Marc Coleman – Co-operation of State and Business: Ireland and Latvia

CO-OPERATION OF
STATE AND BUSINESS:
IRELAND AND LATVIA
Marc Coleman
Leading Irish Economic Commentator

SMS jautājumi – LTC un JAUTĀJUMU sūtiet uz 157 Tvītiem – #LTC_conf

Marc Coleman, BA M Econ Sci ASP MBA
Economist (formerly ECB)
Broadcaster (Newstalk 106fm),
Columnist (Sunday Independent)
Author of 2 bestselling books

Keeping the “ Growth Flame” alive
by state-business
cooperation


This Presentation:

1. Ireland & Latvia 1912-2012: (Non-identical) twins.

2. How to influence government policy

3. What Government can do for business, Part 1:
Foreign Direct Investment & Choosing winners.

4. What Government can do for business, Part 2:
Other policies

5. Conclusion


Part 1, Ireland & Latvia: 1912-2012
(Non-identical) Twins


1912-1916 Country loses half of population 1845-1858. Loss of national language near complete. Country reconciled
to British Empire. But artistic & cultural national revival and WW1 leads to 1916 rebellion and independence
process

1918-1922 End of WW1, Decl. of Independence, Anglo Irish treaty & Civil war. De facto Independence for south

1939-1945 Neutrality during war understandable given legacy of British persecution but leads to misunderstanding &
economic isolation

1972 – 1987 Entry into EEC. Sense of new potential, new alliances and horizons
But disastrous economic failure, rising government spending, taxation and stagnation

1987-1992 Drastic fiscal consolidation & mix of relative internal + external devaluation.
1992 saw irrevocable commitment to EMU – this was key to beginning of our boom.

1992-2004: Genuine high productivity boom. Population rises by a quarter, living standards by one half

2004-2009: Disastrous regression – for political reasons - to policies of high spending, weak financial regulation and
socialisation of economy and bank debt

2009-2012: Government remains too large as a result of 2004-2009 spending growth and socialised bank debt still a
chronic problem. Internal devaluation more modest than Latvia due to rigidities in public sector & other
sheltered sectors of economy.

2012: Irish external economy is recovering and the fiscal correction has been hailed internationally for its courage
and ambition. But bank debt and failure to extend internal devaluation to sheltered economy remain
critical challenges. Unfortunately our national language has – 100 years later – still to recover from previous
century. Challenge of globalisation & dominance of English.


Part2: Influencing Government policy

Specialist
media
(initiation)

Govt policy

Popular Networks
media & events
(popularise) (disseminate)


Part2: Influencing Government policy
Specialist Media: Academic journals
Business magazines / sections of newspapers
Trade / professional journals

Creates acceptability for ideas amongst policy elites/intelligensia. A vital first step.

Events/meetings/conferences: Business / employer conferences and dinners
Professional org. / Trade Union congresses
Political party or special policy conferences

These events are crucial to identify key stakeholders in a policy decision

Popular media: Newspapers
Radio/ TV
Social media including twitter, facebook

If a policy idea faces resistence these are crucial to ensure politicians


1. Irish Times
Economics Editor
2. Academic papers
3. Presentations
4. Think tank
www.nationalforum.ie

1. Stamp duty (property
tax) cut from 7% to 1%

2. Social partnership
model reformed (less
power to public interests
now)

3. Emphasis of fiscal
1. Newstalk radio show correction more on 1. Business & employer
spending cuts events & dinners
2. Sunday Independent
column (1m readers) 2. Government
sponsored policy
3. 2 books events
4. TV appearances 3. Meetings with other
journalists & politicians


Example 1: Failure!
Warnings
about economic 2004 Dublin Economic Workshop conf: “Why Stability Treaty gravely weakened
http://www.marccoleman.ie/wp-content/uploads/2012/01/ESRI-paper-on-stability-pact.pdf
Later a paper of the Economic and Social Research Institute
overheating Sept „05 (Irish Times) I interview ECB President Jean Claude Trichet who indirectly
warns Irish financial authorities to tackle credit growth
http://www.marccoleman.ie/wp-content/uploads/2012/10/Trichet.pdf

July „06 (Irish Times) “Aimless, lopsided and unsustainable, our economy needs
remedial action now”
http://www.marccoleman.ie/wp-content/uploads/2012/01/He-had-a-good-run.pdf

2007: In various articles covering June 2007 election I warned that economic forecast
of parties were unrealistic, also promised based upon them

No impact
on Govt or
on
political July 2006: I proposed contingency plan for a recession at Govt party conference.
parties
Oct. 2006: At Irish Small & Medium Employers conference I warn recession
No would begin in 2008
popular
Feb-May 2007: At political party eleciton briefings I challenge economic forecasts of all
media main parties and ask what they will do if these
forecasted growth rates don’t materialise?


