December 7, 2008
Admittedly, looking out towards the horizon of the Indian Ocean from the volcanic heights of the French island of La Reunion is not the worst place to be writing about any economic crisis.
Indeed, when you read the history of this tiny speck in the ocean, almost a thousand miles from Africa and another couple of thousand from Australia, you get the definite feeling that this place has weathered worse storms. (Before you think I’m rubbing it in, I am working here for the French government putting a plan together to get this economy onto a more stable long-term trajectory. This type of strategic thinking appears to be lamentably absent in Ireland at the moment.)
In our current difficulties, we in Ireland could learn quite a bit from the economic history of trading outposts such as Reunion and other countries that shone brightly, only to succumb to bad decisions in the context of global upheavals. Regular readers of this column will know that, whereas many economists are concerned with how poor countries get rich, this column has always been equally concerned with the opposite dilemma, namely: Why do certain rich countries get poor?
Some countries get caught on the wrong side of global events and, due to no fault of their own, become footnotes in economic history. Other countries, more egregiously, get similarly caught on the wrong side of global events, but make things worse by bad policies. Reunion is an example of the former; Uruguay an example of the latter. Unfortunately, Ireland is in severe danger of becoming the Uruguay of Europe.
What makes the comparisons between the three countries – Ireland, Reunion and Uruguay – interesting is that, in their day, they were the poster boys of the three major eras of globalisation. Reunion was the poster boy of the first period of globalization between 1600 and 1800, when the Europeans first rounded the Cape of Good Hope and made the Indian Ocean their souk. Everything was traded here: spices, timber, gold, guns, slaves and, later, countries – and even empires.
The Portuguese, French, Dutch and then British fought over the few volcanic scraps of land that jutted out of the ocean. Reunion was one of the most important islands and later, after it had been settled, it became one of the world’s biggest producers of sugar. Disaster struck with the opening of the Suez Canal, because the world’s shipping from Asia no longer had to pass the Cape. Reunion went into terminal decline. Only the colonial architecture reveals the echo of its illustrious past. In fairness to Reunion, there was little it could have done about the geo-political shock that was the Suez Canal. More worrying for Ireland is the story of Uruguay.
Last year, when we suggested that Uruguay could be a warning for Ireland, we were scoffed at by the panglossian economic shamans who, back then, dominated discourse in Ireland. Now the alert doesn’t look so outlandish and it is worth considering the story again. It may be hard to believe now, but Uruguay was the world’s fastest-growing country for almost 20 years. It was the poster-boy of the second age of globalisation, from 1860 to 1930,when the Americas began to export aggressively to Europe. It had one of the world’s most comprehensive social welfare systems, brilliant infrastructure and, like Ireland of the past few years, 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 among the most productive in the world and, with the huge revenues it gained from this pre-eminence, the government invested in a modern 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 World War II, 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. Money ran through Uruguay like a dose of salts and, 60 years after its heyday, Uruguay went from being the seventh richest country in the world to the 78th richest!
The main domestic reason that Uruguay messed up was that it tried to insulate itself from the changing global realities by expanding government employment. Rather than invest in infrastructure, it decided to hire more public servants and pay them better, creating a constituency that has held up reform in Uruguay ever since. Now look at Ireland. We are repeating these mistakes. Our pre-eminence as the world’s favourite multinational production location has been undermined by our own slipping competitiveness and the opening up of cheaper locations, particularly India. Equally, the cheap credit that fuelled our housing boom is gone.
Instead of facing up to our potential bankruptcy, we continue to pay public servants as if they were somehow special. Look at the two tables attached. In tables one and two, we see that our public servants are wildly overpaid when compared either with the private sector or their counterparts abroad. If we want to avoid the Uruguay situation, this nonsense of paying public servants more than anyone else has to stop.
The state needs to renege on partnership now and look for cuts in public sector wages. This will save the country from bankruptcy. If we continue along this outrageous path, Ireland will make the same mistake as Uruguay and see decades of hard work evaporate in a mirage of bad policy.
Here in the Indian Ocean, the history of Reunion – the poster-boy of the first age of globalisation – tells us that there are certain things you can’t change. However, the warning from Uruguay – the poster boy of the second age of globalisation – is stark. If we want to be remembered as the Uruguay of Europe, we are going in the right direction. If we want to do something about it, the time to act on public servants’ salaries is now. The choice is ours.