Hard Times Ahead

More uncertainty about oil, a threat to agriculture, and social justice only through redistribution.

Ten years ago it would have been impossible to imagine the present state of the world economy. World GNP was growing rapidly, as it had been since the end of the second World War. Unemployment was no longer a serious problem in industrial countries and inflation, though rising, was felt to be manageable. For poorer countries the experience was rather different with employment rising less rapidly than required to cope with the growth in the labour force plus the shift from the land - but even in this case, in spite of the magnitude of the problems, it was felt that aid-financed growth would lead to general welfare gains in poor countries. In the late 1960s it was only possible to imagine further growth with perhaps minor slowdowns or growth cycles.

This cosy picture was seriously dented in the 1970s particularly with the growth in the rate of inflation. In the early 1970s both wage and price inflation were running at levels that worried governments. A slowdown in activity in 1970-71 failed to reduce the rate of price inflation. Inflation tended to accelerate in the 1972-73 boom with the world economy running up against supply constraints on materials, labour and capital stock. In several industrial countries government policy was then directed to reducing overall demand to reduce pressure on resources and thereby cutting inflation rates.

This was a more serious attempt than had been tried before. Unfortunately world trade models are inadequate for indicating whether such policies would have induced a recession rather than a slowdown in growth. The likelihood is that world output would have fallen. It is clear, with hindsight, that countries acting alone seriously underestimated the extent of interdependence between countries so that the overall effect of separate deflationary policies was greater than anyone could have anticipated. Whatever doubt existed about world growth in 1974 was removed by the oil price rise of end 1973.

The immediate effect was an increase in the rate of inflation - an increase on a rate that was already considered excessive. There was also a major difference in the impact on the balance of payments of different countries depending on the importance of imported energy (and in the case of the US on the pricing of domestic energy). Since there was a net transfer of ownership of assets outside the industrial world the effect was deflationary, compounding the deflationary pressure already there.

The lessons learned from that recession and the structural change it necessitated are still with us. While some countries tried to counteract the oil price rise effect others did not. The result of major differences on that account on the balance of payments was to provide even greater disparity between the balance of payments of different countries. It is ironic to realise that countries that intensified deflationary pressure, such as West Germany, affected wage rates through increased unemployment (and incidentally reversed migrant flows), maintained a reasonably favourable current balance of payments situation and achieved a strengthening of their exchange rates. The irony resides in the realisation that countries who tried to maintain employment ended with large scale government borrowing, more rapid inflation, and exchange rate depreciation.

Cynical self interest confers its own morality in international economic relations. The lesson here is surely that as a nation we should avoid providing the domestic stimulus to someone else's current account surplus. The failure of the recovery to be sustained after the upturn in mid-1975 indicated the continued concern of Governments with inflationary pressure. Indeed the rise in inflation in the first half of this year had induced restrictive monetary and fiscal policies in major industrial countries. The situation is thus somewhat similar to that prevailing in 1973 though now the effects of such policies coupled with the effect of the formal and informal oil price increases of this year are now more clearly understood. So long as governments are concerned with inflation, rather than unemployment, growth rates must inevitably suffer.

Growth rates of 2 1/2 per cent would prevent unemployment levels from deteriorating too dramatically, and this is significantly less than the 5 1/2 per cent average growth of the 15 years preceeding 1974. As things now stand it is difficult to see governments making a sudden switch in emphasis, so that the expectation must be that the world demand will not grow rapidly. Thus for existing firms in Ireland, export growth solely from income growth abroad will be poor for the future.

While the world growth will be slow this is not the only unfavourable external influence. The real price of energy will continue to rise. The experience of two major oil price increases and supply interruptions in the 1970s suggest that the energy price rise will not be smooth but will occur in quantum leaps causing further disruptions. If the present energy price increases are followed by a short term real energy price fall it would be a mistake to become unduly complacent. The objective on a national level must be to reduce the instability caused by sudden price changes and this involves deflationary action in periods when the terms of trade are favourable and vice versa. The above points relate to the overall international climate within which we must operate. In addition sectoral developments are also likely to prove important. This is particularly so with regard to agriculture.

At the moment the Common Agricultural Policy of the EEC is under serious attack. The expectation must be that real agricultural prices will fall from present levels to reduce surpluses within the EEC. Real price falls work in two ways on the demand side by increasing consumption and on the supply side by forcing some farmers out of production and reducing production by other farmers by hitting profitability. For Ireland the effects are not clear cut as agriculture is still in a process of transformation from less profitable to more profitable lines of production. A real-price fall will reduce output below what it would otherwise have been but so long as such vast differences exist between different lines of production overall output could still rise. It would require not only a real price fall but a relative price shift within agriculture to prevent the transformation to dairying from continuing.

