Thursday, 23 March 2006

Northern Ireland - Where is the bright new future?

Eight years on from the historic Good Friday Agreement, the much-longed-for dividends of peace remain an elusive dream for the province.

The bombs and bullets may be no more, but Ulster's politicians are still bickering, its economy is moribund and the British tax-payer is fed up with footing the bill. What is the answer? Alan Ruddock reports.

In its heyday between the first and second world wars, Harland & Wolff, the Belfast shipbuilder - whose giant cranes still dominate the city's skyscape - provided work for nearly 35,000 people. Two years ago, after it had completed the construction of The Anvil Point, a roll-on, roll-off ferry, Harland & Wolff applied for membership of Northern Ireland's Federation of Small Business. Its workforce had shrunk below 150, its shipbuilding was at an end and the company was reinventing itself as a high-tech engineering design company. In October, the old shipyards took another step towards oblivion when a billion-pound regeneration plan was unveiled for Belfast's waterfront.

The Titanic Quarter, named after Harland & Wolff's most famous progeny, will take up to 20 years to complete and will replace 185 acres of shipyards with homes, businesses, leisure centres and tourist attractions. It will, according to Mike Smith, its chief executive, become 'a major symbol of the economic regeneration of Belfast and Northern Ireland'.

It's a big claim, but the symbolism is appropriate. The province's once-vibrant manufac- turing sector has been relentlessly eroded over the past 35 years; its dependence on traditionally labour-intensive industries such as textiles and shipbuilding mean that it has suffered exponentially at the hands of globalisation.

More than 100,000 manufacturing jobs have been lost since 1970, and there's no end in sight. Inward investment is sluggish and indigenous entrepreneurialism low-key; employment is now concentrated around a service sector that is an extension of mainland Britain's. The result is an economy that has more in common with the old communist regimes in eastern Europe than with the dynamism just across the border in the Republic of Ireland, where the Celtic Tiger has delivered remarkable and sustained growth for more than a decade.

Public spending by the British government is responsible for 63% of Northern Ireland's gross domestic product, and the state directly employs about a third of all those in work, double the rates south of the border and substantially more than in the rest of the UK. The effect is economic sclerosis, with statistics that point to steady economic growth masking Northern Ireland's suckling dependency on government spending.

Last year, Northern Ireland received £5 billion more from the British government than it contributed, a subvention that has been rising steadily each year despite a decade of 'peace', yet the province remains one of the poorest regions in the UK, with GDP per head of population almost 20% below the UK average.

Low unemployment figures of 4% conceal the fact that the levels of economic inactivity are far higher than the rest of the UK, with the number of people on incapacity benefit 74% higher than average, while university graduates leave in droves. Even demographics are against it: the province's baby-boomers are some 10 years older than their counterparts in the Republic, while school enrolment has been falling steadily for the past nine years and is forecast to fall by a further 10% in the next nine years.

It's a grim backdrop, made incalculably worse by the dismal politics that have characterised the province since the signing of the Good Friday Agreement in 1998. The agreement, which followed years of negotiation between the political parties, the governments of Britain, Ireland and the US, and which was made possible by the cessation of most terrorist activities, was meant to herald a new beginning. With peace would come investment, jobs, prosperity and a virtuous spiral that would secure that peace for future generations.

A devolved government, based on the principles of power-sharing, was meant to ensure that responsibility for the province's future would rest in the hands of its own people. Instead of progress, however, devolution deliver- ed stalemate and acrimony as Ulster's political parties failed to live up to the requirements of the agreement. And while the political establishment engaged in interminable wrangling, the economy was left to wither and the peace dividend remained uncollected.

Worse, failure to reach a mature settlement accelerated the very polarisation and sectarianism that the peace process was meant to eradicate. Seven years on, and after a number of false starts, devolved government remains a distant prospect. Northern Ireland is governed directly from Westminster, its assembly and executive suspended indefinitely, while its local politicians bicker and abuse each other.

