SUBGROUP ON ECONOMIC ISSUES

Thursday 14 December 2006
(Morning evidence session)

Members present for all or part of the proceedings:

The Chairman, Mr John O’Dowd
Mr Fra McCann
Mr Mitchel McLaughlin
Mr David McNarry
Ms Margaret Ritchie
Mr Mervyn Storey

Witness:

Prof John FitzGerald, Economic and Social Research Institute (ESRI)

The subgroup met at 10.23 am.

(The Chairman (Mr O’Dowd) in the Chair.)

The Chairman (Mr O’Dowd): I welcome Prof John FitzGerald to the Subgroup on Economic Issues. He has travelled from Dublin this morning, and I believe that he has rescheduled his itinerary in order to appear today. The subgroup thanks him for that. Prof FitzGerald will begin proceedings with a statement lasting around 10 minutes, and then the floor will be open for questions from members.

Prof John FitzGerald (Economic and Social Research Institute): Thank you; it is an honour to be here. I was asked to talk about two matters: the priority areas for investment in the Republic of Ireland, and the drivers and principles for cross-border co-operation, particularly in infrastructure-related areas.

To determine the Republic of Ireland’s priorities, we must look first at constraints. The current problem in the Republic is that the economy, just like a child, is growing out of its clothes. There are huge constraints due to infrastructure, and something must be done about that because it is affecting competitiveness.

The other problem is that the economy is growing above its potential; though the money may be there, the infrastructure cannot be delivered as rapidly as people would wish.

Human capital remains important. The national plans include significant investment in the infrastructure of education and training as well as in the people involved. That colours our views on investment priorities and on areas in which there should be co-operation between the North and the Republic.

Since the completion of the single EU market at the end of 1992 there has been a free market for business North and South, and there is no constraint on business. Market forces should, in the absence of market failure, give the optimal outcome for business. Of course, market failure does occur, and Governments have to get involved, but that involvement should only happen when market failure has been proven.

Barriers still exist in the production of public sector goods and services where there may not be an optimal allocation of activity on the island and where the border still exists. I shall return to that theme later.

For Governments to become involved, then, market failure must be proven, and before cross-border co-operation can begin, it must be clear that a better outcome can be achieved through co-ordinated activity by the two Governments than if they continue on their own. The costs of co-ordination are very high; studies show that the completion of the single electricity market would benefit the people of this island, North and South, but the transactions costs of doing it are very high. Alternatively, the ‘Enterprise’ train does very well out of cross-border co-operation. So, you do it if you have to, and if the benefits outweigh the costs.

As regards the Republic’s priorities, the problem is how much the economy can deliver. Last winter the Irish Government published their spending plans for the next decade. The Economic and Social Research Institute (ESRI) examined those plans and said: “You cannot spend that much. You will have the money, but if you spend it, the economy will explode and you will have to cut back on what you intend to do.”

The top priority is to complete the inter-urban motorway system, which will be completed by 2010, followed by urban public transport system, particularly in the Dublin area. However, in the ESRI’s view, the planning for that has not been done properly. In addition, human capital remains important, and R&D has been ramped up, but one of the problems in all of these areas is that if we go from zero to100 very rapidly, we may get into trouble. Ramping up R&D rapidly may not be very efficient.

The final factor, which the Department of Finance in the Republic finds difficult to take on board, is that economic infrastructure is not the be-all and end-all, and that social, cultural and recreational infrastructure may play a role too. Mostly, the latter is provided for by the private sector, but making Ireland an attractive place for skilled Irish people to come back to — remembering that one-third of all young Irish people in the Republic still emigrate — to attract them back and to attract skilled foreigners, who are so important to the economy, we have to make Ireland an attractive place. That is why public transport is needed, but there may be other elements in making an economy successful, which would not normally be thought of.

The low priorities are the productive sector; aids to business and agriculture. We should really get rid if them. If one cannot make business work in the Republic today, one should not be in business at all. It is necessary to show market failure. There are still areas, though, such as marketing tourism and R&D in which there is still a need for public involvement.

If the Irish Government were prepared to tax the housing sector to release houses for social housing, the ESRI would say yes. However, the Government cannot just pump more money in; that would lead to inflationary problems.

