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.
Pay Deals………noboddy needs to emigrate from Ireland ….we have the best Production Centers ( Added Value ) , Supply Centers ( nearby Markets ) and Sources of Supply ( Materials ) and Skills ( Labour ) ………all we need to do is ..ADAPT and ..Manage it Competitively
Good article. Well it looks like the pig farmers will be queuing in front of Dell to get a job so they are definitely out. ”If we want to do something about it, the time to act on public servants’ salaries is now. The choice is ours”, you wrote this a few times already and I have a feeling it might be too late and ‘now’ has gone for a lot of things at that stage. As regards the choice being ours it’s clearly not. What is our choice David? What can I do, me, humble citizen when none of… Read more »
David – interesting article. Once again you have pointed the dangers of current trends in Irish policy and where they could ultimately lead. I do not know if our policy makers are taking note. The examples that you provide share certain elements in common on their road to demise. Firstly they were pretty smug and arrogant to begin with. Or as we say in Ireland, proud. And in Ireland a lot of people are very proud. A lot of the time in an undeserved manner. Secondly, inefficiencies started to get built in. Fine if they can be sustained. Next, and… Read more »
Perhaps we could do an exchange programme where we get other european states to give us their brightest young politicians and we give them people like Mary Harney and Jackie Healy-Rae. We’d learn plenty from it.
Ireland is much more like the headless chicken of the credit crisis. There is no leadership, no single pied piper to lead the way out of the crisis. With all due respect to the government they are seriously out of their depth struggling to find which way to turn. Sadly the opposition is no better and rather than helping seeks to undermine the present (elected) majority ruling party to feather their own nest, stoking up the same electorate with emotive proclamations of how bad the government is, rather than working to contribute of useful solutions. Their goal is to provide… Read more »
David is right, the buying of public servants votes by Fianna Fail, over the past decade, was a policy which could only end in the country´s ruination.
This prescient “futuristic”video I made in April 2007. The scenario I envisaged is uncannily accurate and is still unfolding.
At least I was wrong about the elevation of Sinn Fein to government, and the survival of the PD´s..
http://uk.youtube.com/watch?v=aL7mOOSK1rw
David: You are a brave man to venture to Réunion with its Rivers of Fire, Chikungunya-bearing mosquitos and population that has doubled since the 1960s. Maybe Ireland should count its blessings. Uruguay would have had a much more enjoyable subject for your economic punditry. I spent a couple of weeks there many years ago and it was like living in a time-capsule of the 1930s, with the lowest cost of living I have ever experienced. In many places it also has an extremely high standard of living. To get an idea, zoom-in to Punta del Este on Google Earth. When… Read more »
We have to something about the cost of electricity in this country. The Greens seem delighted that electricity is expensive. Fianna Fail seem to be looking after unions, and politcally appointed managers. The cost of electricity is a factor in the cost competitiveness of every Irish enterprise, and household.
Maybe it is time for Shane Ross to open the books on the ESB, and let us see what is going on in there ???
Power of Now – the electorate know what political & business decisions should be taken but are imperceptable and formless on the political radar screen where the power of Now is .We the Irish Electorate are complacent in allowing a political void develop with foreign underlying tones .Sharia Law in Ireland is creeping in and very much alive within their own community because they have an elected community council by their own people and have a voice to act at national level to do what they want to do .In other words their shadow Irish House of Commons is more… Read more »
For me the article is eclipsed by the authors circumstances. When, yet again, one of the finest economic intellects in the country is allowed to emigrate, albeit temporarily one hopes, to work on another countries rescue plan, I am left speechless. Uruguay is as Malcolm says and benefits from holiday traffic from BsAs across the Plate. It’s an excellent comparison to draw. One small poor State separated from it’s larger neighbour by a wide body of water.The odd thing about both countries, Uruaguay and Argentina, is that Irishness or being of Irish extraction is valued and respected. Unlike the ould… Read more »
While I agree 100% with Davids opinion on public sector pay, I think that the ESB crews who repair the lines etc after storms should be well paid, its tough work. I’m not sure how much on electricity charges is down to pay levels in the ESB, benchmarking etc……That said I dont know how the ESB compare with equivalents internationally, just that the price to consumers is higher than it should be here. I did hear that prices were higher because of the regulator trying to encourage new entrants/green technology but I don’t know the extent of this The ESB… Read more »
Tables one and two ?.
But what you failed to mention about Uruguay was that the place was being run by a cohort of native families who remained fairly rich at a global level. And also the fact the place was alive with anthrax and other nasty things.
