David McWilliams: How will Ireland fare as world enters a new economic era?

The film Fitzcarraldo starring Klaus Kinski is the true story of a mad Irish opera buff, Brian Fitzgerald, who was determined to bring an opera house to Manaus in the middle of the Amazonian jungle. Seen from the vantage point of today, the craziness of the entire project is mind-boggling, yet it happened.

During the global rubber boom of the 1890s, the plantations of the Amazon, like their sister plantations in the Congo, generated untold wealth for their owners on the back of slave labour. Ultimately, Roger Casement exposed the Belgian Congo’s atrocities. Across the Atlantic in Brazil, the story of Fitzcarraldo underscores how untold riches make us batty, driven by hubris and excess.

The other moral of the Fitzcarraldo story is the transience of mineral wealth. Regions that get rich exclusively on resources all come to a sorry end. The stuff runs out and the world moves on.

The Romans used to say: “Those whom the gods would destroy they first make mad.” When, in a hundred years or so, Qatar is relegated again to a backwater, will the World Cup be looked back on as a mad Fitzcarraldo moment, when Qatari wealth blinded them and the world to this oddest spectacle, imported grass and all? Undoubtedly yes.

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From the economic perspective, the Qatar story allows us to focus on the age-old question, what make societies wealthy? And, once we’ve answered that, how is Ireland placed?

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The so-called father of economics, Adam Smith, maintained that a country’s growth depended on being very good at producing specific things — by specialising. By becoming extremely good at one or two things, a country might gain what he termed “comparative advantage” and from there, buy and sell their one or two goods to everyone else at a high price. Smith predicted that such countries would prosper. This bizarre idea has been parroted by generations of economics students, almost by rote.

The problem with this world view is that when you look at the data, the hard evidence concludes the opposite is the case. Countries that are rich in the real world are the most complex, not the most specialised. They are the countries that produce a vast array of divergent things, mixing up their talents, not specialising.

As we head into a new global phase of economic development, where globalisation might be less expansive, how are we fixed?

The critical factor behind a country’s wealth is diversity, not exclusivity. The country that produces more products, tries its hand at a mix of services, jobs and businesses, which is brimming with ideas, open to success and failure, is always richer and more robust than the country that specialises in one product, even if that product is highly valuable.

The living economy is ruled by one commercial dictum: beware of keeping all your eggs in one basket. Diverse economies are more resilient. If the different sectors are all rubbing up against each other, even better. Societies that embrace a bit of volatility, variance, and risk, become more robust and more capable of dealing with downturns. What these types of places give up in terms of security, they acquire in terms of adaptability. If one sector fails, those people, that money and know-how, can migrate to a new industry or sector, or simply make up something new. The more we try to insulate ourselves from the volatility of evolution, the more likely we are to become extinct.

The economist Ricardo Haussman likens the process of economic growth to a giant game of Scrabble. The more letters used in the widest possible combinations produce the most complicated, sophisticated and highest-scoring words. If a player (or country) is limited to only three letters, that country can produce a restricted number of words no matter how creatively it combines its three letters. But if the country has 10 letters, there’s a huge variety of potential words.

In short, Adam Smith couldn’t have been more wrong on this score. In truth, economic diversity is the road to riches. Diversity offers more options, combinations and novel possibilities for commercial cross-pollination.

If complexity, know-how and diversity are the key to producing sustainable wealth, via the elixir of economic growth, how is Ireland doing? As we head into a new global phase of economic development, where globalisation might be less expansive, how are we fixed?

An interesting place to start trying to assess how complex and diverse the modern Irish economy might be is to look at the courses offered to teenagers finishing school. The more degrees offered, the more likely the diversity in the labour market. In the past 40 years, according to the CAO, the number of honours degree courses to choose from has exploded, from just 69 back in 1977 to 866 in 2017, a figure which has likely risen since. If we add to degrees, various diplomas and other qualifications, the CAO’s website suggests there are more than 1,800 courses to choose from.

Unfortunately, detailed occupational data is not readily available for Ireland, the best we have is a comparison of employment by broad industry grouping from 1991 to 2011 — and it shows a huge shift away from agriculture and manufacturing into service-based and technical industries. In 1973, just under 60 per cent of our exports were in only three categories: food, drink and tobacco; chemicals; machinery and transport. Food and live animals comprised 41 per cent of Ireland’s total exports.

Since then, Ireland has become a service-driven economy. The value of services exported was about $71.4 billion in 2005. By 2020, this number had increased to about $280 billion, accounting for 59.85 per cent of total export value. ICT, meaning information and computing technology, services are the lion’s share of all services exported, accounting for 51.28 per cent of total exports. This reveals a highly technically literate workforce and economy, meaning that Ireland is third in the world behind Japan and Korea in the technical savvy of the labour force.

For a country exporting cattle on the hoof not so long ago, this is an immense transformation. Today Ireland’s labour productivity is nearly 100 per cent greater than that of the UK. In addition, our agricultural industry has moved from the farm to the laboratory, becoming among the most complex in the world, manufacturing serums, hormones, and other ag-tech products.

The economy is a completely different creature to the one that existed in even the 1990s. Ireland’s weakness is, as it has always been, in macro-economic management, as we witnessed in 2008. The underlying economy is now both diverse and complex, unlike Qatar.

Next time you read about imported grass, airconditioned stadiums and hundreds of daily flights between Qatar and party-town Dubai so supporters can get a pint, think of a mad Irishman building a giant opera house in the jungle. Essentially, the background music couldn’t be more similar, and more bizarre.