It is interesting to compare the differences in priorities North and South. The ESRI has examined those differences, because it is important to the Republic to know what is going on in the North. The Republic needs certain things from Northern Ireland, and vice versa. For example, the Republic’s priority is to spend four times as much per head of population than the North on transport, but less on health and education infrastructure, which is surprising, because the health system is much better in Northern Ireland than in the Republic.

According to the Secretary of State, Northern Ireland has too many schools. Why, therefore, is there a need to invest so much in education, rather than transport or the environment — areas in which there are different levels of investment in the North than in the South?

10.30 am

Our research in the Republic has shown that the issue is not simply about spending money, but about making use of the infrastructure. Appropriate pricing of water, waste services and congestion charging may all be unpopular, but an infinite amount of money could be spent on urban roads, for example, and they would still be congested. Unless good use is made of money by investing it in public transport, there will not be a sustainable society. In addition, to produce sustainable cities, planning must be based on a much denser population, particularly in Dublin and possibly in Cork and Limerick.

Growing and retaining human capital, and R&D, could benefit from co-ordination. As student numbers in the Republic will fall, and Northern Ireland has too few third-level education places, co-ordination could benefit both regions.

The border makes a difference in the provision of public goods such as education and health. For example, the single biggest infrastructure project planned for Northern Ireland is a new hospital in south-west Ulster. There are major problems in the Republic’s health system; so, if that hospital were to be sited in Enniskillen, for example, it would make sense for the Republic to buy services from Northern Ireland in order to provide a decent health service in border areas. The Republic could vice versa provide services to Northern Ireland.

Infrastructure benefits from co-ordination. That already happens in certain sectors, such as electricity provision, and is being driven by market forces. However, there are regulatory problems. In many cases, the Government should not just spend money, but should establish the regulatory environment for telecommunications and energy in order to produce the optimal outcome.

North-west Ireland is a major issue for the Republic’s Government. Donegal’s problems cannot be solved without considering investment in Derry. The north-west will be a priority area and the Republic wants Northern Ireland to co-operate in the north-west to benefit infrastructure development on the island as a whole.

Elements that can help businesses include selling the location of the island, marketing, tourism and so forth. Our research shows that there should be less emphasis on aids to the private sector and more on concentrating on public goods in the areas that I mentioned.

The Chairman (Mr O’Dowd): Thank you. The floor is now open for members to ask questions of Prof FitzGerald.

Mr Storey: I welcome your comments, Prof FitzGerald. There is a raft of issues to consider from your presentation. I was interested in your comments that co-operation only happens when it produces a better outcome. You highlighted the example of co-operation in electricity provision, which is driven by market forces, and that such co-operation arises not because of political expedience but because of the benefits it brings.

The DUP has been very clear that co-operation is not about establishing institutions for the sake of it or ticking a box to placate some particular ideology. Co-operation should be based on good economic sense, and provided that areas can be identified and clearly defined, and that co-operation would achieve a better outcome, it is to be welcomed.

You mentioned the percentage of the population aged 25-34 with a third-level education in 2005, and you said that the figure for Northern Ireland was calculated on the basis of 36·3% of males and 31·5% of females having a third-level education, giving an overall figure of 26·4%. My estimation is that that figure should be around 35% or 36%.

Prof FitzGerald: You are correct. The data that I received was incorrect but was later corrected. The two Governments published a paper, and the correct data is included in the appendix to that paper.

Mr Storey: The figure should be 33·9 %, which you say is higher than the EU average.

Prof FitzGerald: It is slightly higher than that.

Mr McLaughlin: That was an interesting presentation. You discussed the impact of the border and gave some examples of co-operation, cohesion and obstacles to mobility. You specifically mentioned the public sector. What possible options might we explore, and is there potential in the new EU regulations relating to territorial co-operation for widening the areas of co-operation and, perhaps, eliminating those difficulties?

Prof FitzGerald: From the Republic’s point of view, EU money is irrelevant at this stage. However, EU regulations, such as those that may lead to the hiving off of the transmission of the Viridian Group plc, may be significant. As regards INTERREG funding, it is not so much the money as what must be done for other reasons. The Republic will find the money on its own part, if it needs to, but the north-west is an area where you cannot solve those problems with money alone. The infrastructure connecting Derry and Belfast is important for Donegal. Historically, Donegal was part of Belfast’s wider hinterland, but now it is not. I am not an expert on regional issues, but that is one area where the Republic would like to see investment. There has already been some investment in the airport there. I travel by public transport, and to get to Donegal is a real pain. Now I can fly to Derry, so I can see that, on a personal level, it makes a difference.