“The main domestic reason that Uruguay messed up was that it tried to insulate itself from the changing global realities by expanding government employment.” The downward spiral in economy will continue indefinitely when we are ramshackled with such a high public sector wage and pension bill. These “root and branch” reforms seem to result in just more reports being published and more committes formed. We are constantly being bombarded with biased statistics defending the public sector’s pay vis-a-vis private sector so it is refreshing to see the table in article. It’s obvious that making token snips at top income public… Read more »
VincentH – ah yes I see your point. An elite in charge of Uruguay – who continued to live in comfort. Protected. Insulated from the hardship of the situation. In control of the state also no doubt. As Furrylugs says – just like here. Ireland is rotten with nepotism. What Shane Ross calls the incestuous network of Irish Commercial life. Banks. Retail groups. Merchants. Property moguls. Commercial property owners. Developers. We have the Economic Rent infrastructure(ERI). All elements are united by the same self interested principle – the attainment of market distorting position by the few, at the expense of… Read more »
Fred – INTO president Joe O’Toole refers to the state as an ATM machine. The teachers can take as much as they want out, but they should not go too far in case they empty the account completely. (and then they get found out).
You might find this link interesting
http://www.irishtimes.com/newspaper/opinion/2008/1101/1225321621904.html?via=mr
I reckon we have the most expensive teachers in Europe. They should take a pay cut and go back to the EU average.
David, Your at your best when you draw lessons from the arc of history and geography – an Irish Thomas Friedman I guess. The most recent Economist Intelligence Unit Briefing on Ireland (http://www.economist.com/agenda/displaystory.cfm?story_id=12664671) should be required reading by everyone in the Irish Government and for anyone else who can potentially influence the economy and strategic thinking in the coming months. It reinforces David’s point that if the policy makers don’t get it right now Ireland is in for years of economic decline. Beyond stating the standard set of woes impacting the Irish economy – housing bust, rapid decline in domestic… Read more »
Well done David. Keep it up, maybe someone will hear you eventually. To be honest, I despair. I fear that our country is being ruled by a not so elite and not so intellectual, but well connected and self preserving political class. This class have their roots and derive their allegiances from a politics that is long sice useless. That politics is the politics of the civil war. Why do our electorate have to chose between 2 right of centre parties with the same policies dressed in deiiferent clothes at every election? Why are our bright and talented young stars… Read more »
Ruairi – I believe I have made my statements clear …do you have any question ? why are you confused ?
Bonsoir David,
As my wife is from that part of the world, I’m curious as to how you see the Réunionaise economy developing. Will the plan you are working on be available to the public in the coming months?
If things continue downhill here I may need to brush up on the old francais or learn some kréol…
DMCW- its 40 years old today that Pearl Harbour was bombed……and of course u are on a peaceful mission in the pacific
As criteria such as ability to repay have again become important in deciding whether to lend, Biffo will run out of rope unless global events turn around very quickly. With declining revenue the figures will make bankers very nervous about lending to us should trends continue. Would you loan a company money to pay salaries in the present climate with no plan as to what those people will do to pay it back? That is what is going on at the moment in Ireland. There is a national development plan but that is just a figleaf for borrowing to pay… Read more »
John Curran – there has been an information technology revolution in the private sector. This means that the number of employees involved in administration and management and other similar tasks has declined relative to their relative output. Software has replaced clusters of desks. It has also enabled efficient resource allocation. But this only came about as a result of competition. And the more competition you have in the sector, it seems the greater the productivity gains. For example in air travel, the internet and online booking has dropped the cost considerably to the benefit of people on very low incomes… Read more »
Like many of you have said in agreement with DMcW we’ve no strategy and basically we need to fire the top management. It needs to replaced fast. We need a few more FAS/ Pig Feed Dioxin cockups before this will be countenanced. My sincere hope is that no one will face physical injury or worse before the firings begin. The fact is that the outrage out there is real. Loved ones are now being cried after as they leave our shores trying to get a job abroad. People with serious qualifications and experience are out of a job for the… Read more »
Heads need to roll.
Explicit comparisons of pay scales in Ireland in comparison to our European neighbors/competitors must be made available for all jobs and professions. Though pay is much more generous for many jobs the difference for consultant doctors is particularly remarkable.
The port crisis has exposed another quango to the public eye, FSAI, a staff of 90 and yet didn’t catch a major food scare that has resulted in ALL Irish pig meat having to be taken off the market…. apparently the Italians were the ones who found it and told us. A look at their website shows the prototype quango, grandiose titles, boards of directors all very expensive people, backed by government law/unaccountable and all lost in the twilight zone of defining best practises, standards and advertising while avoiding doing any real work.. We would be better served with the… Read more »
[…] than the public sector’s: in Britain by 8%,Germany 5%,Denmark 8%,Finland 12% and Netherlands 0.4%. Harsh lessons of economic history | David McWilliams The bad news in these figures is that RIPOFF Ireland is going strong in public sector pay. If the […]
While Uruguay is of course a good economic model from the past to make a comparison with why not stick closer to Europe and use Romania ? , As today here we have a very similar set up to what they had less than two decades ago, we have an elite group right across the board milking the country from our over paid politicians through to semi states, quangos our Bank Managers the HSE management and our Educators the university Management. Many articles ago when Mr Williams was talking about the property slow down and what will happen here in… Read more »
I blame feminism.
