Posted on Wednesday 11 April 2012 by Ulster Business
If the Programme for Government (PfG) succeeds, many successful private sector businesses will have been motivated to profitably increase their investment and output.
The Economic Strategy, as part of the PfG, has now been approved. The Strategy has also been welcomed by the main business representative organisations. Business spokespeople, with some reservations, have bought into the underlying approach.
The central theme is the growth of the private sector. If the balance between the private and public sectors was nearer to the overall UK average, the private sector would be about 10% larger with up to 45,000 more people in employment.
The special analysis prepared by Oxford Economics to inform the Executive in the preparation of the Strategy shows that, on current trends, the relative standard of living in Northern Ireland will remain nearly static at about 75% of UK average incomes into the distant future. Whilst the PfG takes a fresh look at many aspects of economic policy (with one or two notable omissions), there is an unhappy concern that no marked improvement in living standards is currently forecast.
The caveat to that forecast is that there is the ambition to incentivise and create more dynamic positive processes so that the forecast is invalidated.
The ambitions for the private sector can be seen in two overlapping strands. First, the ambition from Government is that the development agencies, particularly Invest NI, should endeavour to promote 25,000 new jobs in the next four years. Allowing for this to generate other “multiplier” effects, this could mean total employment rising by over 50,000.
Four separate strands, each of near to 6,000 jobs, are targeted: (1) the expansion of indigenous businesses, (2) an increased number of new business start-ups, (3) the establishment of new businesses by external investors (classified as Foreign Direct Investment, FDI) and (4) significant numbers of jobs to be generated by the appropriate use of the Jobs Fund which is structured to be an extra instrument in rebuilding the economy.
The second strand translates the ambition for 25,000 jobs into an assessment of the possible shape of a stronger sustainable economy. The logic of a stronger economy is that to earn higher living standards and pay for the goods and services that would be imported, Northern Ireland must sell (or export) more goods and services to other places.
Exports of goods and services are inevitably a central contribution to rebuilding the economy. There is scope for some import substitution or internal demand but the scale of the transformation that would be necessary means that increased exporting is a critical element.
In the PfG, this recognition of the need to export more goods and services converts into a target that the value of exports of manufactured goods should increase by 20% by 2015. This is a formidable ambition which merits closer examination.
The Government statisticians estimate that Northern Ireland annually exports manufactured goods worth just over £12.3bn. A 20% increase would convert to an extra £2.4bn each year.
The summation of the key policy changes into an ambition to increase the value of exports of goods gives a sharp focus to questions on whether this is possible or, rather, what else would need to happen to make it possible.
As the economy recovers from the recession of the last three years, are the locally established businesses capable of profitably selling increased output on world markets? Are the locally based businesses either sufficiently competitive or can they be assisted to become more competitive to capture more external customers in selected market places?
There is some evidence that, overall, the larger businesses in Northern Ireland are emerging from the recession with rather less damage than was feared. Undoubtedly, the recession has had an impact. However, manufacturing output is showing signs of recovery after a fall of nearly 19% between mid-2007 and mid-2009. Since mid-2009, output has increased by about 10%.
Other evidence points to some recovery in profitability (excluding the banks) for the larger local private companies. Following a fall in pre-tax profits in 2009-10, the early results declared in 2011 point to an increase in profits.
The private sector in Northern Ireland seems to have managed to adjust well to recession. Not that the recession has been painless but, despite the pain, competitiveness seems to have been protected. Maintaining profitability during the recession has been a notable achievement. However, that offers no assurance that the further gains of increased output will match the ambition of the PfG.
If sales to GB are added to exports to other countries, then Northern Ireland exports are probably equivalent to nearly 40% of the regional total GVA. Increasing exports by 20% implies that GVA might increase by about 8%: against a background where Government spending is contributing about 6% less to GVA, the effect would be a net improvement of about 2%.
However it is measured, the exports target is formidable.
Achieving the exports target would rely on three main features, each of which would demonstrate that production in Northern Ireland was showing competitive market prices.
First, the performance of the 40-50 current largest exporters would need to increase sharply. Second, the PfG target of encouraging 6,000 new start-up businesses will need to include a significant number which are motivated to export. Third, some success in attracting more FDI (foreign direct investment) will be needed both because that will bring employment and also because FDI firms are more likely to be export generators.
For each of these groups, the extra exports targets are ambitious.
To focus on whether local existing or new businesses can be expected to increase the level of exports by 20% is an important performance indicator. However, it is an outcome which depends on other aspects of economic motivation. Can these new and existing businesses identify profitable export opportunities?
Do profitable export opportunities exist that are not fully appreciated? If so, then the emphasis on trade missions, exporter visits and better business intelligence are all critical parts of the preparations.
Perhaps a reliance on better knowledge and better market intelligence is too simplistic. Large scale changes in production will call for major investment decisions backed by advanced business plans, access to finance, efficient official public services and adequate local skilled staff.
The largest 40-50 private sector firms in Northern Ireland already have an impressive export record. Many are earning satisfactory returns on their investments. These are the businesses which must be motivated and incentivised to “go for growth”. Some are private family controlled businesses; some are subsidiaries of larger multi-nationals.
Where are the up and coming businesses that can follow Andor and First Derivatives and seek a listing on the AIM stock market?
To move to a stronger export led economy calls for further improvements in the underlying competitiveness of the economy. That brings the debate back to the same fundamentals: productivity, skills, operating costs, public services and better public administration. That, of course, underpins the whole economic strategy. The strategy illustrates that success will be a joint effort: Government accepting that it must sharpen its action plans and business responding to new opportunities.