Example 2: Success! 12 Dec. 2005: In Irish Times business section I use
technical
arguments to argue against EU plans to harmonise
Defence of Ireland’s corp. tax

low corporation tax http://www.irishtimes.com/newspaper/finance/2005/1202/11323302629
64.html

regime. Specialist
media
(initiation)

In Sunday Independent –
readership 1 million –
Govt policy
I argue against
harmonisation of
corporation
Tax using arguments and
ideas from Popular Networks
Irish history media & events
http://www.independent.ie/national-
news/no-surrender-to-others-getting- (popularise) (disseminate)
their-hands-on-our-taxit-is-time-that-
we-showed-the-rest-of-europe-a-bit-
of-steel-writes-marc-coleman-
1092510.html
I raise this this issue extensively at press
conferences held by
Government and at general election
briefings by political parties

Example 3: Success! 1 Jan 2006: I call for abolition of stamp duty, a
tax on family homes
http://www.irishtimes.com/newspaper/finance/2006/0113/113411
7224050.html

Call for abolition of
6 June 2007: In Irish Times business section I
stamp duty on the repeat this call and warn of electoral
consequences:
family home. http://www.irishtimes.com/newspaper/finance/2007/0608/118072
1263038.html
Specialist
media
(initiation)

18 Nov 2007: In Sunday
Independent – readership 1
Govt policy
million –
I frame argument as battle
between overpaid
bureaucrats who want tax
maintained and majority of Popular Networks
voters & taxpayers media & events
http://www.independent.ie/opinion/anal
ysis/ministers-must-face-down-the- (popularise) (disseminate)
mandarins-1222400.html

I raise this this issue extensively at press
conferences held by
Government and at general election briefing
by political parties

Other Examples & Results
Book 1 (bestseller) “The Best is Yet to Come” (Dec. 2007)

The book warned about crisis to come despite title, which is based on confidence in recovery by 2020 if Gov’t is tough &
thinks in long-term

Credible optimism based on long term trends, e.g. growth from 3.6 million in 1996 to forecasted 5 million by 2020

It stresses long-term supply side challenges including
 Reform of electoral system to reduce influence of organised lobby groups
 Better urban spatial and regional to channel population growth
 Spending and tax reductions
 Increased competition in markets.

Book 2 (bestseller) “Back from the Brink” (Nov. 2009)
I called for overhaul of financial regulation & banking. This begins in early 2010

I called for fair balanced reduction in public pay This occurred in December 2009

I called for reform of social partnership model New government committed to this in March 2011

These books contained ideas I expressed on radio (Newstalk 106-108fm) and in my articles (Sunday
Independent). But by putting them in book form they acquired a permanence and credibility, allowing them to
be taken seriously by policy makers


Other Examples & Results

- Abolition of “Groceries Order”, an anti-competitive ban on below cost
selling
- 16 Sep’t 2005: Article in Irish Times warns that high cost of living could lead to a new political movement:
http://www.marccoleman.ie/wp-content/uploads/2012/10/A-silent-unhappy-majority-arrives-at-the-tipping-
point1.pdf

- Although written in “specialist media” business supplement of Irish Times, a TV programme at the same time raises
public concern and anger at rising price levels

- In January 2006, the Groceries Order is abolished

- In “Back from the Brink” I called for government to incentivise Research
and Development spending and direct third level research funding towards
job creation.

- See next section for results

- Call to defend programme of infrastructure spending against spending cuts
- More productive in long term
- Danger that this is cut too much as the “easy option”
- I challenged all political parties in 2007 election to promise not to use Capital spending as “line of
least resistance”


Part 3:
What Government can do for
Business: Foreign Direct Investment
& Industrial Policy


Industrial Development Authority (IDA)
• Note: Ireland has all-island population of 6.5 million but Republic is
just 4.6 million

• 1st country in world for value of Investment & 2nd country in world for
Inward investment per capita (IBM 2011 Global Location Trends report)

• 2nd most attractive country globally for FDI (2011 NIB/FDI Intelligence
Inward Investment Performance Monitor).

• Attracts more US investment than China, India and Russia combined.

