The Enterprise Strategy Group report is full of conjecture and short of evidence to justify yet more corporate welfare, writes Colm McCarthy.
Ireland has used a policy of low corporate taxes as a tool to promote industrialisation and foreign direct investment for decades. But other countries have learned, and rates of corporation tax worldwide have been falling rapidly.
The effective rate of corporation tax (after various write-offs and avoidance measures) is much lower than the apparent rate in virtually all countries. Even in Social Democratic Sweden, the EU has calculated that the effective rate of corporation tax is only 14 per cent at the margin, and some new EU entrants such as Estonia have decided not to have any corporation tax at all. If the Irish Government wishes to have a pro-active industrial promotion policy, something is needed in addition to the low-tax carrot, and it cannot be straight capital grants, given the EU dislike for state aids to industry.
But the economy is at full employment, and many sectors experience periodic labour shortages and pressure on wage costs. Skilled and, increasingly, unskilled labour is scarce. The job-creation imperative is gone, and the traditional Irish case for industrial policy ("Let's create jobs to cut the dole queues") has been undermined. The first agenda item is whether we need a pro-active industrial policy at all. What form it might take in our changed circumstances is only interesting if the answer to that first question is positive.
If you would enjoy a discussion of why we might need to continue with industrial policy, you will not find it in the report of the Enterprise Strategy Group. Indeed, the report is pretty thin on analysis throughout, and consists largely of casual empiricism in support of an intensification of existing Government policy in two principal areas:
sales and marketing, and
research and development (R&D).
These two are indeed important ingredients in the overall expenditure mix for the modern company, more for some than for others. But companies must also spend on labour, capital and raw materials. How would an assertion that Irish companies spend too little on raw materials be greeted? It could, of course, be true, but hard evidence would be demanded. It is implausible that Irish companies, most of them thriving and well-run nowadays, are so dim-witted as to spend too little on raw materials.
The report asserts that Irish companies are not adequately equipped in sales/marketing, and are also weak in R&D. In other words, companies spend too little in these areas. No persuasive evidence is offered in support of this assertion, which is, a priori, just as implausible as an assertion that they wilfully keep running out of essential raw material stock.
The report concludes that the State should assist Irish companies to greater efforts in these two critical areas, and the authors propose an increase in state agency budgets. Any hopes that economic success and full employment would permit a reduction in corporate welfare can be abandoned, it would appear. Notwithstanding the success of the economy and the labour shortage throughout the country, an exciting new vista opens up for the state sector, whose talents (and budgets) are as essential as ever! It is fair to ask whether the authors can contemplate any set of economic circumstances sufficiently benign as to permit Ireland's impressive army of policy quangos and corporate support agencies to be stood down, or even pruned a little.
There is an important issue of microeconomic policy involved here. Markets sometimes fail to work properly, and where this can be demonstrated, there may be a role for the State. But in a mature and successful economy, the onus of proof must fall on those who promote state activism. If market failure can be proven, a series of questions arises. Where is the market failure, what is its nature, is there a beneficial way for the State to intervene, and if so, what is the least-cost state intervention?
Sales and marketing, and research and development are expensive purchased inputs which can be vitally important in some businesses, and a waste of money in others. Sales and marketing is not a priority for the city council's water department, nor is research and development for retailers. The Enterprise Strategy Group appears to take it as self-evident that the management of Irish companies, as some kind of a national characteristic, fail to appreciate the virtues of spending extra resources in these two areas. There is simply no evidence, in the report or anywhere else to my knowledge, which systematically establishes that this is the case. Many Irish companies, including smaller companies, spend a bundle on marketing or on research, others spend little or nothing. It is simply not good enough to assert, as some self-evident truth, that those who spend little are incompetent, and do not know what is good for them. It is particularly dodgy to rely on EU-wide percentage spend relative to GDP, well understood to be a rickety measure of activity in Ireland. And why should Ireland's optimal spend on R&D bear any particular relationship to an EU average, however measured?
Even if the patient could be shown to be ill, the prescribed medicine (more state-supported spending in the favoured areas) may not be the correct treatment. There could, for example, be measures which directly address the sources of market failure, if such had been systematically established. But alternative remedies are not considered, since there is no evidential base for the illness in the first place. The recommendation is essentially for an intensification of existing policies and state-support programmes for enterprises in Ireland.
Evidence-based policymaking is a popular mantra with officials and politicians in recent years. This document, as well as being quite incontinent with cliché, suffers from a distinct whiff of policy-based evidence making.
• Colm McCarthy is MD of DKM Economic Consultants.