John Bruton

Opinions & Ideas

Category: IFSC

AUSTRALIA

I visited Australia this week on behalf of the IFSC. I t was my first ever visit to a country, in which so many Irish people have come to make a new life over the last 200 years.

IRISH CONNECTIONS
In fact, among the first Europeans to settle in the Sydney area, were 160 convicts transported there from Cork. 

I visited the impressive Parliament building of the state of Victoria to learn that in the 19th Century, two of the Parliament’s speakers were
+  Peter Fintan Lalor, brother of James Fintan Lalor, the Young Ireland revolutionary, and

+  Sir Charles Gavan Duffy, who had also taken part in the Young Ireland movement before going to Australia. Gavan Duffy’s son George, became a politician and a judge back in Ireland in the early years of the State.


THE ABORIGINAL PEOPLE

Although Irish people were among the first European settlers, Australia was already inhabited, for thousands of years, by an aboriginal people with their own strong traditions and values. 

Initially, these aboriginal people were badly treated, driven from their traditional hunting lands and marginalised in society. Their educational performance and participation in society has lagged, and their life expectancy is still 10 years below that of the average Australian.

In this sense their position is similar to that of the Travelling Community in Ireland, and for many of the same reasons .

At public events, including at the Mass I attended in St Patricks church in Sydney, the aboriginal peoples, who originally inhabited the site in question, are formally acknowledged by name, which is good and fair thing. It may not undo the damage done, but it causes people to pause and reflect.

AUSTRALIA IS VERY DEPENDANT ON MINERALS
Income per capita in Australia is very high, $10000 per head higher than the United States, and about $15000 per head higher than Germany.

Public debt is low, about 30% of GDP.

Australia has experienced almost 22 years of continuous growth and is expected to grow by 1.6% this year. Unemployment is only 6.25%.

But the prosperity is vulnerable because it is so dependent on non renewable sources.

Minerals have been, and remain, an essential contributor to the Australian economy.
But mineral prices are volatile, and this expose Australia to booms and busts.

Extracting minerals consumes a lot of energy and, as a result, greenhouse emissions per capita are higher in Australia than in any other OECD country.

Iron ore represents 22.6% of all Australian exports, coal, 12%, natural gas 5%, gold 4%, and crude oil 3%. 

So 46% of all Australian exports are of raw materials that are non renewable, and subject to volatile price movements. Iron ore prices are down now, because of reduced demand in China, and this will slow the Australian.

Since European settlement began, Australia has enjoyed three eras of long and sustained economic growth,
    from the start of the Gold Rush in 1851 up to the early 1890’s,
    from the end of World War Two up to the  early 1970s, and 
    from 1992 to the present.

Despite its large land area and low population density, agriculture plays a relatively small part in the Australian economy. Wheat and beef are less than 4% of Australian exports. Water shortage is the key problem.  Finding a way to boost agricultural production, by using solar energy to desalinate sea water, and thereby improve Australia’s food production, is a priority. The centre of Australia is largely uninhabited because of water shortage.

Services are the big components in the Australian economy, Finance (10%), Construction (9%), professional services (7.5%) and Health (7.5%) are the biggest contributors follows by public administration, transport and education. Manufacturing contributes only 7.5% of Australian GNP. 

The service economy is sustained by minerals exports.

Up to the 1980’s, Australia pursued protectionist policies. The minerals boom has enabled it to abandon these without too much pain.

Nowadays, 32% of all Chinese exports go to China, 15% to Japan, and 7% to Korea. Only 5% go to the US, and only 2.4% to Britain (its traditional market). A downturn in Asia would hit Australia very hard. This is unlikely, but private debt in China has reached 200% of GDP, and Chinese residential construction has slowed down. This could dampen demand for Australian exports.

RENEWING OLD ACQUAINTANCES

During my visit, I met two Australian politicians, who were my contemporaries in politics and who I had got to know well over the years.

One was John Dawkins from Freemantle, who was a Labour politician and Treasurer (Finance Minister).

The other was Phillip Ruddock, a Liberal MP, who is still in Parliament, and was Immigration Minister, and until very recently Government Chief Whip.

While in Australia, I read an excellent book by another political contemporary.

Former Australian Prime Minister and Finance Minister, John Howard. Our times in both of those offices in our respective countries overlapped. John’s book  is entitled “The Menzies Years”, and covers Australian political history from 1949 to 1972. It is a remarkably fair minded book, and an excellent background for understanding Australia today.

URBANISATION….AN INEXORABLE TREND, BUT IS IT GOOD FOR US?

In global terms, the pull of ever bigger cities seems inexorable.

In 1970, a third of the world’s population lived in cities, more than half do so today, and by 2050, it is predicted that two thirds of the world’s 9 billion people will live in cities.
City dwellers consume more energy per capita, produce more greenhouse gases, and are more exposed to crime.

