ECONOMIC AGENDA: by Patrick J. ByrneNews Weekly
Ireland to establish a development bank
, June 21, 2014
Of the European countries hit hardest by the global financial crisis (GFC), Ireland has proved to be one of the more economically resilient. Now it is establishing a development bank focused on building small to medium-sized enterprises.
This move offers some lessons for Australia. Here are some reasons why.
Enda Kenny, Prime Minister of Ireland
Following the federal budget, economist Steve Keen pointed out that Treasurer Joe Hockey will find it hard to achieve his target of making overall spending in the economy (that it, household consumption, investment and government outlays) grow at an annual rate of 5 per cent, while at the same time aiming for a government budget surplus (that is, government tax revenues exceeding government outlays) of 1 per cent.
Keen calculates that achieving a 5 per cent annual growth in total spending will require bank-lending, mainly to households, to grow at about 6.6 per cent annually.
However, Australian household debt is currently about 150 per cent of gross domestic product — seven times the Commonwealth government’s debt.
Keen concludes that Australia could avoid the risk of a slump in spending “only if the private sector — and primarily households — continues to borrow.”
He warns: “If they don’t, then the monetary equation will be balanced by either a lower rate of economic growth, or a higher budget deficit than planned, or both”.
Taking a more long-term view, economic commentator, Alan Kohler, says that, in the past 30 years, the share of the economy going to wages has dropped from about 63 per cent of GDP to only 50 per cent.
Partly, this is due to the increasing use of robots and computerised “software” machines that are now replacing labour not only in manufacturing, but in an array of white-collar industries.
Kohler offers a possible solution. He says: “The only antidote, and I do mean the only one, is public spending on infrastructure to improve human efficiency – mainly through better transport facilities.”
Instead of attempting more rapid economic growth through increased bank-lending to households, or greater government deficit-financing of infrastructure, there is a superior alternative.
The Commonwealth could establish an Infrastructure Finance Corporation — a form of development bank — to fund a much greater expansion of Australia’s infrastructure.
This would allow Treasurer Hockey to cut his deficit by $50 billion, which is the amount that the government plans to spend on infrastructure.
It would also allow much more than $50 billion to be invested in roads, rail, telecommunications, airports, etc.
In the wake of the 2007/08 GFC, Ireland is the latest of many countries to establish a development bank to boost investment and innovation.
Last month, the Republic of Ireland’s government announced the establishment of a Strategic Banking Corporation of Ireland (SBCI), to become a provider of finance to large capital projects, a conduit for venture capital and a lender to small-to-medium enterprises (SMEs).
According to the Dublin-based Nevin Economic Research Institute (NERI), the SBCI will be funded from capital provided by the Ireland Strategic Investment Fund, the European Investment Bank (the EU’s bank) and the German state development bank, the KfW (Kreditanstalt für Wiederaufbau, or Reconstruction Credit Institute).
Established in 1948, the KfW has since grown to become Germany’s second-largest commercial financial institution.
According to an Irish government media release, the KfWs involvement in helping establish an SBCI follows directly from discussions between Ireland’s Taoiseach (prime minister), Mr Enda Kenny, and Germany’s Chancellor Angela Merkel. This came after Ireland’s successful exit from the EU/IMF financial support program that aided Ireland’s economic recovery, although unemployment in the republic remains high.
On May 22, Ireleand’s Minister for Finance, Michael Noonan, announced: “The establishment of the SBCI will provide over €500m of additional credit for SMEs.… This will promote greater competition in the SME lending sector, will drive economic growth and job creation in this key sector of our economy.
“The Government will be prioritising the passage of the required legislation through the Houses of the Oireachtas [the Irish parliament], and I expect the SBCI to be facilitating lending before the end of the year.”
The SBCI will lend to SMEs through innovative loans via on-lenders, retail banks or other organisations that have the ability to assess SME loan requests.
The SBCI will provide loans that are currently not typically offered in Ireland. Its lower cost of funding will confer a cost advantage onto SMEs.
Speaking in Ireland in support of the SBCI was international financial expert Professor Stephany Griffith-Jones, financial markets program director at the Initiative for Policy Dialogue at Columbia University. She has made a substantial contribution to the study of financial regulation, governance and international capital flows.
She said: “Public investment banks provide the vision and long-term finance that help sustain investment, innovation and job creation, particularly when private lending on its own is not sufficient.
“A significant level of lending is required for public investment banks [in order to] to have a positive impact on the economy. In Germany the state-owned KfW bank accounts for 12.7 per cent of total bank credit in the domestic economy.”
Many other advanced economies have sizable government-owned development banks, including, Germany, Austria, France, Norway, Canada, Japan, Singapore and South Korea.
Patrick J. