Irish vs Latvian lessons (52)
Autors: Mortens Hansens
Publicēts: 2009. gada 16. decembris 14:38
Atslēgvārdi: , , , , , .
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A small, relatively poor country on the periphery of the European Union. Unemployment close to 20%, soaring public deficits and debt. Main export article: People.

Yep, you guessed correctly, Republic of Ireland, 1987*.

For decades Ireland had been a poor country in an EU sense and a good friend of mine who worked in the Irish Central bank at the time told me that they cancelled their subscription to The Economist when it ran a survey on Ireland entitled “Poorest of the rich”…

1987 is often seen as the year of the turnaround.

From being at the bottom of the EU (then of 12 members, enlarged in 1995 to 15 members) in terms of GDP per capita (at around 60% of the EU average) Ireland’s GDP per capita steadily rose, surpassed 100% and reached some 145%, the second highest in the EU**.

It is the only country ever to have made it from the bottom to the top and this deserves (and has received) scrutiny. The story has been told before but I think it makes sense to dig it up again.

Typically, two questions are asked in the Irish case:

1) What was behind the “Irish Miracle”?

2) Why was this convergence so delayed?

To make a long story short, here is a list of the most used arguments:

1. Macroeconomic stabilization

2. Agreement among government and social partners on the broad guidelines for economic policy

3. Greater openness of the economy

4. Low tax rates to attract foreign investment

5. Industrial Development Agency (IDA) to attract foreign investment

6. The EU’s Single Market

7. Well-educated labour force

8. English language (beneficial when attracting US investment)

9. “Lighter” exports

On a per capita basis Ireland attracted much more foreign investment than any other country in the EU (and the world). The computer and biotech industries boomed as many US companies used the well-educated and English-speaking Irish labour force as its springboard to the EU’s Single Market. These industries, with their very high productivity paved the way for high wages, lower unemployment, economic growth and prosperity.

Similarities and differences with Latvia?

3) and 6) are fulfilled,

1) is (frantically) being worked on,

2) is so-so,

4) and 5), yes, but so do other countries in Eastern Europe,

8 ) no – but what about Russian?,

9) yes, and what it means is that one euro of exports today has much less weight than in the old days of manufacturing. Today a lot of software is produced and exported, in the “old” days it was heavy machinery. This means that location is no longer so important for exports and it is a strong argument against those who think that being at the periphery dooms a country.

I have always marvelled at the vast amount of top companies that came to Ireland – Dell, Microsoft, Oracle – they basically all came and also for the reason for where I believe, always have believed and shall remain believing unless convinced of the opposite, that they will not come to Latvia in droves:  lack of relevant higher education.

“Build it and he will come”, the voice says in the movie*** “Field of Dreams”. In economics it is the same; firms will react to the supply of infrastructure, of skills, of tax rates, of macroeconomic stabilization etc.

I have often heard that Latvia should be big in “high-tech” but high-tech firms have no incentive to come here in droves unless they can find the well-skilled people they need.

But build them and they will come! High-tech firms don’t “just” come and income convergence doesn’t just happen – it is not automatic but requires active policy. Simple, but true.

And little PS: When Ireland grew rapidly in the 1990s another thing happened that we all want desperately to see here in Latvia: People came back.

*And now…. Except for not being poor anymore. Ireland is in crisis but will not go back to 1987, far from.

**True, some of this overstates how well off the Irish really are as a quite substantial part of GDP is owned by foreign companies, notably American ones. But what is left for the Irish, so-called Gross National Product, is still well above the EU average.

***If you haven’t seen it, see it, if you have seen it, see it again! And the term “Build it and he will come” has actually been adopted by economists to signal the idea that supply will create demand.

Morten Hansen is Head of Economics Department, Stockholm School of Economics in Riga

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Komentāri

Sensacija ->

Well, I have mostly second-hand information about this phenomenon, from conversations and reading internet forums, but this seems often to be the case, especially outside Riga, and especially in public sector companies, where directors change after each elections, giving place to winning party members/supporters (like communal services companies).

First problem being the bosses, who are often uncomfortable having aspiring workers under them, who can threathen their position in the near future, the second one I think is skewed risk-reward system – compared to other countries I have some information on, I have a feeling that in Latvia it is very likely to get punished if You take the innitiative and fail, than to get rewarded if You succeed. This could be the result of inability of managers to set correct incentives, or some remains of soviet time thinking…

Art

M.B. wrote:

‘’your story of India (not that you have provided much of a hard evidence in favor of your arguments:) kind of proves my point.’’

Sorry, you made the grotesque and laughably absurd argument about Latvia lacking IQ, sounds similar to the book the Bell Curve, so the onus of responsibility to prove that point of view with even a shred of evidence falls to you, not to me.

If you knew anything about high tech you’d realize that some of the biggest computer companies in the U.S. were started by just a handful of people, not thousands, like Dell, Hewlett-Packard, Apple, Microsoft, Google, ect. That fact alone seems to explode your assertion that high tech comes only in India’s sense due to scale. That’s absurd, the Nordic states are relatively small and high tech, yet you’ll attribute that to the stupid idea of a master race.

Go and whine and bemoan the state of the universe, blame Latvia’s history or your own lack of intelligence and self-esteem. Pour yourself another drink and cry yourself to sleep. While you’re doing that the rest of us will be working on making things better.

b.

