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Does Political uncertainty make economic progress impossible?- Northern Ireland and international evidence

Summary of a presentation to be given to delegates from Turkey and Middle East (visit organised by Democratic Progress Institute and Irish Government), morning 12 July, Europa Hotel Belfast

The evidence I present includes both good and bad news- international examples (e.g. Italy in the 1950s-60s and the US more recently) suggests the business sector can prosper and grow in spite of political dysfunction or instability.

That’s the good news, the bad news is that Italy over the last 17 years, for example, illustrates how far an economy can be held back when political institutions fail to deliver fundamental reform. The longer politics fails to work in Northern Ireland the greater the likelihood we are heading for an Italian stagnation.

The lack of a settled devolved government in Northern Ireland is considered far from ideal. The main “cost” is, however, more likely to be in political terms- the loss of whatever improvement in accountability occurs when local political representatives take decisions. It is much less clear whether there is a direct, necessary and short to medium term cost in terms of the economy.

The actual record of Stormont when it did operate during 1999-2017 suggested a reluctance to make “hard decisions”. It remains to be seen whether a form of Direct Rule would prove superior in that regard.

There is an often expressed view that political uncertainty discourages investment and hence reduces economic growth. What we do not know is how strong any such effect is.

What we can say about the impact of recent politics on the NI economy includes the following:

  • A survey in 2013 [See Note 1] indicated that in terms of trust in politicians and transparency of decision making, NI ranked worse than both the UK average and the Republic of Ireland (though the situation in Italy, for example, was indicated to be worse).
  • In the 19 years since devolution was first restored in November 1999, devolution has been fully operational for only about three-fifths of the time (the institutions have had one major crisis every year since 2014).
  • Whereas in the first half of the period since the 1998 Belfast Agreement the NI economy tended to outgrow the UK average, since 2007 the NI economy has generally lagged the UK average. Levels of GDP per head and per worker have slipped compared to the rest of the UK since devolution was restored in 2007. We cannot conclude that devolved government made relative economic performance worse but it is clear that devolution has not been accompanied by a closing of the gap relative to the rest of the UK.
  • The list of ways in which NI economic policy since 2007 has diverged from UK policies is a fairly short one and that list becomes even shorter if one excludes policies which had a clear negative impact (RHI, “super-parity”- see Note 2) or were ambiguous in their impact (e.g. the large Retail Levy, some of the attempts to blunt welfare reform in NI).

With the renewed inter-Party talks failing to reach a conclusion before the latest deadline (end June) what might the future hold for the NI economy?

The presentation notes the example of post-War Austria. For about half a century, 1945-99, Austria was governed by grand coalitions of the Left and Right together, the legacy Parties of those groupings which had been engaged in a near civil war in the mid 1930s. These arrangements were stable because the Austrian Conservatives and Socialists realized they had no alternative but to work together [see Note 3].

If the DUP and Sinn Fein cannot “do an Austria” then the optimistic scenario would be to be like Italy in the 1950s-60s when businesses prospered in spite of the politics.

There is, however, also the pessimistic possibility that NI will become more like Italy since 2000. A country where political decision making seems to be in paralysis, fundamental reform has been postponed so often that all the problems have been allowed to accumulate, economic growth has slowed towards zero and hence economic policy increasingly seems to be about squabbles over shares of a shrinking cake.

Finally, can parts of Turkey and the neighbouring areas of Syria and Iraq learn anything from the so-called “peace process” and its interaction with the NI economy. Esmond Birnie said,

We need to be extremely cautious, not only is every case study unique in some regards but there is always the danger of learning the wrong lessons. In any case, the available evidence is unfavourable. NI does not look like a model example of how to achieve prosperity in a deeply divided society. If anything, alas, we may become a textbook example of how not to manage the political economy of a divided society. This is because the political institutions are:

- Too complex

- Too costly to run

- “Lock-in” community division rather than promote greater flexibility

- Encourage wasteful behavior (what economists call “rent-seeking”)

- And give insufficient priority to improving the productive base of the economy and society.

Notes

  1. The NI Competitiveness Index prepared for the Economic Advisory Group by SQW and Cambridge Econometrics. About 100 chief executives in the NI private and public sectors were asked questions about the various drivers of competitiveness. The same questions were asked, by the World Economic Forum, to CEOs in 144 countries. 2013 is the only year for which we have responses for NI about the relative performance of the political institutions. Given that survey in 2013 pre-dates the three recent Stormont crises (late 2014, late 2015 and December 2016 onwards) it is very possible that a more recent comparison would indicate NI’s relative position has worsened.
  2. “Super-parity” is the extent to which even compared to GB regions such as parts of Wales or the North of England which have very similar socio-economic conditions to NI (e.g. level of GDP per head or unemployment rate), the rate of regional taxation in NI is considerably lower (notably, lower domestic Rates coupled to the absence of domestic Water Charges). Free prescriptions, free public transport for the 60+, lower Tuition Fees have contributed to such Super-Parity.
  3. Economists and others might describe Austrian politics during 1945-99 (or, indeed, NI politics since 2007) as being a bit like a duopoly in business (e.g. Boeing and Airbus or Coke and Pepsi etc.). There is repeated inter-action between two main “players” each of which can only maximise its position if it recognises that the other party must be allowed to do the same (in formal “game theory” terms if a position of stability, or an equilibrium, occurs it will be similar to the type of equilibrium identified by the Nobel Laureate John Nash).

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