Mr McLaughlin: It will be possible to establish bodies that, with the two Governments’ agreement, will have their own legal identity and can be located in the North or the South. I am using this island as an example, but dealing with shared boundaries is an EU-wide matter. Those legal entities would be subject to the fiscal policies, or legal issues, of whatever EU state they are located in. Would that provide an example of how we can deal with the difficulties of mobility?

Prof FitzGerald: Having spent three and a half years, up to the end of September, on the Northern Ireland Authority for Energy Regulation (NIAER), I have been involved on Northern Ireland’s behalf in negotiating the all-Ireland electricity market.

The complexity of producing co-ordinated legislation between Westminster and Dublin is warranted by the potential benefits to the island. However, there must be big benefits involved in order to justify that level of co-ordination.

I have been part of a process dealing with multiple levels of government in Westminster, on issues that Westminster should not have been involved in and was not interested in. I am loath to be prescriptive, and organisation economics is not my area, but when you start messing around with those sorts of organisations, the costs are high, and as such should be avoided.

I remember when a House of Commons Committee came to the ESRI in the mid-1990s, and I said that an all-island electricity market is important. I was asked if I thought that there was a need for all-island institutions. I said possibly not, but it might make life easier. Having been involved in such co-ordination work with NIAER, I know that it is very demanding on everybody’s time, but it was obviously warranted in that case. Matters must be dealt with on a case-by-case basis.

Ms Ritchie: Prof FitzGerald, you are very welcome. I believe strongly in North/South co-operation, and North/South economic co-operation in particular. I read your documentation, and I note that you mentioned the north-west quite a bit. I can understand that from the Republic’s perspective as it sees an advantage in developing the north-west as far as Donegal.

However, you mention at the end of your submission that the Dundalk Institute of Technology should exploit further its hinterland with the North to provide services in that area. Please expand on that as regards skills and technology. Furthermore, how could the south-east be developed? In contrast with the north-west, it seems to get left out a lot.

The subgroup has been given detailed research, which shows that the South expanded the work of the colleges of technology in the area of skills, which helped the growth of the economy in Dublin. How did the development of the colleges of technology impact on growth and development in the economy in the South, and how could that contribute to the development of the economy in the North? What further levels of co-ordination, including the development of North/South bodies, are required to ensure that we can share some of the South’s resources and develop the economy in the North to a level that is comparable with that in the South?

Prof FitzGerald: I visited the Dundalk Institute of Technology, and I was struck by the fact that they have a relatively limited number of students from north of the border. Looking at a map, one would expect that the institute would attract more students from north of the border than from the South. The institute had to check on the numbers as they had not focused on this issue. It seems that the North is short of places in third-level education.

People are not going to take the train to Dundalk, morning and night — the Belfast issue has to be solved on its own. However, IT colleges in the South should be given incentives to focus on cross-border recruitment of students and provision of services, because they do interesting work on sustainable energy there. There is also interesting work being carried out in Northern Ireland on sustainable energy, of which people in the Republic need to be more aware. Quite a lot of experiments have been carried out up here.

There are areas in which the Dundalk Institute of Technology could provide a service. We also need to look at the Institute of Technology, Sligo and Letterkenny Institute of Technology. Of course, third-level education works as an island without anybody telling it to do so. The bulk of the sociologists with whom I work come from Queen’s School of Sociology, Social Policy and Social Work, because it is the best on this island.

We organised a seminar in the institute on electrical engineering, and we work jointly on PhDs with University College Dublin (UCD). One of the top students at the seminar was from Queen’s University, and she was being jointly supervised in her PhD studies by UCD and Queen’s University. Thus, co-operation is happening at a local level, but more focus at an IT level would be important.

In terms of impact on the Republic, it is the expansion of third-level education down to certificate diploma one and two-year courses that is keeping kids in school until the age of 18 and then, afterwards, allowing them to study for what we in the Republic call a post leaving certificate, which would be one year after high school graduation — the European norm being to graduate from high school at around 18. The North has a big gap. In the past, when people in the Industrial Development Agency (IDA) saw themselves as being in competition with Northern Ireland — I do not think that they would do so any more — one of their big benefits was that when a company such as Intel needed technicians in Carlow or in Kildare or wherever, the local IT college would put on a course and train lab technicians or whoever very rapidly so that they would gain qualifications within one or two years. They needed third-level graduates, but they also needed other trained people urgently, and they had the flexibility to meet that need.