If the women had stayed at home instead of having careers, house prices would have been kept down, which would have meant lending was lower, which would have meant the banks would not be in the mess they are today.
Fellas these days brag about how much their wives earn. Men should instead be bragging about how good their wives cook, look after their looks, parenting skills, supervising the kids homework etc…
I envy my father and his generation so much.
Important news before I log off.
It’s 79 degrees with light winds and occasional cloud in Reunion tomorrow but fine for the week after.
Lucky B*****d.
Slan
Yes Colins comment is suicidal but there is an element of truth in there. We’ve moved on wholesale in this and other countries to a different model of society where all “must” work and in particular where women “must” work out of necessity not choice. Its now so ingrained in the public mind that if one wishes to have a one bread winner with mother at home model (not for life but during the childrens formative years) one is seen as being foolish/ignorant and undereducated. Our society is falling apart at the seems with people talking of being unhappy and… Read more »
I read that over a third of Poles have plans of heading home in 09. Of course some might say, great! we’ll have loads of empty vacancies we can fill with paddies. Think again! Traffic was cruel this morning. M1 was chockers going at 1 metre / hour seemingly from Belfast to Dublin. Plenty of fuel tax heading into the coffers while productivity heads further south. Gormley & the lads would do this country a great service by stepping down now. The longer they hold out, the worse it will be for their party. They were supposed to be the… Read more »
A friend of mine forwarded this link on to me about the “cost of checks” in a software organisation. http://www.paulgraham.com/artistsship.html The gist of it is that sometimes checks that are introduced in a company specifically to increase efficiency have the opposite effect. The specific example is a piece of software that has to be sold at 10 times the cost for a smaller company due to the overhead of dealing with a large company’s process. This kind of thing is rife in our civil service and need to be refomed. There’s a trendy private sector loathe-fest going on now where… Read more »
Its very simple David give us a leader with Balls, to guide us not cowardy Cowan…..its all about confidence and FF or FG are so busy fighting over bullshit that they have missed the point of whats going on… U turning on everything just makes me think that everything with Cowan is an afterthought. People must understand that our boom years had nothing to do we F.F (Slapping themselves on the back) and everything to do with cheap money and business knows that during the goodtimes you keep a stash of money away for the bad times and not spending… Read more »
Philip wait till you see what happens after Christmas when 200k Polish and Eastern Europeans dont return head off to London and elsewhere and watch how far rents drop leading to alot of people paying two or three mortgages forcing a further property meltdown.
David, I agree that we are in danger of becoming a Uruguay of Europe. I also believe that we have the capabilities and resources as a people to prevent this from happening. Just wondering whether the Irish government have ever approached you on helping them to put an economic plan together to us get through this mess? It seems to me that the only consultants that the government seem to appoint are those who tell the government what they want to hear. It is time for a reality check and we need people like you to be in the influential… Read more »
exactly Shane.. We create bureaucracy to provide governance and oversight. They do exactly that, spend weeks and months drawing up ever more perfect systems that sound great when presenting to their peers but just add huge costs to anyone who has to deal with them. And we act surprised; but the bureaucrats have done exactly what we asked them to do. The problem is you cannot charge for going through their process, its a hidden cost on the supplier. At least in your example a small company can chose not to sell to such organizations or at least jack up… Read more »
Cowen, Lenihan, Coughlan and Kenny all inherited their safe seats from their father.The lack of talent in Dail Eireann is frightening.Cowen is so out of his depth, you may as well ask him to play rugby for New Zealand!.As ever emigration will rescue the public finances and the rest of the economy.The lack of action from our “leaders” is unbelievable.Who gives a toss about Lisbon?.
I think our gouvernement in Paris got it cul volte-face, M. David. It is you of whom we are in need here; let les deux Brians untrammel the trajetoire of our little economie. I am even in the process of arranging the sale or location of a bijou pied-a-terre (prix negociable) in which the two gentilhommes might be permitted to be, how shall I say it,
incarecere a longue terme on our isle of paradis.
