"Devil is the detail regarding how we'll fare when the UK goes it alone"

Description

Article commissioned by Belfast Telegraph

Subject

In the light of the economic impact which followed from EU membership during 1973-2020 what might happen now given Brexit?

 

Longer version of article including supporting dataset on NI's comparative GDP per capita 1973, 1998 and 2020

Release: Immediate Monday 27 January 2020

 

Goodbye EU- What next? Summary of development of NI economy 1973-2020 and implications for future

Dr Esmond Birnie, Senior Economist

“Summary

The Northern Ireland (NI) economy certainly grew during 1973-2020 and average living standards rose but how far can all that be attributed to EU membership? Just as important may be all the other things which were impacting on the economy- growth of public spending, the Troubles, ceasefires, state of the world economy?

In fact, a number of structural weaknesses became more pronounced during the time we were part of the EU:  economic sectors which sell beyond the region shrank in proportional terms, the public sector became larger and NI was more dependent on a fiscal subsidy from the UK Treasury in 2019 than it has been in 1973. If the good things which happened to the economy are partly attributed to the EU then some of these weaknesses may also have been related to membership or at least any membership benefits were not large enough to prevent those weaknesses becoming entrenched.

The crucial economic test is how well NI performed compared to other EU members during 1973-2020 in terms of levels of output per head of the population (GDP per capita). In most cases NI failed to catch up and fell further behind. Compared to 14 member states NI fell behind. Compared to 10 it either held its ground or converged. (These comparisons do not include the UK or the three micro economies- Luxembourg, Cyprus and Malta.)

There is a strong case for saying the impact of EU membership (good or bad) on the NI economy has been exaggerated. Much more important were the policies adopted during 1973-2020 and the institutions which attempted to implement those policies. Post-Brexit the real economic challenge will remain what it was before Brexit: raising levels of productivity within the NI economy.

By the end of this week Northern Ireland (NI) along with the rest of the UK will no longer in a formal sense be part of the EU. Of course there is a the transition period until the end of the 2020 and the particular arrangements relating to the Single Market and agri-food regulation in the NI Protocol to the Withdrawal Agreement.

For sure, the NI economy has grown and changed a lot during 47 years of EU membership. Total employment has increased by about 280,000 (in 1973 the number of employees was about 495,000 but in 2019 it was about 780,000). The share of manufacturing in the total number of employees has shrunk from 33% to about 11%. The public sector, however, has increased its share of employees: from about one-quarter to about one-third. Back in 1973 the crucially important tradeable economic activities (those which could conceivably sell outside of the region/UK, i.e. manufacturing plus business services) represented 35% of all employees but by 2017 that share had declined to only 15%.

During the last half century personal incomes and consumption have grown considerably. Back in 1973 only about one-in-three households owed a TV and about one-quarter a telephone. Today almost every household have at least one TV and more than three-quarters of individuals have a smartphone. During the same period NI’s population grew from about 1.5m to almost 1.9m. The NI economy’s “net dependence” on the UK Exchequer, i.e. the extent to which public spending within the region exceeded the tax revenues collected here, increased during 1973-2019: the Subvention or net fiscal transfer from HM Treasury increased from about 15% of NI’s GDP to about 20% currently.

To sum up, whilst membership of the EU probably facilitated some growth in the NI economy that membership was not enough to prevent the continuation of certain structural weaknesses in the economy. Indeed, some of those weaknesses may have become more pronounced during 1973-2020 and EU membership may in some regards have been unhelpful- encouraging a bias towards high growth of public spending and the maintenance of low productivity sectors.

A useful summary measure of economic performance is the level of output (GDP) in NI per head of the population compared to other countries/regions. How did performance measure on that score during the period of EU membership? It is a mixed picture but not a very flattering one. During 1973-2018 the gap in terms of GDP per head between NI and the UK average did narrow a bit: in 1973 NI was 73% of the UK level and in 2018 (according to the most recent ONS data published on 19 December 2019) NI was 81% of the UK average. So, some improvement over half a century but more could have been reasonably expected [Note 1]. But what of performance compared to other EU countries? See Table 1.

NI’s position in 2020 is worse than it was in 1973 when compared to the Republic of Ireland, Austria, Netherlands, Finland, Czech Republic, Spain, Slovenia, Lithuania, Slovakia, Portugal, Poland, Hungary, Romania and Croatia [Note 2]. NI roughly held its position compared to Denmark, Germany, Belgium, Estonia, Greece and Bulgaria (in the first three cases that meant a large shortfall remained when NI was compared to the other EU country but at least that gap did not widen by much). The only EU economies NI clearly converged towards during 1973-2020 were: Sweden, France, Italy, and Latvia although in none of these cases had NI caught up by the end of the 47 year period.

