Investing in the knowledge-based economy
With their narrow accounting focus on the budget deficit, have the Irish government, opposition parties and media commentators lost sight of the bigger picture?
Only three years ago, the government announced its commitment in the National Development Plan 2000-2006 to building a knowledge-based economy. This approach was later reaffirmed at the European Union's Lisbon Summit, which pledged to make Europe the "most dynamic and competitive knowledge-based economy in the world" by the year 2010.
The reasoning was clear and compelling. During the 1990s, Ireland was extraordinarily successful in attracting foreign direct investment in the key global growth sectors - and linking investors to local industry supply chains and the graduate labour market. As a result, Ireland experienced the highest rates of output, employment and productivity growth in the whole of the OECD. The Celtic tiger was truly roaring.
By the year 2000, over 40 per cent of Ireland's trade with the rest of the world was in research-intensive products and services - double the figure a decade earlier and eight times the OECD average. The problem, however, was that these products embodied research and technology generated not in Ireland but abroad. Despite robust trade surpluses, Ireland was running a huge technology deficit. According to the OECD's international comparative data, our emerging knowledge economy was a "technology-taker" rather than a "technology-maker".
This problem has now been compounded by a massive shift in the distribution of foreign investment in Europe towards the new accession states, particularly Hungary and the Czech Republic. Their success is based on a deliberate strategy of emulating the Irish model of low corporate tax rates, investment incentives and a flexible, high quality workforce, with the added attraction of much lower labour costs. Clearly, for Ireland to recapture and sustain competitive advantage in this context, a new model would have to be devised.
It was soon understood that the primary emphasis of any new model must be the development of world-class capabilities in research and innovation, enabling clusters of both Irish companies and local subsidiaries of multinationals to compete more effectively in the high value-added, knowledge-intensive sectors of the global economy. A promising start was made in the National Development Plan with its commitment to research funding of EUR2.5 billion.
"The vision of a knowledge-based economy in Ireland has not been entirely extinguished by this Budget, but it seems that the case must be made again - and again."
The plan recognised that "there is a strong link between investment in the research and innovation base of the economy and sustained economic growth ... The accumulation of 'knowledge capital' will facilitate the evolution of the 'knowledge-based' economy". Most of the funding was earmarked for the ambitious new Programme for Research in Third-Level Institutions (PRTLI), Science Foundation Ireland and R&D measures operated by Enterprise Ireland.
The importance and urgency of this funding has now been highlighted by an OECD report which compares "investment in knowledge" across a range of countries, using an index of investment in higher education, R&D and computer software. The data show that by 1998, despite some improvement over the decade, Ireland's investment in knowledge at 3 per cent of GDP still lagged other countries and was scarcely more than half the figure in our nearest comparator country, Finland.
The obvious implication for the 2003 Budget was the need to step up public investment in research and innovation, as well as in the infrastructure which supports it. Indeed, the economic slowdown of the last two years made the timing of a substantial boost to such investment more rather than less propitious. Through a combination of good luck and good management, Ireland's national debt fell during the 1990s from over 100 per cent of GDP to around 30 per cent - the lowest in Europe. This has enhanced Ireland's ability to borrow on international money markets.
At the same time, the projected budget deficit this year and next was well within the 3 per cent of GDP limit set by the European Union's Stability and Growth Pact, which in any case is in the process of being revised to accommodate higher research and infrastructure spending. In this context, a renewed commitment in the Budget to the National Development Plan targets would have made sense not only in terms of the longer term objective of a knowledge-based economy but also as short to medium term counter-cyclical policy.
Yet, almost unbelievably, these arguments have been rejected in favour of a sharply contractionary Budget with a projected deficit of 0.7 per cent of GDP. To achieve this deficit outcome, not only will capital spending be cut in nominal terms by 1.5 per cent, but indirect taxes on a range of goods and service will be increased, pushing up the rate of inflation to 6 per cent - the highest in the eurozone. Consequently, in real terms, capital spending will fall by more like 7 per cent and wage claims will factor in higher prices, contributing to a loss of competitiveness.
The position is even more serious for strategic research and education infrastructure. The Budget imposes a "pause" in capital spending for research programmes - that is to say, no spending commitments at all for programmes which in some cases have only just got off the ground - and a nominal cut of 24 per cent in capital spending across the third-level sector as a whole, translating into a real cut of around a third. These measures are as short-sighted as they are unnecessary.
Can the Minister of Finance and his Department explain how research is to be conducted, especially in large-scale science and technology projects, without adequate facilities, equipment or accommodation? Does he think that research is something that can be turned on and off like a tap? The vision of a knowledge-based economy in Ireland has not been entirely extinguished by this Budget, but it seems that the case must be made again - and again.
Roy Green is Professor of Management and Dean of Commerce at the National University of Ireland, a former member of the Evatt Foundation's Executive Committtee and a contributor to the Foundation's new book, Globalisation: Australian Impacts, (UNSW Press).