Professor Peter Clinch, special economic advisor to An Taoiseach addresses the the Engineers Ireland Annual Conference on April 21st 2010.

1. Ireland - The Smart Economy
The Framework for Economic Renewal
by
Peter Clinch
Special Economic Adviser to the Taoiseach
Presentation to Engineers Ireland Annual Conference
Thursday 22 April, 2010

2. ‘It’s tough to make predictions, especially about the future’ –
Yogi Berra
May 2008: OECD, ESRI, IMF Forecast approx 3% GDP growth for 2009
Unemployment rate forecast of 6.2%
p y
2009 outcome: GDP growth -7.1%, unemployment rate 11.6%
Causes:
Global economic crisis: Ireland 3rd most globalised economy - trade amounts
to 150% of GDP. OECD GDP growth in 2009 circa –3.5%
Dramatic correction of domestic property market – mean annual investment in
housing as % of GNP 2005-2007 14.4%, ESRI 2010 forecast ~4%
Depreciation in Dollar and Sterling
2

3. Meeting the Challenge
Effecting stabilisation
Public Finances – stabilisation plan
Banking – deposit guarantee, re-capitalisation, NAMA
Cost-competitiveness adjustment
Job supports, activation, re-skilling
Stimulus in a small open economy via capital spending (~€40 bn to 2016)
3

4. Status check - Cost Competitiveness
Ireland - Euro Area HICP inflation differential since the beginning of EMU
5.0
4.0
3.0
Rise = loss of competitiveness
f
Percentage poin differential
2.0
1.0
nt
0.0
-1.0
-2.0
Fall = gain of competitiveness
competiti eness
-3.0
-4.0
-5.0
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source: Department of Finance, April 2010 4

5. Meeting the Challenge –
cyclical cost-competitiveness adjustments and global
li l t titi dj t t d l b l
demand only part of the story
Economists have known since 1950s growth in economic output results from:
1) an increase in the number of inputs that go into production, and
1) improving productivity - developing new ways to get more output/a
higher-quality output from each unit of input.
5

6. How many economists does it take to screw in a lightbulb?
Productivity as the Key Driver of Economic Renewal
Productivity is a key driver of economic performance and sustainability ………
Paul Krugman (
g (Princeton Nobel Laureate): “Productivity isn't everything, but in the
) y y g,
long run it is almost everything”.
…. a key contributor to societal improvements ………..
William Baumol (Princeton): “Nothing contributes more to reduction of poverty, to
increases in leisure, and to the country's ability to finance education, public health,
environment and the arts”.
…. and a key driver of Ireland’s (absolute and relative) prosperity.
6

7. -1%
0%
1%
2%
3%
4%
5%
South Kor
rea
Hunga
ary
Pola
and
Finla
and
U
UK
Jap
pan
U
US
Swed
den
The Productivity Challenge
Switzerla
and
OEC
CD
Ireland GD
DP
Germa
any
New Zeala
and
Netherlan
nds
Spa
ain
Average Annual Growth in Output per Hour Worked
Fran
nce
2004-2008
Denma
ark
Ireland GN
NP
2000-2004
Italy
7

8. Smart Economy – a high-productivity economy
y g p y y
A Smart Economy is simply a high-productivity economy.
y py g p y y
It is about people thinking smarter and working smarter, getting more for less
y
across all sectors of the economy.
Process innovation as well as technological innovation. Public sector and the
private sector.Domestic economy and the internationally-traded sectors.
No distinction between the Smart Economy and the rest of the economy.
8

9. Productivity Drivers
Framework for Economic Renewal – Building the Smart Economy
Action Area 1 Action Area 2 Action Area 3 Action Area 4 Action Area 5
> Securing the > Transforming Irish > Low Carbon > Investing in Critical > Efficient and
Enterprise Business Economy Capital Effective Public
Economy > Establishing > Green Enterprise - enhancing productivity Services
> Promoting ‘Innovation Ireland’ - Mobilising the market and competitiveness > Smart Regulation
Competitiveness - fostering ingenuity to protect the - education; - achieving greater
- achieving fiscal entrepreneurship,
entrepreneurship skills; environment; - R&D efficiency in public
stability; - stimulating innovation - developing the Green - broadband/comms. services;
- stabilising the banking & commercialisation; Enterprise sector; - environmental and - reducing costs and
sector; - incentivising BER&D; - the public sector as a energy infrastructure. enhancing services;
- reinvigorating financial - developing exported driver of environmental - transport - improving citizen focus
services; services; innovation; - effective and efficient
- improving - MNC development - improving energy regulation.
competitiveness, - developing, scaling & security and reducing
particularly ‘indirect supporting indigenous energy costs.
exporters
exporters’. high value-added
value added
industry
- strategic markets
<- Securing jobs -> <--------------------------------------- Growing jobs ------------------------------------- 9