Perhaps membership of the Single Market had much less positive dynamic effect than has often been claimed, Or, at least, other factors had a much more important role in determining NI’s performance. Throughout the period of EU membership NI’s comparative productivity remained stubbornly low and this issue will remain the greatest economic challenge post-Brexit.

One particular question is why some other EU members- notably the Republic of Ireland and some of the former Eastern bloc countries appear to have performed much better. Part of the explanation may lie with how those countries have invested in human capital or the way their training systems operated. The Republic of Ireland has invested very heavily in expanding the number of graduates in the work-force. The Czech Republic, Slovakia and Hungary even during the Communist period retained enough of a “German style” apprenticeship system to stand them in good stead post 1989 [Note 3]. In fact, many of the former Eastern bloc economies have either over-taken NI or are rapidly catching up. Here, again, the critical lesson is this: more important that EU membership are the policies and institutions used by a country:

In Table note the colour coding of NI’s performance compared to other EU members: RED= “NI falling further behind”, GREEN= “NI catching up”, AMBER= “NI holding its position”. Numbers greater than 100 indicate a level of output per person in the other country which is higher than NI’s

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table 1: Levels of GDP per head as % of the level in Northern Ireland (i.e. NI=100), adjusted for price differences (purchasing power parity comparison)

	1973	1998	2020
Singapore	68	157	277
Republic of Ireland*	90#	112	235*
Switzerland	205	167	182
Norway	118	163	178
US	190	181	171
Austria	129	144	156
Netherlands	146	139	155
Denmark	154	148	153
Taiwan	48	112	147
Sweden	154	123	146
Australia	143	135	145
Germany	150	137	144
Finland	124	128	142
Belgium	137	146	136
Canada	156	142	130
France	148	132	128
UK average	137	126	123
S. Korea	32	82	119
Japan	126	146	116
Italy	120	126	112
Czech Republic	80**	76	112
New Zealand	143	100	112
Spain	101	99	110
Slovenia	96***	89	110
Israel	110	105	109
Lithuania	86	39	104
Estonia	99	47	102
Northern Ireland	100	100	100
Slovakia	80**	60	96
Portugal	88	90	93
Poland	61	47	92
Malaysia	29	48	92
Hungary	65	61	92
Greece	89	87	84
	1973	1998	2020
Romania	40	35	83
Turkey	30	41	79
Croatia	49**	42	77
Russia	68	38	73
Bulgaria	61	29	64
Latvia	89	36	62
China	10	21	54
India	10	12	23

Note:*: The combined effect of the very large international firm sector in the RoI together with the relatively low rate of corporate taxation and changes in rules regarding national accounts (to allow R&D spend to count to GDP) help explain why measured GDP growth in the RoI massively accelerated in the mid 2010s (recorded growth of 26% in 2015). Whilst some of the measured GDP may be a statistical artifice the likelihood is that the level of GDP per head in the RoI is considerably higher than that in NI.

#: RoI/NI compared using the figures in K.A.Kennedy, T. Giblin and D. McHugh 1988, The Economic Development of Ireland in the Twentieth Century, Routledge.

**: Using a figure for Czechoslovakia in 1973 for the Czech Republic and also for Slovakia.

***: Slovenia estimated from Maddison (2003) figure for Yugoslavia in 1973 but applying the Slovenia/Yugoslavia ratio which Maddison estimated for 1990. A similar method was used for Croatia in 1973.

Source: NI GDP per capita estimated using the UK level and applying the NI/UK ratios for 1998 (79.3%) and 2018 (81.3%), the latter proxying for 2020, from ONS 19 December 2019, Regional Economic Activity by GDP, UK: 1998-2018. International GDP per capita data from The Economist 2001, The World in Figures 2001, and The Economist November 2019, The World in 2020 (the latter using Economist Intelligence Unit forecasts for 2020). For UK/NI for 1973 from Kennedy, Giblin and McHugh 1988 (NI/UK 73%). For 1973 for other countries figures from Angus Maddison (2003) The World Economy A Millennial Perspective mostly quoted in S. Broadberry 2003, “Economic growth in Europe and the US since 1870: A quantitative economic analysis incorporating institutional factors”, Working Paper, University of Warwick..”