Those arrangements were set up in the Republic in the 70s, but it had a major impact only when kids stayed at school until age 18 and then went on to do the course.

10.45 am

My kids went to the local community school, where two thirds of the children came from local social housing. I was very conscious that, in the late 1980s, parents were saying that there was no point in their kids remaining in education. The children who were in my youngest daughter’s class remained at school and the parents changed their attitude. However, you needed a flow of kids from working class backgrounds to stay in education until age 18 and then to go on to third level education, so you have to look at them jointly.

Ms Ritchie: With regard to the development of partnerships, would you see a significance in Newry College of Further Education developing further partnerships with Dundalk? Some partnerships already exist, but there are other possible areas for development, for example in IT.

Prof FitzGerald: I would have thought that there would be scale economies there — they are sufficiently close, especially with the recent road improvements. There are similar links, for example between Letterkenny Institute of Technology and Magee College. Such links may well happen anyway without anybody suggesting them because market forces will drive them. However, I think that there is logic in terms of improving the content and range of services available to everybody in that region.

Ms Ritchie: In assessing the impact of ‘Transport 21’, have you or your team given any thought to where the North needs to develop complimentary roads, given that the South has put such an emphasis on inter-urban routes as a means of developing growth in the economy?

Prof FitzGerald: The two road systems that are important to the Republic are the Belfast to Dublin road, because so much of our exports go out through Larne; the other is the Derry to Belfast/Derry to Dublin routes. However, say, for example, a new hospital is built in Enniskillen and it is the major centre of excellence in that part of the island, then there might be a wish to improve the regional roads, because the roads from Enniskillen to the Republic are rotten. There might therefore be a desire to develop some routes for regional reasons, depending on what is happening in the area.

The Chairman (Mr O’Dowd): David, the floor is yours.

Mr McNarry: Four short questions, if that is OK.

The Chairman (Mr O’Dowd): Four short ones or two long ones?

Mr McNarry: I will go for four short ones. Prof FitzGerald, thank you making the effort to be here. Are you able to give a sense of what public opinion is like in the Irish Republic with regard to the Irish National Development Plan, which proposes to contribute capital investment into Northern Ireland? How do the people of the Republic feel about that?

Prof FitzGerald: I live in an ivory tower, so I am not necessarily the best person to assess public opinion. I think that if the amount of capital investment were limited and had a very clear logic from the point of view of the Republic, then I think that people would say yes. If it were a substantial amount, however, concerns would be expressed about dependence and so on. However, as an example, I think that the Derry people are happy that Derry airport is there and that it provides a service to Donegal. Similarly, where there are direct benefits for the people of the Republic, they would see the benefit. However, if the amount of investment increases, then people would ask whether the Republic were just making Gordon Brown’s life easier and subsidising the United Kingdom rather than Northern Ireland. I think that it is a question of scale.

Mr McNarry: Would the intellectual argument in people’s minds stretch as far as involving Gordon Brown? Would the Irish people be so alert to that?

Prof FitzGerald: They would be if there were a lot of money involved. Think of people the world over; where there is a lot of money involved, people start asking questions — all it takes is one newspaper article to raise questions in people’s minds and then they are off.

Mr McNarry: So, 1 billion euro, as alleged, is not really an awful lot of money?

Prof FitzGerald: It depends over how many years you spread it. You may spread your butter thinly.

However, that is not my area, so I cannot answer your question.

Mr McNarry: That is fine; I just thought that you might have been able to give us a local perspective. How do you feel about it, or is that an unfair question?

The Chairman (Mr O’Dowd): I think that you are being slightly unfair.

Mr McNarry: If it is an unfair question, Prof FitzGerald does not have to answer.

Prof FitzGerald: It is not unfair. I would have thought that the amount would be limited. However, if we take east Germany or the Mezzogiorno as examples, pumping money into infrastructure does not necessarily pay off, because other things are needed. Therefore there should be a limited amount where there is a clear pay-off for the Republic.

Mr McNarry: My question was obvious. I wanted to know how people in the Republic feel. Unionists have sensitivities with that issue, because for electoral reasons nationalist areas appear to be bolstered, while unionist areas are excluded.