A 1% increase in the urban population leads to a 2.5% increase in energy use. Cities  often expand close to the coast line where they will be exposed to rising sea levels caused by climate change.
Big cities lead to anonymous atomised lives for many….lost in the crowd. This makes big cities harder to govern democratically, because the social networks that facilitate democracy and discussion in rural areas, are often missing in big cities.

Yet people seem to prefer to live in cities.

Why?

A recent study says that , on average the bigger the city, the bigger the income per person,  and  the higher the proportion of the population with higher level degrees.  But the same study also shows that the bigger the city, the higher is the incidence of anxiety and transmissible diseases.

A study published by the Royal Society in London last month suggests, using data collected from tracking people and their mobile phones, that the  bigger the city, the more friends people have, but the more frequently do  they change their friends!

It even discovered that bigger the city, the faster people walk, probably reflecting higher stress levels! 

Attaching importance of things that can be measured in money seems to drive this rapid urbanisation of the world’s population. 

But one must stand back and ask if this sort of living is best for children growing up, if it facilitates children having enough time with their parents, and if it is good  for the quality and cost of the schooling  children receive. 

A living pattern that is not good for children may not be sustainable in the long run.

This drive to live in ever bigger cities seems also to be a function of the increased specialisation of people’s lives. 

Jobs have become so technical that fewer people understand the work that their next door neighbour does, and only in bigger cities will ne find a critical mass of people  with specific inter relatable skills.

That’s what attracts firms to big cities and may explain why property prices in Dublin are more dynamic than elsewhere.

REASONS FOR IRELAND’S SUCCESS….CONSISTENCY OF POLICY

As a small island off another island, distant from the European mainland, Ireland has done exceptionally well to develop critical masses of skilled people in sectors like pharmaceuticals, medical devices, software, certain financial services, use of big data and food technologies. 

Foreign direct investment continued to come into this country in these sectors even in the worst period of the recession.

As I work abroad for IFSC Ireland, I am repeatedly told that what attracts firms here is the ability to recruit the right people, either locally or among people who are willing to come here to live and work.

Since the abolition of exchange controls, money can come into a country quickly. But it can also leave it quickly. Money often has the legs of a hare, but the courage of a mouse! That is why confidence must be constantly maintained by steady management and consistent fiscal policy.

It is thanks to this continuing overseas confidence in the Irish economy that we have been able to meet our fiscal targets, borrow at reasonable rates, and restore economic growth. But such confidence is volatile and fragile, and prone to sudden changes in sentiment due to media headlines. We must remain vigilant.

THE SOCIAL BENEFIT TO IRELAND, AND TO THE WORLD, OF IRELAND’S INTERNATIONAL FINANCIAL SERVICES INDUSTRY

SERVICE IS THE KEY WORD

The financial service industry would not exist if its sole purpose was to provide jobs for those employed in it, and consequential revenue to the state. Like any other institution, like even money itself, the financial service industry exists because it is socially useful. 

Before jobs or taxes, the industry exists to serve society, and to meet real needs of real people.

Of course, some participants in the industry have done things that were not consistent with social benefit. Sometimes they have spoken about their business to the rest of society , in such impenetrable  jargon, and even with such condescension, that the social goals and benefits of financial services  been completely obscured from  public view.

As President of IFSC Ireland, my job is to promote Ireland as a location for new financial service activities. I put the emphasis on the word “service”.  The industry exists here to provide a service to the rest of the world. If it fails to provide a good service, the business will go elsewhere.

My argument is that Ireland can and does provide these services to global customers better than is done anywhere else in the world. We have had some success in this.

6000 EXTRA JOBS SINCE 2008, AND OVER 2 BILLION IN REVENUE TO THE STATE EACH YEAR

In 2009, 29,704 people were employed in the Irish international financial services. By 2012, according to Department of Finance figures, the number of jobs had risen to 35,698.

And the taxes paid by the industry have risen commensurately. We have estimated that the tax contribution of the International Financial services industry to the Irish Exchequer is 2.1 billion euros.  2.1 billion euros is equivalent to two thirds of the entire voted capital budget of the state, or to 10% of the entire Social Protection budget, and is the same amount as the entire correction that has to be  made in 2015 budget according to the programme agreed with  the EU/IMF. 

Sometimes it is helpful is seeing the value of something by posing the counterfactual, where would we be if we had no international financial services industry? We would have almost 36000 fewer jobs and  would have to make a 4 billion euro budget correction next year, rather than a 2 billion euro one.

That’s important to say.

But it is only possible to say it because our financial services industry provides a service that shrewd professional all around the world are prepared to pay good money to have done in Ireland. And they are only prepared to do that because this industry provides a good service, a social benefit, to their clients .

HELPING PEOPLE MITIGATE THE RISKS OF LIFE

The basic social goal of the Irish financial services industry, is to help people to all over the world make financial provision, in the most efficient way, to mitigate the risks of life.

Risks are always there.  Mitigating risks, managing risks, and choosing between risks. 

