How much are we pre-destined by our culture to follow particular paths? How difficult is it to make startling departures from traditional ways? The question is worth asking in the light of the recent proposal in “The Irish Times” by the economists Sean O’Rian and Michael O’Sullivan that we start a state-investment bank.
The first objection is one that any semi-literate ten year old can make: how are we to trust an unreformed public sector with the management of a government-run bank? The only beneficiaries of the collapse of Ireland have been the state-grandees who oversaw the upper reaches of government, and found no fault. And once it was found that in fact that the joint between finance, administration and government policy was like a gay New York bathhouse, circa 1982, why, the administrative class responsible for infecting us with economic AIDS promptly collected their winnings and departed, leaving the rest of us to collect the bill, which we’ll be paying off for several generations.
OK; that’s the whinge out of the way. And, as it happens, that is a simplification too far. According to O’Riain and O’Sullivan, it was the state-run Enterprise Ireland which funded genuine investment into industry and technology, while the private sector charged into the Ponziland of property: by 2007, that was where two-thirds of outstanding loans resided, with a further one-sixth to the financial sector itself.
A State investment bank can address the problems created by very weak lending activity by the banks.
However, to be truly effective it must address the long-standing puzzle of capital misallocation in Ireland and it must be structured in an innovative and far-sighted way.
This bank could raise new capital and put existing funds to better use. It would be funded largely by private savings (and potentially through large international private equity and wealth management institutions).
One innovation may be to seek capital from the very large cash holdings of international multinationals. Many of these companies have manufacturing bases in Ireland and, given their largely positive experiences here, may well also be willing to act as operational partners in investment projects.
Specifying the goals and investment criteria of a State investment fund is challenging. The basic criteria is that projects will generate a return greater than the cost of capital, but this does not rule out the incorporation of strategic development goals with purely commercial ones.
Most crucially, the State investment bank would promote shifting the structure of the Irish economy from property and construction towards industries that respond to and reflect new global megatrends.
A strategic investment bank can do much better than existing lenders in funding projects in newly emerging sectors (from “green technologies” to “social investments”), in supporting infrastructural projects with longer-term returns and in connecting existing innovative ideas with funding that enables them to develop further.
The State’s ties to universities and their research foundations may also be better catalysed through the existence of a strategic investment bank.
A State investment bank can help to support important public-good projects that would perhaps be beyond the capability or remit of more straightforward investment funds. It could also be the institution that designs and manages the issuance of Government-backed convertible-type bonds linked to specific infrastructure projects. The ability of the bank to bring about synergies through its connections across the public and private sectors would be a crucial resource.
Commentary on State institutions tends to assume they are ineffective. But state investment banks and agencies have played key roles in development in Israel, Taiwan, Brazil and across Europe, among many other places.
More surprising perhaps is that existing research shows that public institutions such as Enterprise Ireland have a good record in financing business development in Ireland. State aid to exporting companies has been found to have promoted manufacturing employment in the 1980s and in the 1990s, and research into Irish-owned software firms in the 1990s showed that those firms that received the most State grant aid exported more, employed more people and grew faster.
It was investment from State sources that led the financing of enterprise in the late 1990s and again after the dot.com bubble burst in the early 2000s. Private finance only took over after growth had resumed.
The expertise in the relevant agencies is clear from the fact that, quite early in the course of the economic crisis, officials from Enterprise Ireland were sent to advise staff in the banking organisations on business lending.
Therefore, it is important that this investment bank should be run as a State body – to break the cycle of bad practice in private banking, to reinforce the focus on strategic and developmental goals, and to take advantage of the business lending and development expertise already built up by State agencies.
To “deleverage” the property and banking bubble is one thing, but to build a more sustainable productive economy requires that we put all of our assets to use.
A strategic investment bank is a valuable instrument in that urgent task.
Seán Ó Riain is professor of sociology at NUI Maynooth, and Michael OSullivan is author of Ireland and the Global Question (Cork University Press)
© 2011 The Irish Times