Notes on the Front

Say what you will about him – war criminal, corrupt, spawn of the demons sent by Satan himself to destroy humankind – Donald Rumsfeld’s brain crushing elucidation of ‘unknown knowns’ and ‘known unknowns’, never mind ‘unknown unknowns’ is a gem of intellectual miasma. It would defy the examination of logicians from Aristotle to Bertrand Russell. Now I accept that talk of the ‘knowledge-economy’ doesn’t, or shouldn’t, conjure images of death and destruction but we are forever being regaled with the benefits – and the inevitability – of the new economy. And behind every assertion and exhortation I get a sneaking sense that there are some knowns, unknowns and, lord help us, unknown unknowns.

Dan O’Brien of the Economist Intelligence Unit provided a refreshing and upbeat assessment of Ireland’s transition to a new stage of enterprise development. His central thesis is that, below the radar, Ireland’s exporting market is booming in the traded service sectors. He points out that service exports are substantially increasing and that, already, Ireland is the 12th largest services exporter in the world in absolute terms (in per capita terms, we rank second). Native Irish firms are far more export oriented in the service sectors than they ever were in the manufacturing sector. He goes on:

People dream of high value-added industries . . . This is exactly what Ireland is fortunate enough to possess. Information technology, finance and business services are the future for any country that wishes the best for its citizens.

There is much to this. Certainly, services are becoming a major force in international trade. And the entry costs and barriers to entering export markets are considerably less than for goods – especially for a country with a small home market.

But the transition to a knowledge economy will not be without its challenges and, unless we get a grip on the thing, the future may not be as rosy as some predict. The following information is taken from Forfas’ agency data (this does not include all enterprises, involved in export-activities or not – but it is representative the majority of companies working with the IDA, Enterprise Ireland, etc. which are export-orientated).

The growth in service exports has been considerable. In the early 1990s services made up less than 15% of all exports – nearly half of that tourism. It is now approximately 40% and on current trends will overtake manufactured goods in the next decade. But the manufacturing and service sectors have much different impacts on the economy.

Though service exports make up nearly 40% of total exports, they make up only 27% of the total economic impact in terms of wages, Irish sourced goods and services and tax yield.

This shouldn’t be too surprising. A manufacturing firm will have much greater need for a range of goods and services, a service firm less so (a simple example is that manufacturing firms need to have their goods transported, warehoused and shipped out; tradable services mostly don’t need these). There is a working assumption that every job in the manufacturing sector sustains more jobs downstream – whether in associated manufacturing or services. This is not a ratio that traded services can match.

This should alert us to a problem – as services become a more important element in our export portfolio, they will have proportionately less impact on the economy. For every €100 earned in exports:

• Manufacturing goods produce €31.30 in wages, Irish sourced goods and services and corporate tax yield.
• Services produce €21.27.

Let’s pretend for a moment that we have a ‘knowledge-based’ society today, based on service exports. Let’s pretend our export profile is reversed, that services today make up 60% of exports while manufacturing goods make up 40%. What would the economic impact be based on the 2005 figures?

The economy would be worse off by €3.9 billion. That’s less money in terms of wages, Irish sourced goods and services and corporate tax yield. This doesn’t count the loss in income tax and VAT. This represents nearly 3% of GNP and a lot of jobs. That is a considerable sum.

If maintaining growth and wealth at the national level will be a challenge, it will be an even greater one at the regional level.

Internationally traded services are highly concentrated in Dublin while manufacturing is more evenly spread around the regions. As the economy moves towards a strong service-export platform, we may find ourselves creating even greater regional disparity than we have now. In short, Dublin and the Eastern region will benefit, while the rest of the country will not.

And, of course, we will still face that ancient problem – the over-reliance on multi-nationals. When figures are produced on ‘service exports’ we should be careful to distinguish between the native and foreign-owned sectors. Our native manufacturing base has been limited due to such factors as skill-base, managerial capabilities, international distribution networks, etc. If we are not careful, we could be replicating a similar situation in our native traded services sector.

There has been a substantial growth in service exports. But it is almost primarily due to the foreign-owned sector. Currently, foreign-owned firms make up over 90% of total service exports. Whatever about the logistical problems in multi-national manufacturing firms upping stakes and moving out of Ireland, clearly service firms are much more mobile and, hence, volatile.

And, of course, I have not even begun to mention the enormous challenge of educating people for the knowledge economy – a challenge we are running away from at every possible opportunity.

None of the above should be read as an attempt to turn back or stop the clock. Modern economies will become more and more reliant on service exports. However, that transition is full of knowns, unknowns and every variant of those two. We don’t have to call in the marines just yet. The trick is to get a better grasp of, and so limit, the unknowns.

For moving to a service-export sector will involve issues of creating an indigenous enterprise base, ensuring its regional pluralism and linking it to the remainder of the economy to ensure that the wealth created is truly national. If that, and meeting the challenge of education, were achieved then Mr. O’Brien’s optimism will be justified. But that won’t be done by letting market forces do their thing. It will have to be done in a planned and co-ordinated way (and given that we have crucial statistical deficits in the service sector this will be no easy matter). But if we start now, we might yet turn service exports into everyone’s advantage.

And we won’t have to fire a shot.