November 1, 2006

Uruguay or Switzerland?

Posted in Celtic Tiger · 8 comments ·
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For years in Ireland, political and economic debate has focussed on relocating industry and financial opportunities from Dublin to the regions. The rationale being that people and money accumulate in the city at the expense of rural Ireland and so, it is incumbent on the elected representatives from rural Ireland to make sure some of the goodies were divvied up more equally. Dublin has been portrayed, unfairly, as a long shadow which blights and darkens the countryside. In fact, the opposite is the case. Dublin and big cities in all countries are the dynamos of the national economy. Without the heat generated from cities, there would be no such thing as a national economy.

Ironically, senior civil servants were to the fore in implementing this “forced regionalisation”, yet they themselves are about to suffer from the superannuated version of their own misguided policy which is decentralisation. And surprise, surprise they don’t like it one bit. It would be unfair to revel in the difficulties of those that who once lauded wholesale economic decentralisation because that would miss the point. The crucial factor is that decentralisation is and has always been a profoundly silly idea. It is based not on common sense but on shady political imperatives which will have an overall negative impact on the public sector – a sector that can ill afford such an upheaval.

Before we examine the decentralisation question, let’s consider the city issue for a little while. Why do cities rather than the countryside generate wealth? Why do cities generate inventions and why is economic history, not the history of countries but the history of cities? Why do cities grow in the first place and why does the city typically pay for the surrounding countryside?

These may seem self-evident and frivolous issues but given the “pathological regionalism” which dictates Irish economic debate, they are worth considering. If you look around the world, the first thing you see is that cities generate innovations. Most inventions, even those which ultimately increased the yields in agriculture, were made in cities. The reason is that since the Middle Ages, cities fostered an economic dynamic usually based on trying to make stuff in the city which had to be imported in the past. Back then, for a city to grow economically strong, it had two achieve two things: first, the city had to produce nails, hammers, tools of all sorts so that it could wean itself off imports and thus, dependency; and second, it had to excel at something so that it could export and generate currency to sustain itself. By being an economic dynamo, traditional industrial cities created a demand for food that in turn, sustained the countryside around it. So this history of modern Europe and the US from the Hanseatic League and the first Puritan settlers, right up to the end of the Cold War, is the history of cities.

Countries such as Switzerland and the regions of Northern Italy and Southern Germany achieved this diverse patchwork of trading cities and towns each with their own specialities and skills. Even today, these places are at the forefront of highly profitable business usually still in the hands of family firms. Similarly, Japan in the second half of the twentieth century operated the same type of economic model, based largely again on family firms. Ireland never developed like this and instead we have sought to attract in foreign capital by making it cheap, by giving it a tax break. This has worked spectacularly well and at the moment, Ireland is a significant cog in the global economy’s supply chain.

But herein lies our vulnerability. We are part of a global supply chain and as such are a supply region. As long as we can supply part of the manufacturing process at a competitive cost, we are fine, but what happens when, not if, that changes?

Economic history is replete with examples of this. A country we are rarely compared to is Uruguay. However, if there is one place that Ireland in the early 21st century resembles it is Uruguay of the early 20th century.  It maybe hard to believe now, but Uruguay was the world’s fastest growing country for almost twenty years. It had the amongst the world’s most comprehensive social welfare system, brilliant infrastructure and like Ireland today, a rapidly rising population driven by immigration. So advanced was this small Latin American country, that it was termed the “Switzerland of the Americas”. Uruguay was in truth nothing of the sort. Like Ireland today, it was a supply region. In its case, it was a highly efficient part of the global trade in agriculture. Uruguay was one of the world’s most competitive suppliers of meat, wool and leather. Its farms were amongst the most productive in the world and with the huge revenues it gained from this pre-eminence, the government invested in a state of the art welfare system, great schools and a European-style transport infrastructure. Montevideo’s boulevards were home to the finest fashions of New York and Paris. The virtuous cycle seemed to have taken hold. Because it was so brilliant at agriculture, Uruguay did not see fit to promote other industries or innovations. Montevideo was content to process agricultural products, add value and export them.