10. Productivity Drivers
Framework for Economic Renewal – Building the Smart Economy
Action Area 1 Action Area 2 Action Area 3 Action Area 4 Action Area 5
> Securing the > Transforming Irish > Low Carbon > Investing in Critical > Efficient and
Enterprise Business Economy Capital Effective Public
Economy > Establishing > Green Enterprise - enhancing productivity Services
> Promoting ‘Innovation Ireland’ - Mobilising the market and competitiveness > Smart Regulation
Competitiveness - fostering ingenuity to protect the - education; - achieving greater
- achieving fi
hi i fiscal l entrepreneurship, skills;
t hi kill environment;
i t - R&D efficiency i public
ffi i in bli
stability; - stimulating innovation - developing the Green - broadband/comms. services;
- stabilising the banking & commercialisation; Enterprise sector; - environmental and - reducing costs and
sector; - incentivising BER&D; - the public sector as a energy infrastructure. enhancing services;
- reinvigorating financial
g g - developing exported
p g p driver of environmental - transport
p - improving citizen focus
p g
services; services; innovation; - effective and efficient
- improving - MNC development - improving energy regulation.
competitiveness, - developing, scaling & security and reducing
particularly ‘indirect supporting indigenous energy costs.
exporters’. high value-added
industry
- strategic markets
<- Securing jobs -> <--------------------------------------- Growing jobs ------------------------------------- 10

11. Innovation is a Key Driver of Productivity
Prior to 1950s view was you needed more people and money to
increase output.
Now strong literature and empirical evidence on the role of
technological progress and innovation (process and technical) in
economic growth.
g
Now more realisation of importance of innovation right across
economy (incl. in public services).
11

12. Irish Government Vision of ‘Innovation Ireland’
“The Ireland of the future will be a smart, high-value, export-led economy. It will
have some of the world’s leading research-intensive multinationals, a number
of which will be Irish-owned. It will have thousands of innovative small and
medium enterprises.”
Taoiseach, announcing the establishment of the Innovation Taskforce, in June
2009
Objective is to position Ireland as an Innovation Hub in Europe
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13. Entrepreneurship – why should Governments care?
Entrepreneurship
E t hi Innovation
I ti Productivity h
P d ti it enhancement
t Economic output
E i t t
Powerful link between innovation and new firms - Schumpeter’s hypothesis of
large-firm superiority does not hold up – many innovations start with small
companies;
13

14. Entrepreneurship – why should Governments intervene?
The literature suggests that Governments can stimulate entrepreneurship,
innovation and the risk-capital required.
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15. Why Ireland? Excellent
Good tax and demographics &
Highly attractive location for regulatory education, English
businesses in a European environment speaking,
speaking
context IP – one of best cultural innovation
Entrepreneurial environments
culture; globally
Indigenous VC
base
b Excellent
Transport links
Global Networks
and Diaspora -
cultural links to
US best in EU
International
mindset amongst
Entrepreneurs
Skill base – and Teams
ICT, med & pharma
p
multinationals;
Established Legal system
entrepreneurs. closest to US
model
Time zone allows Cultural
coverage of US Ideal location for
and Asia inside acceptance of Ireland
the working day & Irish across Europe investors to cover Europe
& US;
EU influence
15

16. Presence of Multinational Companies
EMEA HQ - Operations
p Global Business Services
Advanced Manufacturing Research, Development & Innovation
16

17. Is this policy view too Innovation Centric?
We will not win a ‘race to the bottom’.
race bottom
General national welfare is highly dependent on the ability of a country to
foster innovation and use that as a wealth building platform.
We will be clever copycats but to be that we also need our own indigenous
innovation and research capacity – smart people can adapt
technology/processes e.g. Ryanair
Economic evidence says: “A country’s ability to absorb foreign
technology is enhanced by investment in education and by investment
in own R&D – a country cannot rely on imported R&D or know-how.”
17

18. Status Check - 4 Key Drivers of Innovation and Export-Led Growth
1. Human Capital
Good demographics, educational level and literacy
Maths and science attainment a significant challenge
2. Research and Development
Significant improvement in outputs and BERD due to Government support .. but
How to maintain effective public investment and ensuring it is ‘productivity-enhancing’
investment?
3. Enterprise supports for innovation and commercialisation
Strong support of industry. Great p
g pp y potential with additional risk (
(‘smart’) capital injected
) p j
Challenging funding environment due to fiscal constraints
1. Cost-competitiveness
Improvements from cyclical adjustment and public sector
Is there a sufficient adjustment in the non-internationally traded sectors (indirect-exporters)?
18

19. Assessment of current position
Strengths of Government Policy
Significant progress on addressing short-term challenges – public finances, banking;
Strong plan for the future endorsed by business, investors, Farmleigh etc;
Excellent base from which to develop – MNC and domestic base convergence;
base,
Progressive decisions being made in many areas including tax.
Improving competitiveness (cyclical?).
Challenges for Government Policy
Prioritising investment to human capital and enterprise support in a shrinking funding
environment.
Strategic
St t i markets and id tif i sectoral opportunities.
k t d identifying t l t iti
Cost competitiveness, in particular, in business services, broadband, incomes policy.
Implementation and communication.
NB. It is enterprise, not government, that will create jobs.
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20. Key messages
Productivity is more than just the same for less
There is a direct relationship between productivity growth and prosperity
Innovation,
Innovation process and technological is a key driver of productivity
technological,
A country’s ability to absorb innovation and its capacity to engage in process
innovation is a function of its own ‘innovation stock’
innovation stock
The whole economy must be a smart economy – all sectors, public and private.
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