On the streets, sporadic violence erupts with burning cars and rioting youths providing TV companies with the sort of news footage that the peace process should have consigned to the past. Its people, wrote Kevin Myers, a columnist with the Irish Times, are addicted 'to blood- sport and division.

It is their oxygen and their lifeblood. They don't want to agree. They are like delinquent children in a playground who only feel comfortable with aggression and suffering, and who don't have to be responsible or grown up, because that reliable, cretinous dupe the British taxpayer will always bail them out, will always repair the windows, will always rebuild the burnt-out classroom.'

Last September's protracted rioting by Loyalist youths caused trade visits to be cancelled and prompted an exasperated Peter Hain, the secretary of state for Northern Ireland, to threaten a 'ruthless reduction' in government spending and to warn that the province's pampered status as a heavily subsidised yet under-performing province (per capita public spending is 29% higher than the UK average) could not be allowed to continue. The cretinous dupe is beginning to notice.

'The politics of procrastination is rife in Northern Ireland,' says Hain. 'There is a kind of blame culture: blame the secretary of state, blame London, blame the other parties. It is time people started escaping this and taking responsibility for governing themselves. I think this is going to happen.'

Maybe, but trust between the local political parties remains non-existent.

Sinn Fein, the newly dominant political force on the nationalist side, plays fast-and-loose with democratic politics and remains fixed on its agenda to create a united Ireland; Ian Paisley's Democratic Unionist Party, which has eclipsed the Ulster Unionist Party, refuses to deal with Sinn Fein and sees political plots and hidden agendas in every utterance from Dublin or London.

Hain has provoked outrage by arguing that Northern Ireland's only chance of future prosperity is as part of an all-island economy.

'I don't think people have woken up to the fact that the economy is not sustainable in its present form in the long term,' he says. 'We have got to become much more competitive, less dependent on a bloated public sector. I was talking to the Irish foreign minister, Dermot Ahern, about the common marketing of the island of Ireland to investors, where we were not seeking to do each other down but were seeking to maximise international investment either side of the border, and for the Republic to use its clout to get investment up north.'

Although on the surface a logical suggestion, Hain's pronouncement was as disingenuous as it was inflammatory. Unless the British government is prepared to give the province fiscal independence, allowing it to set corporation tax at the Irish rate of 12.5% compared with the prevailing British rate of 30%, then Northern Ireland's business sector starts at an unhealthy competitive disadvantage, while its ability to attract foreign investors is severely curtailed.

According to a report compiled last year by Goodbody Stockbrokers, a Dublin firm, a competitive tax rate could elicit a 20-fold increase in foreign direct investment. Yet the prospect remains as fantastical as local demands for a derogation by which Northern Ireland would join the euro while the rest of the UK remains wedded to sterling.

It will not happen, because it would spark demands from the Scottish and Welsh assemblies for similar autonomy, as well as provoking revolt in the English regions. The province is stuck with Britain's fiscal and monetary regime, and needs to chart a recovery plan that accepts reality rather than pandering to pipedreams.

The bleakness of Northern Ireland's predicament is sharpened by the experiences south of the border. For the first 70 years of its existence, the Republic was the poor relation on the island, a rural, inward-looking economy that paled beside the success and productivity of the industrialised north-east. In the early 1970s, as terrorism and mayhem started to take hold of the province, Northern Ireland's living standards and output per head of population were up to a third higher than the Republic's. Three decades later, the picture is reversed.

Southern Ireland is now one of the most prosperous countries in the developed world, with high productivity, high wages and an economic growth rate without peer in the EU. Foreign investment has poured into the country - 1,000 foreign firms now provide 130,000 jobs and in 2003 generated exports of EUR68 billion (£46.4 billion) and spent EUR15.5 billion directly in the Irish economy through wages and the purchase of Irish goods and services.

Each month, 11,000 immigrants arrive in Ireland and find jobs - last year 100,000 new jobs were created, and a million new jobs have been added in the past 10 years - while Ulster, with a third of the island's population, struggles to create 10,000 jobs in a year.