Prof FitzGerald: That would reflect the fact that the Government in the Republic may be more magnanimous; however, their electorate may be less so and would want to see a pay-off. That is an important point, given that governments have to be re-elected.

Mr McNarry: I got more out of asking that question than I thought, so I am very grateful.

My second and third questions run into each other. Agriculture seems to feature less as an economic issue in both jurisdictions than it did previously. Are you aware of any plans to encourage agricultural growth in the Irish Republic?

Prof FitzGerald: That depends on what you mean by growth. Eighty per cent to 90% of farm incomes are paid in the form of cheques in the post or as subsidies. As regards production, German taxpayers might be happier if farmers stayed in bed in the morning, although the Irish would not. Agriculture is not making a major addition at the moment.

However, if we look at what is happening with global-warming — and I am conscious that the British Government and the Prime Minister are committed to fighting it — we will find that, in the long run and if the price of carbon increases enough, the use of biomass to generate heat and, possibly, electricity, will become an economic option. Indeed, biomass is already an economic option for the production of heat.

My friend John Gilliland, who sits with me on the Northern Ireland Authority for Energy Regulation, has been successful with his work in Derry on biomass. People from all over Ireland — and now from the United States — are interested in his work. If using biomass becomes profitable, given environmental constraints, farming could make a much more positive contribution to the economy, North and South.

The run-off of agricultural waste into rivers and lakes is the greatest environmental problem in the Republic. Agriculture is causing significant environmental damage, although one or two other minor industries also contribute. Therefore agriculture is a complicated issue. However, in the future we may need the agriculture sector to get involved in biomass, not biofuel. That will be a profitable move. Biomass is certainly profitable in heat production, and Balcas Sawmill CHP Plant in Fermanagh is successful in that regard.

It is interesting to note that all the activity on biomass takes place in Northern Ireland; I am not aware of similar work in the Republic. Perhaps I am just ignorant, because it is not really my area.

Mr McNarry: Might the grants be a contributory factor?

Prof FitzGerald: Yes. I was a member of the Northern Ireland Authority for Energy Regulation, which visited the Balcas plant. Given that John Gilliland, who could certainly convince anyone about biomass, sits on the authority, I would be aware of it.

Mr McNarry: Keeping to the agricultural theme, I think that I am right in saying that bureaucratic gold-plating affects Northern Ireland farmers terribly, but when it comes to the application of European rules down South, the restraints do not appear to be the same. Obviously, that has a bearing on economic performance up here. Is there a trick in that down South? Do they pay no attention to it? Do you have any guidance for the industry up here to prevent it from suffering as a result of that gold-plated bureaucracy?

Prof FitzGerald: I am not sufficiently familiar with the area to comment.

Mr McNarry: I have a final question. I was interested in what you said about education. Undoubtedly, education has played a successful role in your economy.

To what extent does the economy suffer from underachievement in education? That is a massively serious issue for us. There is a suggestion that gaps in employment due to underachievement are being addressed, conveniently, by migrant workers. How do you cope with educational underachievement in the Republic?

Prof FitzGerald: That is a matter on which my colleagues in the institute have been working for 15 years. The top priority in the late 1980s was to address the number of students that were leaving school before the Junior Certificate — the equivalent of GCSEs — was completed. There was a substantial reduction in that number up to the late 1990s, when 80% of children, on average, completed high school with the Leaving Certificate. However, there has not been much progress since then, particularly for boys. The rate for girls has continued to rise, but the rate for boys has remained static or fallen. We are concerned that more children complete school. There will then be questions about quality in third-level education: is the quantity up, but the quality down?

I am not an expert on that area, and I deal with education on the macro level. I know that colleagues are concerned with the micro level, and have done much research on how to achieve better results. My school reports always said, “could do better” and, in the Republic, the education system certainly could do better in several areas.

The focus of attention at the moment is the fourth sector — PhDs. However, the biggest benefits will be obtained if we keep kids in school productively so that they complete high school. That would produce the biggest return to the economy.

The study that colleagues have carried out shows that Irish people who emigrate and come back are 10% more productive as a result of what they have learned abroad. I am interested in carrying out a study to see how many of those in the management of multinational companies in Ireland are returned emigrants. It strikes me that if you consider Intel or Dell, the top people are Irish, but they did not grow up in the firm here; they went abroad, learned another language, and learned how to do things differently. That aspect of the educational system — which one might not classify as education — is hugely important. In the last 30 years, a lot of kids have left Northern Ireland to go to university in Great Britain, and have not returned. David Trimble, in a speech to the Institute of Directors before he became First Minister, raised that issue. In the Republic, that is a matter that people generally do not refer to, but I see it as part of the broad human capital.