I live in a middle class housing estate in Dublin, the kids have everything they could want, they don’t know what a hard life is. But, they all act like little knackers, we have trouble on a weekly basis, and god help you if you try to tell them off for damaging cars, and property, they get offended, when you tell them “NO”. The attitude from the community though is just as bad, the attitude from parents and neighbours is “its not my problem”, but then again their parents are at work all day, and I don’t think they give… Read more »
Will somebody please explain to me why nearly all the Government keeps pushing the Lisbon Treaty business on us again and again , Lets be honest they do not have our best interests at heart if they did they would listen to the vote of the people, Its a bit like although F.F won the last election maybe F.G should have so if they change a few policies can we re run the Election? .I honestly suspect that in their warped power grubbing minds that to be perceived as a non Lisboner could mean the end of a ride on… Read more »
Hi David, I hope the nicer weather in Reunion is treating you well. > creating a constituency that has held up reform in Uruguay ever since We already partially had this Public Sector problem. In the 1970’s, when the public sector got ‘ahead of itself’ (ie: got paid too much for what it did) it held the country back. This remained for many decades and the remnants of it are still there although there was some repair made during previous hard times. We have a poorly performing public sector now, and indeed arguably always have. The country gets by in… Read more »
The further from Dublin and main urban centres you are, the more Ould Ireland it becomes. That’s becasue it never got off the ground – so little changes. And most of our Politicians hail from these regions and are used to looking down on the common local yokels. No wonder they do not understand or want to understand modern Ireland. It’d be like explaining democracy to a medieval monarch. Does not compute!! and you ‘d wind up in a dungeon for the criminally insane. Little changes in the civil service as well. In spite of new IT, they still use… Read more »
I have noticed over the past week or so how several media organisations appear to be putting forward the idea that we should pay more taxes for more services…………They have done voxpops with people who say “I dont mind paying more tax…..”. Meanwhile, theres a boffin in the studio from the govt who adds “This is a low-tax economy”………. Meanwhile, I am still waiting to hear somebody, anybody at all talk about a stimulus package. Does nobody else in Ireland think that we should actually try to raise our income as opposed to just cutting costs? We need to encourage… Read more »
Jeasus David, people like you should be working here at home trying to solve our own problems and why can’t the government recognise this? You are a good example of a brain drain from Ireland. Most Irish TDs wouldn’t know that place even existed never mind the fact that one of our own is out there making a difference in the Indian ocean of all places. Why can’t you get a job here advising the government or something? I wish you would. Bring us back a bit of common sense from La Reunion will ya, the country is going to… Read more »
I read the comments on this page because they are far more honest and true than contained in one months “media coverage”. Paul – the traveller kids are actually more civilized than the middle class brats. Traveller kids don’t act maliciously, just out of roughness. I blame the parents. Not that they did anything wrong or were bad parents. They simply made the choices that were fed to them from our mainstream culture. They believed all the BS that has dominated our society since CJH took over from Jack Lynch. I blame them for their obedience to the Economic Rent… Read more »
Gentlemen Although David is right, what happened in Uruguay is what he describes, I hope in the future Ireland will not be termed “the Uruguay of Europe”. I can´t give my opinion of what´s happening in Ireland, as I live in Uruguay, but can give some elements to be analised. Uruguay is not actually what it was between 1930 and 1974, it´s changing and moving towards what it was 150 years ago. Finnish investments in pulp mills, aprox U$S 1 billion. US investments in plywood mills aprox U$S 300 million and increasing, Belgiumns in port activities, Riotinto with it´s Iron… Read more »
Jan – why do we pay both PRSI and VHI ? I mean you pay PRSI, and the service is abysmal, unreliable, and the queues terrible. Therefore you get VHI. And the VHI is to a government run company. And they charge what they like. And the hospitals and consultants can charge the VHI more than the charge the PRSI for the same service. The VHI is a government run company to get you through a government run system. In 1992, I was in college, and a classmate of mine got injured playing football. It was a Sunday evening. He… Read more »
I think that blog is coming to an end. David’s vision was once insightful and exciting because someone might have taken his views into consideration. No one did. The ‘prophecy’ is now unfolding. It was very simple after all. Nobody listened to him or to all of you reaonable and honest commentators, your comments were dismissed and sometimes mocked. The events have caught up with the necessary tactics/measures to avoid the miserable times we are about to live. It is now too late. David or anyone else; Deco, MK1, Furrylugs, Philip etc… you need to find another topic or lead… Read more »
Cowen is a disgrace, rattling off job losses with about as much compassion and concern for the newly unemployed as a headless chicken. This man has no leadership qualities – he turns bully when he is asked a simple question (the last refuge of the inept) – hardly Barack Obamaesque. The man has neither charm nor presence – he is getting paid to find solutions but all the government in their different outfits can think of doing is to open call centres for US multinationals – hardly quality or long term jobs. The Poles et al know better – they’re… Read more »
one example (not that we need anymore to know what is going on)
http://www.independent.ie/national-news/universities-pressured-to-defend-83646m-salary-spend-1566355.html