Globalization to National Advantage: Economic Policy Lessons from
IRCHSS Funded Project 2008-2011
Patrick Honohan (PI), TCD
Frank Barry, TCD
John FitzGerald, ESRI
Iulia Traistaru-Siedschlag, ESRI
Summary of project plan
This research project will clarify how the
forces of globalization influenced the Irish economy and how
The extent to which the Irish experience can be applied in different institutional environments and how the transplantation could be effected will be the subject of a final strand.
In addition to publication of individual
research papers on each of the strands, a synthetic report will be prepared,
integrating these findings with existing literature. This report will thus offer general
conclusions, based on
Overall aim and central research questions
The aim is to fill identified gaps in the
The central research questions fall into five strands:
FDI: how far can productivity growth and the use of technology in
manufacturing and service firms in
(ii) Aid: What characteristics of the institutional arrangements for managing the inflow of foreign aid (EU structural funds) contributed to their effective management and what light does this throw on political economy theories of agency problems in making aid effective?
(iii) Capital markets: How far have international capital markets limited the policy space available for Irish fiscal and monetary policy, or have they enhanced the ability of policymakers to deliver good competitiveness, growth and stability outcomes?
(iv) Labour market openness: What effect has the reversal of international labour market flows had on productivity, the level and structure of wages and unemployment?
Transferability: How might the lessons of
The wide range of these questions is acknowledged; however, these are key areas where gaps exist in our knowledge. They are researchable and the answers are needed for a coherent and firmly-based overall analysis of the Irish experience with globalization.
Description of individual strands
The approach for this strand will be
primarily based on microeconomic analysis of enterprise level data on firms in
Somewhat surprisingly – albeit a not unusual finding in the international literature (cf. Görg and Strobl, EJ 2001) – most of the limited econometric analysis that has so far been carried out on the Irish manufacturing data at enterprise level has failed to uncover sizable spillovers (e.g. Görg and Strobl, Eur Ec Rev 2002, Ruane and Ugur, Int J Ec Bus 2006). The topic cries out for a more comprehensive analysis, and this will be done in particular by broadening the sectoral scope, deepening the analysis of productivity and technology, accounting for firm heterogeneity and addressing the problem of transfer pricing which complicates data interpretation. Two CSO micro databases remain totally unexploited in this regard, namely the Annual Services Inquiry – allowing extension of analysis to an important but relatively unexplored sector (in which foreign-owned enterprises are in some respects as prominent as they are in manufacturing), as well as allowing account to be taken of firm heterogeneity and potentially important links between manufacturing and services FDI – and the Survey on E-commerce and ICT that has been conducted as part of an EU-wide effort since 2002. Use of unique firm identifiers allows this survey to be linked with the Census of Industrial Production and the Services Inquiry.
This strand will analyze the mechanisms and institutions employed to allocate and manage EU structural fund receipts by reference to the political economy literature on public expenditure. Structured interviews with current and recent participants in this process will help provide the factual basis.
EU structural funds exceeded 3 per cent of GDP in the mid 1990s and were used inter alia to modernize infrastructure and reduce pressure on the public finances. They are thought to have been relatively well managed (e.g. low corruption and rent-seeking) and to have had a sizable socio-economic rate of return. How have the classic agency problems between the electorate and the politicians (cf. Persson and Tabellini, Economic Effects of Constitutions 2003; Robinson, “Politician-proof policy” 2005) and between the politicians and the bureaucracy (Huber and Shipan Oxford Handbook 2006) been dealt with? How did the institutional procedures that were adopted (including independent evaluations and broadly representative monitoring committees) match with theoretical ideals for employing use of ex ante and ex post information, and engaging different levels of government in decision making? How did they influence the degree to which the clientilist and other welfare-diminishing policy approaches are employed in practice?
(iii) The international capital markets and Irish macroeconomic policy
This strand will use available
macroeconomic data combined with news media-based dating of policy and
exogenous events to carry out relatively high-frequency macroeconometric
analysis of the two-way interaction between fiscal policy and capital flows and
interest rates. How far did international capital markets limit the policy space
available for Irish fiscal and monetary policy (cf. Rodrik “How to save
globalization…” 2007)? What was the
relative importance of international capital markets and the EU-wide
(iv) Labour market openness
The methodology here will be a small calibrated general equilibrium model. Calibration will draw on the findings of existing micro and macro studies.
This study will add to the previous work in this area by taking account of the simultaneous effects of foreign direct investment on the demand for skilled labour. It will also draw together the evidence of a range of recent studies on the characteristics of individual migrants. Whereas the emigration of skilled labour in the 1980s reduced the productive capacity of the economy, the returning emigrants of the 1990s and the more recent inflows of skilled labour from other countries have, in their different ways, brought new skills (even though many members of the latter group have been unable to find jobs commensurate with their educational attainment). The economy-wide effects of this inflow of skilled labour, whatever its nationality, will be analysed with particular emphasis on productivity, but also taking account of the adjustment of relative wages and unemployment. There may well be effects on the wider economy that are not captured in micro-economic studies on the returns to migration for individuals. The methodology adopted will build on a aggregate small-scale focused model of the Irish labour market that includes the supply and demand of skilled and unskilled labour. By incorporating the interaction of labour demand with investment flows and using results from the most recently available micro-economic studies (e.g. Barrett et al., Econ Soc Rev 2006) it will be possible to improve on the calibration of the model and to analyse the experience of both emigration and of immigration.
This will be theoretical work building on existing literature such as Dewatripont and Roland (Am Econ Rev 1995), Rodrik (Stud Comp Int Dev 2000) and Roland (Stud Comp Int Dev 2004).
Given the wide differences across countries
in the overall environment for policy including the social institutions crucial
for growth-enhancing policy formulation and implementation (cf. Acemoglu et
al., in Handbook..Growth 2005; Przeworski et al., Democracy and Development
2000) what policy relevance can