The final point that you raised concerned immigrants who fill employment gaps. The research that we have done shows that immigrants to the Republic are highly skilled, and have a much better education than the average Irish person. If they come from an English speaking country, such as Britain, the US, Australia, or New Zealand, they get jobs commensurate with their qualifications when they arrive. If they come from a non-English speaking country, they may go home or learn good English and, within six years, they get jobs commensurate with their qualifications. The research shows that because they are upgrading the skills of the economy, they have helped solve the unemployment problem. The economy was constrained and could not grow because there were not enough people with third-level education. If people come from abroad and the economy grows more rapidly, you need more people with lower skills, and that helps to solve the unemployment problem.

Quite a lot of immigrants, especially those from non-English speaking backgrounds, are in jobs that are unskilled, but experience shows that many learn English and gain appropriate employment.

A colleague, who is Chinese, began work in the canteen but now works in our accounts branch. Such good use of resources is hugely important for the economy and for the unskilled. Since the economy will grow faster with more skilled people, careful use of resources helps solve the unemployment problem.

Mr McNarry: I have a quick question. What of the indigenous people, the locals who are underachieving? What happens to them? Do they go onto a heap? We will be faced with a problem in that respect; indeed, we are faced with it already. Most of the immigrants aim for skilled or semi-skilled employment, though not at the levels you are talking about. We do not have the jobs for them at that level. There are growing numbers of people who consider themselves on the scrap heap because they do not have the skills, education or qualifications to improve their lot.

Prof FitzGerald: The boom in the economy changed attitudes, and people began to see hope in education. The long-term unemployment rate is 1.3% or 1.4%. It is sufficiently low for people not to be on the scrap heap today. It could be a problem in the future. The building and construction sector cannot continue to be a quarter of the economy. Hopefully it will slow, but it could collapse. In those circumstances, many unskilled or semi-skilled people in that sector might find themselves unemployed. Issues might arise then. Government policy at the moment is to find anything they can do to upgrade the skills of immigrants — in particular their competence in the English language — so that they will get the skilled jobs that they need them to do rather than take up unskilled jobs.

Our research suggests that the market will deliver and that the Government do not have to worry too much about it. Studies show that the immigrants who arrived up to 2000 have now secured jobs commensurate with their skills. They have either learnt English, or they have gone home.

11.00 am

Mr McNarry: I hope you are not paying £100 million for translators?

Prof FitzGerald: That is a concern.

Mr McNarry: Thank you. That has been enlightening.

The Chairman (Mr O’Dowd): I will open the floor to one more question from each of the delegates, then we shall move on.

Ms Ritchie: Prof Fitzgerald, in view of your involvement in the energy market, may we have your assessment of the all-Ireland energy market, including the electricity network? What benefits do you think it has brought to the island’s economy?

Prof FitzGerald: I am unsure about whether it has brought benefits as yet. It begins next autumn. In the long run, the recently published cost-benefit study indicates limited benefits over cost for the island as a whole and for both jurisdictions. In the final negotiations, Northern Ireland should take care to ensure that it gets its share of benefits right from the start. I am no longer responsible for that, but my colleagues in the authority and DETI will strive to ensure that that is the case. It is something that DETI and the authority will have to work at. It is an incredibly complex area. We know there will be benefits, but we want to be sure that they are maximised.

Ms Ritchie: Chairman, may I have a supplementary question? Prof FitzGerald has said something that requires investigation. What work is required by DETI and those in the North of Ireland to bring that to fruition?

Prof FitzGerald: It is complex. The models must be used. We need to be sure that the price in 2008 will be less than or equal to what it would have been without an all-Ireland market. I think it will be; but officials need to do their sums on that. I understand that they are working on it.

Mr Storey: Prof FitzGerald, do you agree that co-operation between Northern Ireland and the Republic should be only on the basis of benefit? You said earlier that the outcome had to be established. If we establish a framework, it cannot be allowed to become legalistic and cumbersome.

The benefit, cost and sustainability of any particular project must be considered. Would it be possible to look at the axis turning for Northern Ireland? Rather than have a North/South axis, Northern Ireland may benefit more if the axis were turned east-west, given the fact that we could deal with 55 million people in England compared with three million in the Irish Republic.