The particular form the effect of a real price fall will take is always difficult to see. There will be a tendency for the commercialisation and consolidation of holdings in poorer areas such as in Connaught, whilst milk output in Munster will be adversely affected to the extent that farmers have pushed production with current technology to the optimum level.

The overall effect on the economy will depend on the extent to which farmers in other EEC countries are higher cost producers. A real price fall that over time forced more farmers out of production in other EEC countries could be beneficial in output terms here - though obviously incomes would not be as great. Nor can we expect over time that competing food imports from other countries outside the EEC can be kept out.

For the industrial sector the 1980s hold out the prospect of a significant slowdown in world demand. Against that must be set the effects of new industries. There can be no doubt that the IDA have been remarkably successful in attracting new industry. While this might be expected to slow down in a world of poor growth there is still a significant amount of investment likely to be undertaken by internationally mobile capital. The extent to which it can be attracted is a function of perceived cost advantage of locating here along with the usual stability arguments.

Of course, if there is a shortage af skills, or a mismatch between supply and demand then these pose obstacles to new firms. In addition to the growth prospects of existing firms and the influence of new enterprises, firms in some sectors will be adversely effected by imports from poorer countries (as we have experienced in the case of clothing, textiles, shoes). It is idle to pretend that the EEC can continue to restrict imports from poorer countries over the long haul.

For the services sector the most significant influence into the 1980s is likely to be the introduction of microprocessors over a wide area (e.g. commercial, financial). The introduction of computers has been very much slower than anticipated in the early 1960s but the relative cost advantages of new technology are so great that it can only be expected that employment requirement will fall dramatically in affected areas. At a different level entirely the possibilities created within the household environment seem endless, and this creates its own problems with leisure.

It is somewhat ironic to note the potentialities of microprocessors for leisure, within the context of the poverty prevalent within the society currently. It remains absolutely true that many features of poverty could be eliminated out of existing levels without serious dislocation. If however, society persists in claiming that growth by itself alone and without further distributional measures can deal with poverty then poverty will remain with us into the 1980s. This lesson, if no other, has been learned by poorer countries. If we want to deal with unemployment, low income, inadequate housing there is no substitute for dealing directly with them. Generalised measures tend to be diluted so that the 'trickle-down' is not a trickle but a drop. Indeed a greater concern with income distribution may prove essential if growth in any event is to continue, because of the size of government debt and the need to gain competitive advantages.

The very size of Government debt being carried into the 1980s is a matter of concern. If the debt had its counterpart in real domestic capital assets generating sufficient revenue to the exchequer to cover interest and replacement (or a run down of debt) then the size of the debt would not be a matter of concern except in so far as the method of its financing poses domestic monetary problems.

However, the debt does not have this characterization and even where there is a counterpart in fixed assets the return to the exchequer may be minimal, non-existent or even negative. The service of the existing level of debt will require an increase in average tax rates in the 1980s. Not only that, there must be a significant slowdown in the rate of which the Government is adding to this debt, that is, the Government must reduce the borrowing requirement to lower levels of GNP and finance socially profitable projects only. Obviously if there were a large number of worthwhile projects that the private sector were not taking up the state could.

Unfortunately this is not a general characteristic of state projects. If the depressing effect on the economy of such a reduction is to be counteracted then competitive gains must be made and export market shares of existing firms increased. The primary stimulus to this can only come from variations in incomes domestically. Domestic costs are important in determining employment and growth. Increasing employment is the single most effective means for reducing poverty directly.

Unfortunately the whole of the effect in the 1960s and 1970s directed towards reducing domestic costs has been aimed at wage and salary earners. It is idle to pretend that the whole of the burden of adjustment should or will be borne by employees as a class. If domestic costs are to be constrained in Ireland to realise competitive gains and employment increases, not only must inequalities not grow but also some of the more obvious existing inequities must be dealt with. Ultimately we are seeking a just society. Can it really be founded on injustice?

Because of our smallness and openness we are extremely vulnerable to outside influences. The climate in the 1980s will be less favourable than in the pre-recession period: (i) on the demand side as governments seek to contain inflation and, (ii) on the supply side as raw materials, prices and suppliers are periodically disrupted - with in particular real energy price increases occurring.

Different sectors of the economy will experience rapid structural change. The reconstitution of the government finances during the 1980s will also act as a depressing influence on demand and its effects can only be counteracted by competitive gains. These latter may require more not less equity.