Here is some interesting data on national IQs. Latvia’s IQ is one point less than Finland’s. I think this data – though estimate – blows M.B.’s argument right out.

44.

4 years ago when I got my currrent job as Finance Director(for a Latvian company with a UK Managing Director), at the interview,I was asked the standard question…”where do you want to be in 5 years time”. I answered “I want your job”. I got the job and he was satisfied with my answer becasue he wanted people with the wish and ability to grow. He didn’t see it as a threat.

FYI – I don’t have his job yet, but he hasn’t fired me for being too ambitious:)

Being less initiative-prone is actually nothing new in this region and is very much a northern feature, not Latvian. There is nothing bad about it actually. Ambition is highly valued in American culture but the approach has also its drawbacks – namely, noone is ready for a hard work but concentrates on short term – “new proposals”, “initiative” etc. That is largely why Americans are very good at selling but have difficulties in making quality and hi-tech goods, compared to Japanese or Germans. Quality production requires other character – nerdism combined with relatively low ambitions and discipline. Overall, I think it is not a problem.

G.D.

what you’ve written above is laughable, have you ever been to the U.S.? Ever heard of silicon valley? The U.S. has consistently been one of the most innovative countries in the world, partly due to its universities, ranked top in the world, and its investment in the sciences and immigration. while its ranking has slipped in recent years, its still in the top ten. if you didnt know that, then please what planet are you living on?

do you or M.B. actually read anything? or is just your own deductive powers that have led you down this faulty path. for you guys its all national characteristics, or some claim about history and IQ. of course zero evidence is presented.

b.

No one in america is ready for hard work??????

I just broke a rib laughing!

Americans work like dogs, and get 10 days holiday a year if they are lucky. They are some of the hardest workers in the world. I’m not American by the way.

For those commenting on this article who are spouting all this kak about genetics, much of America is populated by Irish, Swedes Germans etc, who, 200 years ago or so, were brave enough to cross the Atlantic, knowing they’d never go home again, knowing they’d never see their families again, knowing they might die of hunger or disease or in an accident before reaching their intended destination, and not knowing how they were going to earn a living when they got there. i.e. genetically stong, smart, initiative takers…………..

Americans not hard workers??? F.F.S!!

“hard working Americans” is a mythology they themselves laugh about nowadays. True, some of them sit at the office desk until 8 pm but
1) Most of the time they spend on various “new proposals”, “initiative” and similar activities. That is a feature of culture. Obvious, 99% of individuals do not have the brains to make any reasonable proposal. Therefore, their working day is not highly productive
2) Actually roads are pretty jammed right to 11am. Their “long working hours” is a gross exaggeration
3) In the last 10 years, government sector has become huge. Red tape is enormous, army (and connected activities) is huge, tax burden is actually close to, or higher than in Latvia and it is all spent on totally inefficient “government services”. Scientific, innovative jobs and the low skilled valuable jobs are usually filled by legal and illegal immigrants. But they are products of another culture, aren’t they?
4) Quality of work in the service sector is usually quite miserable. In general, quality is a problem everywhere…
5) Fake sick leaves and similar lies are widely popular. You cannot imagine something like that in Latvia
6) Actually it was recently confirmed by some international study – the statistics of “long working hours” and “2 week vocations” is largely bs.
7) Those, which are really highly productive, are illegal immigrants… Threat of deportation makes you move.
8) They retire pretty early, and thanks to printing press in the Fed and the Chinese CB –they can afford it

High productivity in GDP figures is actually the result of two effects:
a) Illegal immigration: an American plumbing firm can have enormous turnover with just one person employed (guess why?).
b) Here we come to the most important point of them all: Money printing! America is in a unique position that it can finance its CA (real goods from China) with nice green paper. Therefore, service sectors may be very expensive and consequently have high “value added” (remember the real estate in Latvia, – the most productive sector in Latvia? in the good times when the Swedes financed our CA). No other country in the world can do this “productivity trick”.
Nothing against Americans, though. Actually Americans are very much like Latvians, maybe a bit better –somehow naïve and obsessed with consumption. Definitely they are much more about initiative and doing instead of thinking. And that is good! I would love Latvians to be even more American. But as I said, that does not suit all jobs… and average German is certainly much more productive.

G.D. wrote:

‘1) Most of the time they spend on various “new proposals”, “initiative” and similar activities. That is a feature of culture. Obvious, 99% of individuals do not have the brains to make any reasonable proposal. Therefore, their working day is not highly productive
2) Actually roads are pretty jammed right to 11am. Their “long working hours” is a gross exaggeration’

the above alone is enough to tell you know nothing about the U.S., i suppose from your rant, with no data as per usual, we can deduce that you equally qualified to speak on Latvia. frankly, you’re an idiot, and i’ll not waste my time even reading the crap you throw up while you’re at the computer.

its just too weak, both factually and intellectually.

b.

[...] doma ienāca prātā, lasot citadiena.lv  Rīgas Ekonomikas augstskolas profesora Mortena Hansena Irish vs Latvian lessons. Mortens lasa latviski, tāpēc nedomājiet, ka es viņu aprunāju aiz muguras [...]

Good stuff!

The article, I mean.

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