November 26, 2006
Are we coming to the end of an era? Will the world’s economic geography shift dramatically in the next 20 years? What if the action does, in fact, shift to Asia?
For the past 50 years, the North Atlantic has been the place to be. This was the epicentre of the known world. Ireland has been ideally placed between the United States and Europe – the world’s economic superpowers.
This geographic and cultural sweet spot has served us well. It allowed us to play one off the other. We provided the Americans with a bridgehead into Europe – taking more than 100,000 high-tech, high-income jobs in the process.
At the same time, we played the good European, first availing of EU structural funds and later its savings. The credit expansion that has buoyed us in the past five years is a direct consequence of EMU and, in particular, old Germans’ surplus savings.
All told, we have played both sides off each other extremely deftly and, in the process, created a strong vested middle class.
In the 1970s, Ireland’s economic policy was all about attracting foreign capital. At that time, it would have been considered a positive outcome if Ireland’s economic policy by 2006 produced – as it has – a reasonably tolerant society with higher and more equal incomes and far more people having a stake in the place than before.
In our changing world, how can we protect what we have achieved and improve the place? How will we react to the changing geography of the global economy when the centre of gravity shifts from the North Atlantic to the South China Sea? This is the big question.
At the moment, we are fully paid-up members of the EU, and this has been our passport to prosperity, but the relationship might change in the next few years.
The EU is expanding ever eastwards to countries that are dying. The demographic reality of central and eastern Europe is not very reassuring. According to the World Population Reference Bureau (www.prb.org), the population of every country in eastern Europe will fall by an average of 22 per cent in the next 50 years.
Poland’s population will fall by 17 per cent, Bulgaria’s by 34 per cent, Romania’s by 29 per cent and Hungary’s by 11 per cent. In the Baltics, the populations of Estonia and Latvia will fall by 23 per cent each, and Lithuania is forecast to lose 17 per cent of its present population. The biggest fall will be in Russia where there will be 32 million fewer Russians in 2050 than there are now.
Granted, these trends might change, but they are stark and should be factored into our calculations as Ireland is forecast to increase its population by 12 per cent. The reason these demographic statistics are so important is that they set the tone for the economy. Old economies don’t grow, and dying societies don’t grow at all.
Eastern European societies are dying.
They will not achieve the economic growth rates necessary to lift the continent.
In addition, the social welfare bills of older societies are enormous. So we will be left with old, high-tax countries all over eastern Europe. If this is the demographic future of Europe, don’t you think we should make economic provisions for it?
This means – in narrow economic terms – that Europe will be a net capital exporter for the next few decades. In contrast, the US will continue to grow demographically, while Asia will do likewise.
It is highly likely, therefore, that the action will be in the South China Sea, Indian Ocean or Pacific basin area. So what are we to do?
The worst thing we can do is to hitch our entire wagon to the EU. We should now be thinking in terms of alliances with the growing regions of the world. We should also be thinking about attracting to Ireland the best human capital available because the next economic battle will not be about money – it will be about people.
At the moment, we have the rather ludicrous situation where we are putting Chinese students through our universities, educating and training them and then asking them to leave the country when they qualify. If we are prepared to have them working for Spar, why not for Intel?
Likewise, with our Polish and other eastern European immigrants, we should be trying to make use of the qualifications they have but are not using. How dumb is it for us to have qualified paediatricians working in canteens, architects labouring at hot-food counters and engineers gardening?
Remember, the cornerstone of our economic policy in the 1970swas to attract capital. We didn’t have any, so we made it cheap by giving it a tax holiday. We played beggar-my-neighbour with our tax system and won.
Today, people are the precious asset. So we have to keep the best of our own and attract model citizens from all around the world. This will keep us ahead of everyone else.
To do this, we have to remain highly flexible and avoid rules. A logical fear is that an atrophying Europe will set barriers to discretion and will become more rules-based as it tries to protect what it has. I hope this is wrong, but it might not be. In this context, Ireland might need to think of a plan B.
To get a glimpse of societies that figured out the next big move in the global economic game of chess we have to go back to the city states of the medieval ages.
These places, like Venice, Dubrovnik and Hamburg, created a series of alliances with the big powers.
However, at the same time, they remained aloof, suiting themselves and played the big guys off each other. The key to their success was non-committal flexibility.
As the world changes, we could do worse than look back to history. After all, despite our claims about the uniqueness of our times, everything has happened before. It is just history repeating itself.