See link for sources: http://www.idaireland.com/invest-in-ireland/fdi-in-
ireland/


How was it done?
Part 1: Industrial Development Authority (IDA)

• Established in 1959

• Vital policy supports from:
(a) Low corporation tax base
(b) Infrastructure policy, flexibly targetted
(c) No red tape
(d) A “one-stop shop” approach from government: IDA handles all policy issues

• Paraig White, IDA boss “The IDA laid the basis for pioneering foreign investment when Ireland
was an agricultural country … we identified the parmaceutical and emerging electronic industries
and then set about marketing Ireland as an environment with no red tape, a one-stop shop and
repackaging and presenting what was essentially zero tax on exports.

• 1982 IBM convinced that having HQ in a small country doesn’t prevent access to
larger ones

• 1985 Microsoft chooses Ireland

• 1992-1997 Dell, Intel, Merck Sharpe & Dohme, Pfizer


How was it done?
Part 1: Industrial Development Authority (IDA) … cont’d…

1992: A critical year:
-Irreversible commitment by Ireland to EMU, hence “inside” the club
-But good links & language connections with $ & £ economies
-Start of period of globalisation of world economy
-Also start of High tech FDI boom

1992-1996 -Dell, Intel, Pfizer, Merck Sharpe & Dohme, Hewlett Packard
and many more high profile companies locate in Ireland

Now -1,004 overseas companies employ 146,000 people & export €110bn
-Ireland exports €9 billion per month and exports rising at 18% p.a.
-Exports to China up 20% on August figure.
-Exports of indigenous companies to China up 10% in 2011
-Exports of indigenous companies to Germany, Eastern Europe, Baltic
States and Russia up 27% in 2011


Enteprise Ireland (EI)
Goal…
…. to repeat FDI success with indigenous exporters

Sectors chosen include:
- Software
- Medical devices
- Cloud computing
- High technology food
- Traded services such as education (third level tuition)

2009
- Irish exports fell by 10%
- But thanks to EI Research & Development spending rose and as focused on
commercially relevant projects
- By 2010 exports had regained 70% of 2009 losses. In 2011 total exports recovered fully
and are now growing at healthy rates
- Follows Finnish example: Despite 25% spending cut after 1991 crisis R&D rose 20%

- Sean Baker, chairman of Irish


Enteprise Ireland (EI)
Main functions:

1. Funding company start-ups and expansion

2. Exports: Preparing companies to enter international markets with market
research assistance, international office support and trade events. Also
leveraging Irish diaspora and diplomatic network to develop contact base
for Irish exporters

3. Research and Development: Funding and advice for R&D & innovation
activities

4. Management: Develop and pool management resources of small companies

5. Productivity: Conduct regular “health check-ups” of small firms and
benchmark their performance against international databases of
productivity indicators.


Lessons for Latvia 1:
It can be done, but takes (at least 2) decades to come to fruition.
It requires stable, cross party support so that investors know policy regime will not change if the
government changes

Domestic economy not necessarily obstacle to FDI success. But:
- Patience and long range vision are vital
- Tax regime is vital.
- “One stop shop” approach of government to investors is vital.
- Flexibility - to adapt infrastructure and other policies to FDI needs – is vital

Choosing champions?
– Ask the Danes as they are the experts, leveraging simple agricultural base of economy
into production of Agricultural machinery, Insulin and wind energy
– Or the Finns and Swedes. Excellent 3rd level education. Hence Volvo, Ericsson, Nokia
– Finnish system of state sponsored innovation systems “Citra” is well worth studying.
– With exception of Food industry (Kerry Group, Avonmore) “choosing winners” not a
strong element of Irish policy to date. Ryanair is most successful Irish international
company and government did everything it could to kill it.
– Choose not sectors, but clever companies with potential to grow to at least €100 million
euro turnover within 10 years. Then focus resources on 2 or 3 of them.


Lessons for Latvia 2
• There are some 37,000 Latvians in Ireland alone.
• Around 90,000 in the USA http://latviansonline.com/news/article/7862/

• Famous Latvian-Americans include
– Konstantīns Počs, Co-inventor of AWACS (Airborne Warning and Control System)
– Mark Rothko, painter
– Bob Dylan, musician
– Juris Upatnieks Physicist & Inventor of 3D holography

• The American Latvian Association cultivates cultural and historic links
http://www.alausa.org/en/what-we-do/conference-of-latvian-diaspora-archives-and-
material-culture/
• Question: What about economic links ?