The disparity is vast, and Northern Ireland's businesses can only look on enviously and try to piggyback where they can by increasing their trade with the booming Republic.

Critically, too, southern Ireland's economic success has fostered a new breed of entrepreneurs. According to a recent European study, there are now 324,000 entrepreneurs on the island, but only 71,000 are in Northern Ireland. In the younger age groups, the gap between the two countries is stark: 12% of 25-34-year-olds in the Republic are entrepreneurs compared with just 7% in Northern Ireland, while there is double the percentage of female entrepreneurs in the Republic.

Dr Esmond Birnie, an economist and a spokesman for the Ulster Unionist Party, says Northern Ireland's economy is 'stuck in a predicament. We need to reduce the dependence on the state, but reducing the scale of the public service will reduce the level of demand in the local economy.'

He believes, too, that hopes of encouraging an avalanche of new foreign investment are misplaced. 'There's less mobile capital available these days, and what there is will more likely flow to cheaper economies. We have to focus on locally developed tradeable services,' he argues, pointing to the relative successes of Edinburgh and Leeds in building regional financial centres.

Hain's call for closer integration of the two Irish economies may be fanciful, but there is scope for greater cross-border co-operation and collaboration on roads, railways, power generation and the provision of public services, while the opportunities for Northern Irish firms to trade with the Republic are limitless. Regeneration, however, demands that the state become less powerful, because its sheer scale sucks entrepreneurial life out of the economy. Public-sector employees are better paid than their private-sector counterparts, enjoy secure jobs, good holidays and reliable pensions.

The public sector provides powerful competition to private employers seeking to recruit talent, and it encourages school leavers to seek out university courses that are geared towards a secure if unexciting future.

And this set-up hardly encourages employers to home in on Northern Ireland as a place in which to do business. Just as discouraging is the drain of young talent from the province: a quarter of 18-year-olds leave Northern Ireland to seek work in mainland Britain, and a fifth of 21-year-olds cross the water for their first jobs. Because of a cap on the total number of university places available in Northern Ireland, more than a third of its young people graduate from universities in Britain, and fewer than half of them return home.

Breaking that cycle will not be easy, but the pressure for change is mounting. In London, treasury officials are determined to cut the annual subvention to the province, banking the benefits of the peace dividend that will flow from lower security costs for the UK as a whole rather than for just Northern Ireland. Hain wants to cut 2,500 civil service jobs and says he will eliminate the waste of public money by which Northern Ireland's health services receive more money per head than any other UK region yet deliver lower-quality assistance. Sectarian division is an added expense, with schools under-utilised (there are 50,000 empty places), but closures and amalgamations resisted by parents who insist on maintaining and inculcating their separate cultural identities no matter what the cost - because they do not foot the bill.

The danger, of course, is that the UK state's retreat will gather pace, but the void will not be filled by local or foreign businesses, creating a vicious cycle that will accelerate the brain drain of young talent and depress an already fragile economy.

Later this year, Hain will organise an investment conference that will try to persuade American companies to sink their dollars into Northern Ireland, promising attractive grants, an intelligent, well-educated English-speaking workforce, decent infrastructure, a low cost of living and a hungry, committed people. But the competition for those dollars will be intense. The Republic offers much the same, losing out on the cost-of-living comparison but gaining dramatically with its low tax rates, its membership of the euro and its proven track record in matching the output of its universities with the needs of businesses that locate there. It also offers critical mass, with clusters of high technology firms such as Intel, Microsoft, Google and Dell offering reassurance to newcomers that the Republic delivers what it promises.

Northern Ireland will also be competing with Scotland, Wales and the English regions, which offer all that the province can offer but without the rancorous politics, ever-present threat of civil unrest and the surge in organised crime that has blighted the peace process.

