Notes on the Front

Davy Stockbrokers has produced the must-read report (so far) of the year. Entitled, ‘Years of High Income Largely Wasted’, it is one of the most damning indictments of the squandered boom years. Okay, on the surface it appears a pretty dry affair – analysing the growth in our net capital stock since 2000. But I urge you to take the time to read this short, four-page easily accessible analysis.

‘One of the great misconceptions about Ireland is that it is a wealthy country. Ireland relentlessly climbed the income per capita table year after year from 1994 on . . . Yet it was never wealthy: those years of high income were largely wasted.’

How can Davy (and their chief economist Rossa White) say this? First, they look at GNP per capita at purchasing power standards to take account of living standards. They point out that in 2008 that we ranked 10th in the EU-15; that is, in the lower-half of the table. This is not something we might expect given that during the boom years we were told we were one of the richest countries in the world – and the money would keep flowing. Indeed, it will be interesting to see where we stand when the recession finally troughs. There’s a good chance we will fall further down the table.

However, that is just an appetiser. The main course is this:

‘GNP per capita is an income measure, but measures of wealth are more difficult to grasp. Probably the best way to compare the wealth of countries is to look at the capital stock. Years of high income can be turned into physical wealth if invested properly.’

So, did we invest properly? Hardly. The gross numbers are highly misleading. Between 2000 and 2008 our capital stock ‘soared’ – more than doubling from €228 billion to €477 billion; an increase of €255 billion. Sounds like a lot. And it is. One of the highest in the EU.

But here’s the but: €184 billion went into that ‘unproductive asset: housing’. That’s over 72 percent of the total increase. Davy/White, however, are just getting started.

Only €70 billion went into productive capital stock. But a significant portion – €20 billion – went into retail, transportation and storage (most this accounted for by structures).  The report points out:

‘It is also mainly foreign-owned and not technologically advanced – not an area into which we should have been channelling a significant proportion of our high income.’

What about the rest of the investment?

‘. . .it is interesting to note that most of the rest of the increase in our 'core' productive capital stock was related to the state or semi-state sectors. It was not driven by private enterprise.’

Of the remaining €50 billion – what Davy/White calls ‘core’ productive capital stock – the state and public enterprise investment made up €33.5 billion, or two-thirds: roads, energy, hospital, schools, water and waste, etc. Private sector investment made up a ‘pitiful’ €17 billion. €17 billion out of a total increase of a quarter of a trillion Euros – and this during a period unprecedented growth rates.

From this, Davy/White comes to a damning conclusion:

‘Let's take three small nations as an example: Belgium, Finland and Ireland. The three are closely matched in the euro-area income per capita table . . . But no Irish resident who has visited Belgium or Finland would have the audacity to claim that this country is wealthier. Transport infrastructure is vastly superior in those countries, as is the telecommunications network, and public services are delivered from higher-spec schools and hospitals.’

So what lessons can we draw from this?

• First, as Davy/White points out, ‘our technological capacity has not advanced much over the last decade.'
• Second, again as the authors point out, ‘Unless we re-invest, it will harm productivity.’
• Thirdly, relying on private sector investment – or the free inter-play of market forces – to resolve this is more a leap of faith than an analysis grounded in either historical fact or reasonable expectation. Private sector investment has collapsed and is returning to pre-2000 levels.

But we have a major problem – one that is dawning on some economists and commentators. At the very moment that we must invest, in a technological capacity that hasn’t advanced much over the last decade, when private sector investment is collapsing – what does the Government do? It cuts public investment; cuts it hard. According to their own projections, gross voted capital expenditure will be cut by over 20 percent in real terms by 2014.

The Government’s strategy will reinforce our deficient capital base and relatively low-income status. We will fall further behind our EU partners. Productivity will decline, competitiveness will be even further undermined. And living standards will reflect that.

Davy/White has pointed out a bleak past. Unless we engineer a radical change of policy direction the future will be equally bleak.