These  are the tasks that have to be undertaken.

In some countries, people mandated the state to cover these risks for them. But as society ages, many states will have  less and less    fiscal capacity to cover all the risks they were able to cover when to working age population was bigger, and the elderly population smaller.  Families all over the world will find themselves having to do more of the risk management for themselves. That  is where  the skills deployed by the professionals in Irish international financial services industry will come into play.

The Irish international Funds industry, for example, invests savings generated by pension contributions, and does so in such a fashion as to ensure that, when people can no longer work for a living, they will have a pension. 

That requires spreading money around different types of investment, so that risks of one type of investment are hedged by other investments.

SPREADING INVESTMENTS TO AVOID VULNERABILITIES REQUIRES SKILLS

Unlike what happens when people put money into a share in particular company, or putting it all on deposit in just one bank, putting money into a fund, which invests in different activities, makes sure people do not have all their pension eggs in one basket, so to speak. 

Different funds, and different investment strategies, will be tailored to different purposes. 

An insurance company must ensure it always has money available to pay big claims if there is bad weather or some other such one off unexpected episode. It needs to be in a position to find a lump of money quickly.

In contrast, an investment for a pension fund will aim at having a steady flow of income.

An investment to cover the cost of education will require a different strategy to one to cover end of life nursing care.

The skill of the financial service professional lies in understanding the needs of the client, and tailoring the mix of investments to get the right return, over the right time frame and with the right mix of risk and reward.

The Irish industry can provide those skills. 

It can also look after the administration of the funds, enabling the asset managers to focus on what they do best. 

RENEWING GLOBAL INFRASTRUCTURE AND FILLING THE LENDING GAP

Another social need met by the financial service industry is that of assembling finance for the  building and renewing the world’s infrastructure of roads, airports, rail links, electricity generation and distribution systems. Here the investor expects no return in the short run, but big and steady returns  ones in the long run. This sort of investment is ideal for pension funds.

The contraction of the European banking system, because of past mistaken lending in the property sector, has  created  opportunities for  other types of finance to  enter the market and fill the gap in the provision of credit for business and house purchase.

 Some of the capital of pension funds and insurance companies can, if supported by innovative intermediaries, be used to meet the social need for finance for family home and business working capital. Irish innovation can play a role here in meeting both local and global needs and in filling gap in the market left by the necessary contraction of traditional banks.

TECHNOLOGY TO IMPROVE CONVENIENCE

Another social goal the Irish financial services industry should aim to fulfil is that of extending the convenience of a banking service to people who still have to rely disproportionately on cash. 

A Technology centre in the Digital Hub in Dublin has been established to link innovators in the Irish software industry, where we are world leader, with the international financial sector, where we are also a world leader. The aim is to use the most sophisticated information technology to extend banking services to a wider public, as well as complying with necessarily complex rules introduced since the financial crisis.

The application of technology can also help identify gaps in the market, by using the skills n data analytics that exist in this country.

FINDING OUT WHY THE CRISIS REALLY HAPPENED IS THE ONLY WAY TO AVOID A REPETITION

Another area to which we must apply our talents is that of ensuring that the financial and banking crisis, from which we are slowly emerging, never happens again.

Asset bubbles and financial crashes have been part of human history since the invention of money. To mitigate bubbles and crashes, we must  truly understand why and how they happen. 

As the Nobel Prize winning economist, Robert Shiller said in his recent book “Finance and the Good Society”

“As much as Wall Street had a hand in the crisis, it began as a broadly held belief that housing prices could not fall—a belief that fuelled a full blown social contagion”

He was speaking of the United States but he could have been talking about Ireland . In other words, he was asking why people came to believe something that was fundamentally unbelievable, namely that house prices could only go upwards and not downwards.

He went on

“Learning how to spot bubbles and deal with them before they infect entire economies will be a major challenge for the next generation of finance scholars”

He could have added a major challenge for “finance practitioners and politicians”. 
Ireland needs to apply its best brains to this, to preventing this infection happening again, to understanding the psychology of our recent bubble. Only thus can we prevent a future one. 

The task is not so much about apportioning blame. That’s the easy bit.  It is about understanding why people came to believe, what they believed during the bubble. Unfortunately perhaps, no country is better positioned to provide that understanding of recent history than Ireland is. Doing so would be conferring a social benefit on the world.

These are some of the social benefits the Irish financial services industry provides to the rest of the world. Apart from jobs and taxes, what other benefits does it confer on Ireland itself?

INTERNATIONALISING OUR SOCIETY

It internationalises our country, bringing young people from all over the world to work here, and creating new opportunities for spin off businesses.

It regionalises our country, bringing high quality jobs the places like Limerick, Carrick on Shannon, Navan and Naas, relieving congestion in the capital.


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The above is based on remarks made at a business breakfast of the Dublin Chamber of Commerce  on  27 May 2014 by John Bruton, President of IFSC Ireland

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