepreneurial Irish State

IDAIreland

Paul Sweeney31/01/2019

Perhaps the most sucessful example of the entrepreneurial state in Ireland is IDA Ireland. It is a state agency which has been incredibley successful in attracting foreign direct investment (FDI) by multinational enterprises. It boasts that its “current strategy is based on a policy of attracting investors from a range of industry sectors who are seeking the best location for their Advanced Manufacturing, Global Business Services and R&D operations.” This probably understates it role. It is and has been extraordinarily successful in attracting Foreign Direct Investment to this little island for its 70 years of existence. Furthermore, it has attracted the fastest growing enterprise sectors.

 

So sucessful has it been in its mission that it has presented policymakers with three problems – a) that Ireland may have become over-dependent on FDI; b) therefore the policy elite may have neglected the indigenous sector; c) tax revenues from a very few MNC companies who chose to pay their tax here because of the low nominal rate has led to unexpected problems of sustainabliity and how to deal with the revenue.

Ireland is a Mixed Economy

The success of IDAIreland in promoting Ireland as a business location and in aiding multinational corporations in investing here with grants and good advice epitomises the mixed economy of public and private in Ireland. Ireland is far from a “free” market or a privatised economy.

 

As I have pointed out in four other blogs in this Irish  Entrepreneurial State series, economist Marianna Mazzucato, author of the book, “The Entrepreneurial State” agues that the role of the state is downplayed by the media and by most economists. Further she points out that some of the great recent innovations have been made by state bodies – innovations such as the internet, GPS, the touch screen, SIRI (speech recognition) and so on.

 

The state assists private sector innovation and progress as I have also argued in many blogs here and in detail in TASC’s book, “Nuts and Bolts of Innovation” on industrial policy (introduction by Mazzucato). The Irish state subsidises up to 470,000 jobs through IDAIreland, Enterprise Ireland and Local Enterprise offices (Expenditure Report, 2018 p50) and much more. For example, public capital expenditure to assist these firms, including direct grants etc. will be €560m for the three years 2018 to 2020, with a further €311 in current supports (eg pay) of these agencies and other providers. IDA also gives public grants for capital investment, training, “lean green”, international marketing and R&D. So the success is not cheap, it is paid by the taxpayer, but the benefits are substantial and appear worthwhile.

 

The IDA had an income of €200m in 2017. It spent about €100m in grants and €50m a year in promotion. IDA has eight offices in Ireland but 20 throughout the world induding eight in Asia and seven in US. It’s promotional effort is further strenghtened by the Irish embassies abroad which also promote Ireland for enteprise investment.

 

The State / IDA did Pick Winners

Thirty  years ago, conservative economists argued that the state could not pick winners. Many opposed state intervention such as that of the IDA in the market. Indeed it may be difficult to pick individual winning companies, but the IDA has been outstanding in picking winning, that is growing, sectors – specifically pharma, ICT and medical devices – and in shifting from a former sole focus on manufacturing (originally at a basic level) to services, at the right time. As manufacturing employment declined (as its output soared) services grew.

Ireland’s attraction-  Winning Tax Wars or What?

Commenting on RTE radio on the recent 1,500 jobs promised by Salesforce, Martin Shanahan, IDA CEO, said that Ireland’s main attraction is “stability.” This is “the selling point” on Ireland he said.  

 

He did not focus on Ireland’s famous low tax rates on companies and the many other tax breaks which reduce the rates to near zero, nor on Ireland’s very low employer social charges, nor on the grants and other subsidies.

 

Asked about the impact of the housing crisis on workers, he kicked to touch, saying that there is a housing issue, but the investing companies are looking at long term solutions and housing will be eventually solved by government.

 

The Growth of Two Tier Workforces

Half of all FDI jobs are located outside Dublin, Shanahan pointed out. He agreed IDA had been “remarkable sucessful in attracting FDI but we need the jobs.” However, the quality of jobs is important. While many of these jobs are well paid and highly skilled, many newer firms, especially in techology, are now tending to have a two-tier workforce, with insiders and outsiders – the outsiders being much less secure and lower paid contract workers. In some cases, half of all so called “direct” employees may be contractors. The rise in inequality is due to the fall in labours’ share in national income and in part this is due to the rise of the Two Tier and platform economies and precarious work.

In the past, the IDA encouraged foreign investing firms to recognise trade unions, specifically the ITGWU, now SIPTU.  However, this endorsement of the right to representation, which is a human right, by the state body ended about thirty years ago. Back then there was one-tier of secure workers, who, if low paid by European levels in assembly and basic manufacturing, had very good jobs by the standards in Ireland at that time. Unions worked with companies to improve pay and conditions. Of course, today some firms argue they pay so well, with good conditions that workers don’t need representation (ie bosses know best). This may be correct for Tier One employees. Interestingly, many of the older unionsised foreign firms are One Tier employers.

IDA says “companies around the world are increasingly engaging in corporate social responsibility (CSR) initiatives. Embracing responsible and sustainable business practices helps to make companies employers of choice and has important reputational benefits.” With the falling share of labour income, the emerging trend in two-tier employment practices by many companies here, and the invasion of personal data privacy by the big tech companies, all of which are located here, this assertion is questionable.

Though Shanahan did agree that increasing jobs in indigenous sector firms is part of overall industrial policy, he said that corporate tax rates have been one of the principal elements of the favourable enterprise environment in Ireland for more than three decades. There is much emphasis on the consistency of the 12.5% rate (in place for 17 years, but announced 7 years earlier) and consistencey is important in tax policy.

 

However, today public disquiet here among PAYE taxpayers and European hostility to Ireland’s leading role in the effects of the Corporate Tax Wars between member EU states means a solution has to be found to the Tax Wars. Internationally too, most citizens are totally fed-up with industrial-scale tax avoidance and evasion using countires like Ireland. An OECD voluntary process BEPs is working in the right direction on this, as is the EU Commission. A Single Market will not work well with continuing Tax Wars.

 

So Tax Wars are ending. Ireland had first mover advantage and it was a surprise how long it lasted before other states woke up. But Ireland has many other attractions which have worked and will work in the future, not least of which is the clusters of growing and important industrial sectors which the  IDA has built up here.

 

Conclusion

IDAIreland is a good example of the entreprenerial public service /state in action. It has been so sucessful that it now faces the three problems  listed in the second pargraph. Recently its CEO, Mr Shanahan said stability is Ireland’s attraction. He defends the low corpation tax rate but it has only been one of of several attractions.

 

But there never has been only one silver bullet – tax. The Low Tax mantra echoed by all Irish political parties – a core neo-liberal policy – is not sustainable in the medium term. It was taken to extremes by its beneficiaries and the public is now very angry; and further, modern economies, mixed economies, cannot function without adequate, sustainable taxes. Thus the argument that Ireland achieved its success through market-based, neo-liberal policies, particuarly low taxes, is  not correct: the IDA represents a highly interventionist state.

Posted in: Investment

Tagged with: fdiindustrial strategy

Paul Sweeney     @paulsweeneyman

paul-sweeney

Paul Sweeney is former Chief Economist of the Irish Congress of Trade Unions.  He is a member of the Economic Committee of the ETUC and chair of TASC’s Economists’ Network. He was a President of the Statistical and Social Enquiry Society of Ireland, a member of the National Competitiveness Council of Ireland, the National Statistics Board, the ESB, TUAC, (advisor to OECD) and several other bodies. He has written three books on the Irish economy and two on public enterprise, including The Celtic Tiger; Ireland’s Economic Miracle Explained and Selling Out: Privatisation in Ireland, chapters in other books and many articles on economics.


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