• For IDA and Enteprise Ireland strong diaspora network is a huge help to their work.
• We are formalising diaspora policy with by hosting next year “The Gathering” for its
diaspora.
• Latvia should host and develop similar event and using it to develop small but useful
networks.
• Consider collaboration with fellow Baltic states to achieve Economies of Scale.


Part 5:
What Government can do for
Business: Other Policies

3 Categories:

1. Monetary, exchange rate and banking policies

Ireland’s success from 1992 to 2004 shows that commitment to EMU and strong monetary regime
works. Average growth was over 6% per annum during this 12 year period.

Ireland’s crisis from 2004 to 2007 shows that when safe banking regulation is abandoned and when
economy is allowed to lose competitiveness, disaster results.

The Lesson: Internal monetary discipline must mirror commitment to external discipline.

2. Fiscal policies
1987-1992: Ireland fails to cut spending, raises taxes. Result = average GDP growth of 0.3%
1987-1992: Ireland cuts spending by 10% GDP. Result = average GDP growth of 3.3%

2008-2012: Success of Latvia’s adjustment – international devaluation and strong fiscal consolidation
proves that Latvia has learned lesson that Ireland learned in 1980s

The Lesson: When properly designed – cutting spending rather than raising taxes - austerity works.
When Austerity focuses on tax increases it is destined to failure.
The Irony: Ireland has forgotten the same lessons, taking too long to reduced spending.

3 Categories, continued…

3. Supply side policies

Ireland’s internal competitiveness failure given by some stark figures:

Between Jan. 2000 and July 2007 – the height of our boom:

- average price level rose by 34.5% (CPI)

- but educ, medical & local govt costs rose 73%, 103% & 232% respectively

Ireland’s internal devaluation since crisis too concentrated on private sector and as a result
weak.

Success of our exporters in Ireland is stunning. But small businesses with mainly domestic
demand face huge costs of doing busieness, driven mainly by state or semi state sector.

Latvia more successful in this respect

But Ireland has been successful in stabilising business conditions and
employment losses at 2005 levels by using a number of strategies:

- Strict avoidance of any increase in Ireland’s 12.5% corporation tax rate.
Also strong resistance to any proposals to harmonise Corp. tax base.

- Strict avoidance of further increases in tax rates and increase in tax
threshold for lower income workers

- Introducing a 3 year relief for start-up companies from payment of
corporation tax.

- A 25% R&D tax credit applied to the first €100,000 of qualifying spending.
This helps the vital job creating Small Medium Sized sector

- Greater flexibility in types of spending that qualify for this

A Procuring Innovation Initiative to give SME’s better access to market for
government contracts.

Successful Irish supply side strategies, continued.

- Creation of a new Micro Enterprise Support structure (influenced by Finnish “Citra”)
within Enterprise Ireland to provide office support and advice to small companies

- Creation of mentoring and management development networks with Long-term
development programmes to cultivate business leadership

Introduction of credit guarantee scheme to target small business affected by the credit
crisis. Establishment of a Credit Review Office for businesses encountering problems with
banks.

- Creation of a €100 million micro Finance fund to help lending to small business.

- Establish a Global Irish Network of advocates to maximise investment, export and financing
opportunities of our Diaspora
- Foreign Earnings Deduction from income tax to help incentivise highly skilled individuals to work
overseas

Conclusions:

- Ireland and Latvia have very similar histories and challenges.

- You can influence government policies by “triangular” approach ensuring
that you begin with specialist media, use networks and then use popular
- Media to ensure politicians have necessary support from public

- Ireland & other nations can learn from Latvia‟s impressive & successful
fiscal policies and flexibility of its economy to devalue internally

- Ireland is still a world beater and model nation in relation to Foreign Direct
investment. Also enterprise development strategy is worth copying

- Nordic countries, particularly Denmark and Finland are better models for
“picking winners” regarding industrial policy

- Ireland has a good model for general pro business tax incentives and
company start up supports But Ireland lacks flexible internal markets
and is subject to stagnation in domestic demand and credit constraint
-


High level conference chairing and participation


www.marccoleman.ie

info@marccoleman.ie

00353(0)86 8094193

CITIES, CULTURE AND
THE NEXT 100 YEARS

Ken Livingstone
Mayor of London, 2000 - 2008

Marc Coleman – Co-operation of State and Business: Ireland and Latvia

Marc Coleman – Co-operation of State and Business: Ireland and Latvia

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