IMF holds out hope on remaking the 'Irish Economic Miracle"

On the day last week that two international forecasting-monitoring organisations - Washington"s IMF and the OECD out of Paris - published separate end-of-term reports on the Irish economy, the business news headlines illustrated starkly the troubles facing the economy. There were the reports of the latest job losses, including the news that a well-known car dealership was axing 190 jobs. As Taoiseach Brian Cowen acknowledged budgetary pressure on the social welfare system because of rising unemployment, his Government said it was pledging €1bn to protect jobs. And, as the Dáil extended the taxpayers" guarantee on the debts of the banks beyond 2010, confirmation came that a €200 tax would be levied on holiday homes because the Government needs to scoop up every bit of extra revenue it can. However, it was the report that Cadbury was seeking to drop 220 jobs at two of its three plants, at Dublin"s Coolock and Rathmore in Kerry, which was the most troubling, cruelly underscoring the major theme of the IMF report: the loss of competitiveness that will make the effects of this recession deeper and more painful than necessary. The chocolate bar-maker had idled at least one production line in north Dublin in March and denied to journalists at the time it was considering full-time job losses. Last week, it blamed the high costs of making its products in Ireland for the job losses. The blow was not on the scale Limerick suffered when, in January, Dell said it was closing its Raheen computer plant with the loss of 2,000 direct jobs and shifting production to Poland. But the Cadbury job losses raise the same significant questions about manufacturing in the Republic. Almost all the products the company makes here are for export. Most of the bars of Dairy Milk, Fruit & Nut, Time Out and Heroes are ferried across the Irish Sea for sale in Britain. Individual companies will always have their own reasons for reorganising operations and manufacturing plants. About two years ago Cadbury said it planned to close a factory in Bristol and eventually switch some production to Poland. But companies like Cadbury, manufacturing in Coolock, Rathmore and at its third plant in Tallaght, supposedly enjoy a huge competitive advantage because it needs pay only 12.5 per cent in company profits, much lower than elsewhere. If this huge competitive tax advantage Ireland has enjoyed for over a dozen years has been eroded because costs have risen so steeply, then the Cadbury news has severe implications for major chunks of the economy. Could it be that sterling"s slump against the euro in the last 18 months has taken another great bite out of the benefits the economy once enjoyed here? The IMF certainly thinks so. This is what the head of the IMF"s mission to Ireland, Ashoka Mody, had to say when questioned last week on the economic prospects for Ireland beyond 2010. 'That"s the sense in which we view that the recovery will be modest. That judgment reflects an analysis early in the report which says that the Irish economy"s potential to grow had begun to erode even earlier in this decade, well before the crisis became manifest and that it reflected long-term tendencies which were the consequence of the fact that the Irish Miracle, as we know it, seemed to have run its course by the early part of this decade and new sources of growth had not really emerged in any significant vibrant manner. Therefore, when the recovery occurs it will be important that if Ireland is to go back to something that resembles its more vibrant years, there will have to be a regeneration of new sources of growth.' Though few would have recognised it in the late 1980s, the IMF says that Irish competitiveness and potential growth were 'generally well-matched' between 1986 and 2001, before labour costs ballooned. Apart from tiny Luxembourg, Irish wages are the highest in the eurozone, leaving the country 'facing a significant competitive disadvantage', says the IMF. It is probably right that the IMF and OECD reports prepared a few months ago told us little that was new. As Alan McQuaid, chief economist at Bloxham Stockbrokers, noted, the frenzy of media reporting on the IMF and OECD reports would have suggested that the studies delivered terrible shocks for the Irish electorate. Other Dublin economists, scanning for silver linings, noted that the (less than timely) first quarter employment figures the Central Statistics Office released last week could suggest that the first three months were the worst for the Irish economy. For sure, they said, unemployment will continue to rise because new jobs always lag an economic upturn. However, unemployment may hopefully peak at a lower than feared rate of 17 per cent. On cue, there was at least one positive business news headline on the day the international economists published their reports. Boston Scientific, making healthcare products, confirmed an €91m investment in Galway. 'There are many challenges to bringing Irish competitiveness to a level that allows for solid and sustained growth, but the potential to do so is clearly there and the authorities are moving the economy in a direction where the potential should once again become achievable,' said the IMF"s Mody. Let"s hope the 'Irish Economic Miracle" can be remade.