In the 1930s things began to change. Agricultural prices fell worldwide. Uruguay suffered its first recession. Then after the Second World War European countries – having flirted with famine in 1945-46 – began to crank up agricultural production. Australia and New Zealand emerged as significant players in the market and Uruguay’s period in the sun came to a crashing end. Since then, Uruguay’s story has been one economic disaster after another.

Arguably, had the government and the people realized that they were experiencing a one-off “golden age” they might indeed have innovated in other industries to become the true Switzerland of the Americas. But they did not. Money ran through Uruguay like a dose of salts and sixty years after its heyday it has not yet responded to the challenge thrown down in the late 1940s. In the dry language of economics, Uruguay suffered from what is termed “a terms of trade shift”. The international value of what they exported fell at the same time as the prices of their imports rose. And, they had all their eggs in one basket.

Switzerland, on the other hand, has thrived. Its wealth was based not on being a link in the global supply change but rather on years and years of strong domestic innovation, based in its small cities. Its industrial base has been diversified for years and it can ride out vagaries in the world economy.

In the future, Ireland will have to learn from the Swiss and not from the Uruguayans. Things are going well today, but the real wealth of nations is built in their cities, not the countryside. Creativity, networks and competition thrive in cities and they cities should not be penalised for this by trying to relocate to rural regions which haven’t got the capacity to maintain relocated industries.

Decentralisation should be scrapped because government will work better from the city-centre out.


  1. David – some may think that all your good articles come from the ideas in the books of others.

  2. Ronan

    There were important military aspects to the formation of cities. Particularly in their role as fortresses. Many cities were built around important ports because of the difficulties of land transport. It would have been wasteful to do otherwise.

    Many American cities have their seat of state government away from their biggest city and the centre of that states commerce. Thousands of public servants don’t need to be part of a dynamic city. All they do is compete for space and drive up rents.

    Recentralisation (sic) would free up prime office space and resources within the city much faster than we could build it (since we would already be building at or near capacity).

    A government which relocated (significant parts of the public service) to a cheaper location could be run at a much lower cost.

    The primary reason that decentralisation is madness lies in its raison d’etre. Decentralisation is not about making a more efficient public service. It’s about forcing investment into small towns around Ireland to help candidates from those areas get elected. This turns administration into a mess especially because there’s no discernible plan to it.

    Decentralisation would only work if it was a recentralisation where large numbers of civil servants would remain close to each other and a small number of towns or cities experienced most or all of the influx.

    Civil servants who decentralise face significant hurdles in moving. There are benefits such as cheaper housing but their partners have to find a job too and they have to turn their life around and move away from their friends.

    It’s no wonder most civil servants don’t want to decentralise.

  3. stephen brennan

    great to see the new site up and running, very interesting articles as usual, surely if we notice our potential weaknesses now and are willing to innovate then I see no reason why we can’t do a ‘switzerland’.

  4. Bob

    David – Get that website developer back in! – There is a minimum width setting on the centre frame – If I have My Favourites window turned on, your story jumps to the bottom of the screen, starting below the left and right frames!

  5. webmaster

    Hi Bob

    Mea culpa! I’ve edited the settings so this should not happen.
    Apologies for that.

    Regards

    Ronan

  6. Martin

    Hi, I’m uruguayan, good look with avoiding our mistakes!!!

    You have to have the dynamics in the political system to do a reform, when nobody yet will see the need for it (If the money is still pouring). Which is not always easy. When the political system will react, then it may be too late.
    Switzerland is at the heart of Europe as well, which is an advantage as well in terms of access to markets, etc.

    Best regards

    Martin

  7. Very good article. Ive lived in Ireland for a few years and was amazed by the spirit and dynamics of the country. At first I just couldnt believe that it would always be like this as most of the economy is based on foreign investment. But later I realised that a country with such a small population, low tax rates and low costs (look at the poor infrastructure, there is no money going there) and with a good education system can survive with no major problems. For American companies Ireland will always be a great spot for an european HQ. Small countries are more flexible than big ones (look at Denmark,Austria,Norway, Finland,Belgium,Holland,Luxembourg,Sweden) they are all relatively small in population and have high standards of living.

    Steve,
    http://www.eire.fm

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