Addressing Northern Ireland’s productivity puzzle

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Paul MacFlynn, economist with the Nevin Economic Research Institute, looks at productivity in Northern Ireland and the overall trend in the UK.

Productivity remains one of the most important, yet under-reported issues facing the Northern Ireland economy. Not only is Northern Ireland’s productivity gap with the UK widening, the productivity gap between the UK and the rest of the world is also widening. Among G7 economies, the UK ranks second last in productivity, behind France and Italy and only just ahead of Japan.

Northern Ireland is, therefore, a laggard region within a laggard country. In its simplest terms Northern Ireland’s productivity performance implies that we produce less with more. Either we produce fewer goods and services from the same inputs or the more likely case, that the goods or services we produce are less valuable. Herein lies the challenge for closing the productivity gap in Northern Ireland.

Too often, we are focused on labour market issues such as unemployment or economic inactivity. Important as they are, they will have no bearing on our existing productivity. In order to close the gap we have to critically assess what it is that is being produced in Northern Ireland and where growth lies.

To begin with, there are some who would argue that the productivity gap isn’t really a problem at all. The argument is that not all regions of the United Kingdom can be high-tech powerhouses. Output from lower-value added sectors needs to be produced somewhere – why can’t that be Northern Ireland? More of Northern Ireland’s output is concentrated in agriculture, retail and the manufacturing of textiles and food. These sectors tend to be more labour intensive and thus, contribute to lower productivity. The UK as a whole produces more output from high-tech sectors like information, communications, professional and scientific services.

If you reject the idea that Northern Ireland can remain perpetually less productive than the rest of the UK, it may lead you to conclude that resources need to be shifted from sectors like agriculture to more productive sectors like scientific research. However, the problem is not just compositional. Northern Ireland is still less productive than the rest of the United Kingdom in nearly all measurable sectors. Such a policy would also ignore the historical and even geographical reasons that Northern Ireland output is already concentrated in areas like agriculture and textile manufacturing.

One of the myths that surround the productivity debate in Northern Ireland is that the public sector is holding us back. Based on the data available, the opposite is actually the case. Public administration and health are two areas where output/employment is actually significantly higher in Northern Ireland than it is in the rest of the UK. Were we to shift resources from the public sector to the private sector as it currently stands, Northern Ireland would become less productive.

Paul MacFlynn

Another myth surrounds output from the financial sector. A recent analysis of the UK productivity slump carried out by the Financial Times found that output from the UK financial sector may have been overstated for many years. Therefore even if the UK financial sector regains lost ground since 2008, its output per worker can never regain the level it was pre-crash. This holds important lessons for Northern Ireland in terms of prioritising certain sectors.

The key productivity challenge, therefore, is not only to generate more activity in particular sectors but also to become more productive in the sectors where Northern Ireland is currently producing below potential. The lack of improvement in recent years can be traced to the industrial and enterprise strategies that have been adopted in Northern Ireland to date. Rather than strategies designed to build up the capacity of existing industries through investment initiatives and collaborative partnerships, we have adopted policies designed to buy in success instead.

Northern Ireland has misdiagnosed the role of foreign direct investment as a generator of growth rather than as a catalyst for it. Foreign direct investment can be vital in boosting technology and innovation in high growth industries, but it can’t create them on its own. No reasonable amount of grants or incentives can give birth to an industry. This is also the central problem with cutting corporation tax. We would be far better advised to use our existing resources to build up key growth sectors of the economy whether in agri-food, life sciences or renewable energy. There needs to be a critical mass of investment in early stage and primary research, and there is a key role for public policy in this. The most successful and growth enhancing innovations and technologies have emanated from state-led and state-supported initiatives.

In order to close the productivity gap with the rest of the United Kingdom, we need to both boost activity in higher value added sectors and coordinate significant productive investment within them. We could start by putting together a real innovation strategy for Northern Ireland with the investment capability to back it up. Northern Ireland spends per head almost two and a half times the UK average for enterprise and economic development. In the light of our productivity performance to date it may be time to ask just how well spent that money is.

Paul MacFlynn analyses the Northern Ireland economy for the Nevin Economic Research Institute.

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