Prof FitzGerald: If you are looking for economic benefits, those are what you go after. You co-operate where it is beneficial. There may be wider strategic issues on which the Republic and Northern Ireland need to work together. That depends, however, on what you are trying to do in any particular area. In an all-island market, the electricity market is the most prominent, because it is driven by commercial factors and will deliver benefits, North and South. Rather than say that you want there to be co-operation, you could say that you want to save money for consumers in the North. How do we do that? That was the focus of a House of Commons Committee that came to Dublin in the mid 1990s. Electricity prices had gone through the roof in Northern Ireland. Consumers were being screwed, and the Committee wanted to do something about that. The electricity market would be my economic focus.

What strikes me about east-west co-operation is the cosmopolitanisation of the Republic’s economy and how important it has been for it to have had people with a range of skills from different places, as well as Irish people who have worked abroad. We have substantially underestimated that factor in the success of the Republic’s economy. To focus on the island alone would be most unwise, just as it would be to focus solely on the rest of the United Kingdom.

Northern Ireland must ask how it can cosmopolitanise its economy. You need to look to Europe and beyond — to countries such as China. The Republic has done very well out of those who have gone from the North to work in the Republic, so Northern Ireland must look to an even wider audience than these islands.

The Chairman (Mr O’Dowd): I apologise for the movement while you were talking, Prof FitzGerald. A number of people present have had to leave to attend another meeting.

Our advisers have tabled a number of questions on your commentary. I apologise if I am hesitant while I am reading, but it is like reading a doctor’s notes. If we require further clarification, the subgroup can write to you.

Your table on infrastructure spending in the Republic and the North shows a high level of spending in the productive sector. We are interested in support for the economy. Can you tell us what the money will be spent on in the South?

Prof FitzGerald: Some of that money will provide marketing aid for tourism and some of it will be to aid R&D. I would have to look at the list because I do not have the report in front of me.

The Chairman (Mr O’Dowd): Thank you. The subgroup can follow up that query with a letter.

You suggest that Government must crack market failure. Is that a wide enough perspective, or must strategic objectives also be taken into account?

Prof FitzGerald: Strategic objectives such as building clusters in a particular sector could be set. If you look at the success of the market in healthcare products in Galway and in pharmaceuticals in Cork, you may want to consider building a cluster around Dundalk and Newry. It depends on what you call market failure. I would not get too involved in pedantry. If the state can produce much bigger benefits by spending money, it should go for it. However, you need to be pretty convinced that the state knows what it is doing. Economists said, in reference to the Irish Government in the early 1980s, that Governments cannot pick winners. Fortunately, the economists were wrong and Industrial Development Agency Ireland was right, although not quite in the way that it expected. I may have been more dismissive of this question than I would be in the cold light of day.

Mr McNarry: My question relates to that point, in a sense. I wish to ask about the concept of harmonisation. I am amazed that we have not talked about that yet. Harmonisation has been bandied about as though it were a new god for Northern Ireland. What would the impact be if Northern Ireland were harmonised and able to compete with the Republic? Would we benefit, would the Republic suffer, or would we both benefit or suffer? I use the comparison with tourism reluctantly. We made tourism an all-Ireland issue, and anyone will tell you that Northern Ireland did not do well out of that. Harmonisation creates a conundrum for everyone.

Prof FitzGerald: I would not like to comment about harmonisation in general terms. It may be sensible to harmonise some matters, but not others.

Mr McNarry: Should corporation tax be harmonised?

Prof FitzGerald: I know that people have left the room to discuss that issue. It is considered to be important for Northern Ireland to have a lower corporation tax rate, which would, undoubtedly, bring benefits. The question is: how great would those benefits be? People in the Republic exaggerate the extent to which corporation tax is currently important. It is important, but the investment in human capital and the successful attraction of human capital to Ireland is more important for the future than corporation tax rates.

To some extent, the Republic also had first-mover advantage; it was first to go into the field. However, countries such as Estonia and Slovakia are now queuing up, bumper to bumper. Northern Ireland speaks English, which is another advantage that we should not tell anyone about.

Mr McNarry: We do not speak Irish. That may be another factor.

Prof FitzGerald: The Republic has the advantage of speaking English as well. We both speak English.

