Institutionalised inertia

A senior economist may not be the first person to whom we turn to discuss flaws in our constitution, but given that as far back as 2004 Dan O’Brien was taking the Irish Government to task about its institutionalised paralysis and inertia in the face of weak fundamentals in our economy, he seems entitled to have a view. Senior economist and editor with the London-based Economist Intelligence Unit, O’Brien spends most of the year in Geneva, so one might argue this gives him an external perspective sometimes lacking in his Irish-based peers.

In an Irish Times article back in September 2004 as Charlie McCreevy left office as Minister for Finance to extensive plaudits elsewhere in the press, while recognising that McCreevy was a “decent” and “principled” man, O’Brien lamented his “reckless spending” and lack of foresight:

“The splurge mirrored in many respects the fiasco after the 1977 election. The big difference was something over which Mr McCreevy had no control – the world economy. Had it taken a serious downturn, as happened in 1979, the Irish economy and the public finances would quickly have followed suit.”

The words seem almost chillingly prescient today. “People just did not want to hear,” O’Brien tells me when we meet before his presentation to the Marketing Institute of Ireland’s annual conference in November. “You know, it was just totally obvious that the fundamentals did not support what was going on. You can cod yourself about incomes growth and demographics. There were other countries in the world that had not hugely dissimilar demographics and income trends. They did not quadruple their output of housing. The thing just went crazy, the banks went crazy and, as we see now, the level of lending to developers became quite insane, and it’s all coming home to roost now. It’s not something that can be easily resolved – it’s going to be a long and painful adjustment because it got so out of hand.”

O’Brien has just had his book published, Ireland, Europe and the World: Writings on a new century, a mix of published articles (including the one referenced above) and new material. In it he questions our existing political system in Ireland and calls for reform of our constitutional framework. That proposal has already drawn criticism from one member of the judiciary in an opinion piece in the Irish Times. I ask him to elaborate.

“I think most Irish people don’t realise how unusual the Irish constitution is in how it frames and constructs the institutions of government,” says O’Brien. “It’s extremely unusual in a whole number of respects, and all of those elements together create a really serious inertia.

“If you look at countries that economically underperform consistently, they usually have really bad corrupt governments, a government that actually directly stymies growth. We do not. Corruption is not a serious problem in this country. We don’t have a predatory government. Anyone that says we do just doesn’t know the rest of the world.

“You wouldn’t have had the Celtic Tiger if you had a predatory government sitting on wealth-creating capacities. So you simply cannot explain Ireland’s unusual performance of a slump in the Fifties, a slump in the Eighties that nobody else had, an incredible boom in the Nineties and another slump now that is much deeper than in other countries.

“How do you explain that underperformance and overperformance? Well, you can explain it by a lack of government, and if you look at the three periods of slump that we’ve had, it’s more what was not done that caused them, rather than what was done.”

Inertia by design
“The principle you can start with is that the institutions of government are designed to create that kind of inertia, where people in power have no incentive to take on interest groups, no incentive to deliver change. The electoral system we have, the way of selecting ministers, leads to people who have no agenda to implement reform, and are not qualified to do so.

“You end up with people in ministries who have absolutely no clue about their brief, they have no background in it, and you just can’t run a modern country with unqualified amateurs. You can’t do it. You might have been able to get away with it in the Thirties, but not today. We’re in the situation we’re in because things that should have been done were not done. Unless there is some sort of recognition that we need to normalise our constitutional arrangements, it seems to me the country will underperform in the future.”

So what is O’Brien suggesting should be done? “Well, the aspects of the constitution you are talking about are: the electoral system, the manner in which ministers are chosen, the manner in which the constitution itself is reformed and the balance of power between the institutions – in particular the judiciary seems to me to be excessively powerful vis a vis the executive legislative branches.

“You put the four together and you end up with an executive branch of government that is basically paralysed, and has no incentive to change, that doesn’t know how to change, doesn’t recognise when change is needed and doesn’t want to take the political pain of change. If you simply made the Irish constitution more like other constitutions in its electoral systems, in the way ministers are picked, you would take away some of the problem. I am not saying it would be solved overnight, but you would certainly deal with a significant aspect of that problem.”

What social partnership?
It’s not so much that O’Brien doesn’t believe in the social partnership model, he simply fails to see that what passed under this title in Ireland in recent years was any such thing.

“We know now there was really no social partnership,” he says. “Social partnership, where it works, involves a shared understanding of a lot of basic requirements of the economy. That means that employers make the sacrifices during the good times, clearly dividing the gains with labour, and equally in the bad times the unions lead their membership to take tough decisions rather than having a situation, as it often seems to me here, where some of the trade union leaders are more militant than many of their members. You can’t have that in a social partnership.

“The whole social partnership thing fell apart here as soon as tough decisions had to be taken,” says O’Brien. “It added to our inertia. It was a wet blanket over things and increased the inertia factor. People ended up by basically saying: ‘We’re all in this together, we’re not going to do anything anybody wants, we’ve got enough money to buy off every interest group, let’s just take no tough decisions, let’s not reform electricity supply’.