There are, of course, bright spots. Despite the problems of the past, there are 100 US companies employing about 23,000 people, up from 60 in the mid-1990s. Seagate, the US manufacturer of computer components, is the flagship, now employing more than 2,000 people in two high-tech and highly capital-intensive plants in Londonderry and Limavady. Its experience has been a good one since it first invested in 1993, and its Northern Irish plants have prospered in the face of intense competition from within and without the company, holding their place while similar facilities have been shut in the US.

Seagate's decision to invest in the province was championed by Al Shugart, the company's founder, who had been persuaded to take the plunge by John Hume, the former leader of the Social Democratic and Labour Party, after a chance meeting.

Shugart's optimism has been rewarded by the performance of the Northern Irish subsidiaries, but it has not been shared by enough of his compatriots.

There are 100 US companies in the province, employing some 24,000 people, but direct investment actually fell during the 1990s as the Republic dangled its competing attractions and the political traumas proved a disincentive. Others have joined the limited US investment, but too often the jobs delivered are low-skilled and low-wage, with call centres an all too vulnerable arrival.

Tourism, though, has boomed since the ending of the daily terrorist attacks, with the number of visitors to the province climbing steadily and cross-border co-operation improving. The regeneration of Belfast continues apace too, with new bars, restaurants, hotels and shops breathing life back into the once-battered capital.

Yet for all the hard-fought gains, the shadow of the state still spreads across the economy, blunting its entrepreneurialism, absorbing its talent and dictating its growth. The jobs provided by US investment represent barely a fifth of those lost in the traditional manufacturing sectors, and the drain of young talent is remorseless. Competition for fresh investment grows ever tougher, with the new accession states in the EU offering far cheaper workforces and easier access to the major markets, while the Republic still shines its beacon of low taxes and remarkable economic growth.

Worryingly, too, the politics of the province remain mired in confrontation and mistrust, with no immediate prospect of resolution. When Northern Ireland seeks new investors, it cannot present a united front. Its politicians have refused to take the lead, preferring to play out their tribal differences while ignoring the economic opportunities.

Their shortsightedness has cost the province dear. Concessions that could have been extracted from the British government and the EU in the immediate afterglow of the Good Friday Agreement have been missed. The failure to deliver political progress has worn patience thin in London and Brussels, and now Northern Ireland must plot an economic future through less conciliatory territory.

Goliath and Samson, the two giant shipyard cranes, still stand in testimony to the industrial might that Belfast once wielded, while the new Titanic Quarter provides a template for the future. Getting there, however, will be painful. The state's enforced retreat from Northern Ireland's economy, spurred by the Treasury's need for cash as the UK slows, threatens powerful deflationary pressures that will need to be offset by a sharp rise in local output.

So far, consumed by internal wrangling and overtaken by the Republic's economic surge, Ulster has exhibited few signs that it can rise to the challenge. The peace dividend, which was meant to re-energise the province, has gone south.

NORTH vs SOUTH - The numbers story

NEW COMPANY FORMATION

Growth in number of VAT-registered companies, 1996-2004

N Ireland: +10.36%

Republic: +76.27%

TOURISM

Tourist income, 2004

N Ireland: £3.25m

Republic: £2.33bn

PRODUCTIVITY

Gross value-added per capita, 2001

N Ireland: £11,300

Republic: £18,517

PUBLIC EXPENDITURE

Social security as percentage of household income, 2000 N Ireland: 22%

Republic: 12%

Total government spending as percentage of GDP, 2004

N Ireland: 67.00%

Republic: 34.49%

ENTREPRENEURSHIP

Proportion of 25-34yr-olds who are entrepreneurs

N Ireland: 7%

Republic: 12%

Number of entrepreneurs

N Ireland: 71,000

Republic: 253,000

CORPORATION TAX

UK versus Irish basic rate

N Ireland: 30.00%

Republic: 12.50%

JOB CREATION

New jobs created in 2005

N Ireland: 10,000

Republic: 100,000

SOURCES: Ireland North and South - A Statistical Profile 2003, CSO Publications, DTI, ONS, Eurostat, GEM

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