Mr McNarry: I thought that Ireland was an English-speaking nation, but perhaps I am wrong.

Prof FitzGerald: The English-speaking factor is important in attracting high-tech, mobile investment and skilled non-English speaking people who are from outside of Ireland, who will come here to learn English, but who will not learn Dutch.

Mr McNarry: Fair enough. You said that the Republic exaggerates the importance of corporation tax now. It must, however, have been important in the past.

Prof FitzGerald: It was important in the past. However, it is less important now. Strategically, the Republic must concentrate, not on changing the corporation tax rate, but focus primarily on its other attractions, given that other countries, including Northern Ireland, are going for corporation tax measures.

Mr McNarry: What are those other attractions?

The Chairman (Mr O’Dowd): Remember me, David? I am in the Chair.

Mr McNarry: What are the other attractions, Chairman?

The Chairman (Mr O’Dowd): Thank you. Go ahead.

Prof FitzGerald: Supporting the human capital area, for example.

Mr McNarry: Shinners — once you give them an inch, they take a mile. [Laughter.]

Mr McLaughlin: I was enjoying that.I want to follow on from the previous point. The issue of corporation tax is hugely important to the discussion and to our engagement with the Treasury. However, is it accurate to say that the conditions that existed when corporation tax was a vital element of economic regeneration in the South do not apply in the current circumstances of global economics? There is a different context.

Prof FitzGerald: The context is different today. During the 1970s and 1980s, the Republic was the only country that was cutting corporation tax. However, there is now a lot of competition, for example, in pharmaceuticals, from Puerto Rico and Singapore. In many areas, there are now many competitors.

Corporation tax might well produce benefits from within the United Kingdom, such as relocating activity, which would not be available to the Republic, but that would benefit Northern Ireland as part of the UK; as well as firms from outside of these islands moving to Northern Ireland. There would, undoubtedly, be benefits. However, I believe that there will be fewer benefits for Northern Ireland than there were for the Republic when it reduced its corporation tax.

11.15 am

Mr McLaughlin: If we can compete with the economy in the Twenty-six Counties, that benefits the island, which is a point that was made earlier. That can be achieved by combining other measures that produce the same outcomes, given what are likely to be the British Government’s parochial interests.

Prof FitzGerald: I would not give up hope for Northern Ireland, no matter what. It has potential, and I would place a great deal of emphasis on the human-capital area. However, the issue is not a simple one. Mayo, Galway and Kerry in the west of Ireland have the highest participation in third-level education in the Republic, but if you give people a great education and they obtain MAs, they want jobs in which they will be able to use those MAs. Those jobs are in services areas in cities, although that would include Galway. Therefore the issue is whether you can hold on to graduates. If you can, that will represent a whole new ball game.

The Chairman (Mr O’Dowd): The final contribution will be from Mervyn Storey. We have time constraints, and Prof FitzGerald must travel back to Dublin.

Mr Storey: Mr McNarry picked up on a point that is well worth rehearsing. If we look at the legacy from Tourism Ireland Ltd, it is abundantly clear that Northern Ireland has become the poor sister. The despicable situation is that the NITB can only promote Northern Ireland in Northern Ireland, yet Tourism Ireland’s remit is to promote the island. From an economic perspective, that has created a disproportionate playing field. Northern Ireland has been adversely affected because of the way in which that that organisation was structured and the matter was handled.

Prof FitzGerald: I am not an expert on tourism, so I cannot comment on the Republic versus Northern Ireland. However, having watched what has happened in the Republic, I can say that people thought that a big boom in tourism would be great for rural Ireland. It has not been. There has been a boom in urban tourism, with people spending the weekend in Dublin. The rest of the country and Northern Ireland have suffered in comparison because of Dublin’s dominance.

My daughter bought a painting from one of the best Ethiopian artists. He had spent six months on an Irish Government scholarship in Dublin, and the painting was called ‘A Hen Night in Temple Bar’. That is like Irish people going to paint the natives in Africa. For an African, the painting depicted a strange cultural event. Hen nights in Temple Bar are part of what one might call a success. For those of us who have to live beside Temple Bar, however, they are of doubtful benefit.

The Chairman (Mr O’ Dowd): We could go on all day, but we have time constraints. I thank Prof FitzGerald on behalf of the subgroup for his contribution and continuing co-operation with us. Thank you.

The subgroup was suspended at 11.18 am.