“Why are electricity costs in this county higher than any other European country, 50pc higher than the EU average? Most of it is to do with the way the insiders have such a stranglehold over the system. Does anyone want to take that on? No, there is no question of anyone taking that on, and attempting to do something about it. So the insiders are able to maintain their privileged position at a cost to wider society. And the role of government is, at its best, to drive a wider societal common interest. As I say, there is simply no incentive to do that in our political system.”

O’Brien holds Austria up as an example of a country that has practised true social partnership. “Austria is a country that has never had unemployment over 6pc since the Second World War, and it has in many ways a stultifying social partnership system that necessarily involves deals being done behind closed doors. There is a lot of evidence to say that if you want to keep unemployment low, you go to one or two extremes. You either have a very loose labour market, such as the unregulated labour market that you have in the US, or you have an Austrian-type model that is extremely tightly regulated. There the social partners move their members, so the IBECs impose on their members the deal they agreed, even though people complain about it, and the unions impose on their members whatever is necessary at a time of crisis to restore competitiveness and maintain levels of employment.”

View from abroad
O’Brien spends much of his time in other European countries. I’m curious as to how he thinks Ireland is viewed from abroad? “You know, that’s always a difficult question because, well, what’s your impression of Finland, what’s your impression of Greece? These are small countries, and most people tend to focus on the large ones, or to simply focus on their own country,” he begins.

“Overall, I think the view is different for different countries, and it changes at different levels. Certainly at governmental, diplomatic level in Europe, I’ve detected in France and Germany in particular over the years a resentment towards Ireland. That’s certainly not the case in southern Europe, where they take a very different view: if you can get away with doing things good luck to you. They have no problem with Ireland doing things that appear to be getting around the rules, whether it’s in financial services or our corporation tax. The French and the Germans do – for different reasons. The French dislike you getting your own way, the Germans have a sense that you must do things by the book – but there is a resentment I’ve detected a lot over the years from those two countries, and I’m not sure that’s fully recognised here.

“Again, if you have a foreign minister who has no background in diplomacy, who doesn’t particularly understand how the EU works, they’re not going to be alive to those sort of things. They are not going to say: ‘Look, we need to put our diplomatic focus on the embassies in both these countries, we need to counter these things, we need to work on our image in those countries’. Because that matters – particularly when you go to the table during difficult negotiations, when you need concessions. That’s how the EU works, that endless bargaining process, and when two of the most important players have niggling resentments towards you, it doesn’t help.

“It comes back to that problem of simply not having people at the top who are aware of the problems, who are aware of the opportunities, and able and willing to do something about them.”

Did Lisbon exacerbate that, did it make that resentment stronger, in O’Brien’s view?

“Well, the first rejection was very, very bad, but the second referendum makes up for it, certainly the size of the ‘yes’ vote helped. I think it probably cancelled it out, but it will be an ongoing worry that Ireland is a permanent risk factor for any change in the structures of the entity.

“That said,” he continues, “for the first time in 25 years, change is probably not on the agenda. The EU has hit a buffer and integration may have gone as far as it’s going to go. I’ve been following this for years and everyone is just so roundly sick of it, there is no appetite for more reform in Europe. So, at least from that perspective there is no threat there could be another referendum rejection.”

Ireland’s future
With all the talk of innovation and the smart economy, I’m keen to get O’Brien’s views on whether we have the strengths and skills to make this a reality.

“Certainly a large number of the conditions exist to allow that to happen, but to my mind the biggest disappointment from the Celtic Tiger years is that indigenous Irish business simply didn’t take off. If it wasn’t for multinationals this country would be one of the most closed countries in the world. Multinationals count for almost all of the exports.

“Just look at the amount that indigenous companies spend in Ireland on R&D – I think the latest figures are something like €400m – Sean Dunne was organising deals for that amount for yet another crazy property scheme. I think that’s indicative of a weakness here.”

O’Brien refers to the Management Matters report carried out by McKinsey for InterTradeIreland published in March, which looked at levels of management skills in both Northern Ireland and the Republic. “It was the first time we saw data suggesting that indigenous management is just not cutting the mustard. It was the first serious study I’ve seen that reflected the sense that I’ve had for a long time, and you can see it in the hard numbers, in our low level of exports and patenting.”

On a more positive note, O’Brien believes we have the necessary tools. “You have all of the reasons for that not to be the case: a highly educated workforce who speak the world language of business, geographical positioning in the middle of the Atlantic economy, a huge amount of high-tech companies that will develop as spin-outs, big spending from Science Foundation Ireland. It’s still relatively early days and maybe that hasn’t filtered through.

“The real disappointment for me is that the indigenous industry is a cylinder that was never fired during the Celtic Tiger years. It seems that we’re very good at working for other people, and I think it’s one of the reasons the American companies like us. Not only is there a flexible labour market here but a flexible mindset. We’re great employees, but not such good entrepreneurs – that seems to me to be where we have to change our mindset.”

This article first appeared in Irish Director Magazine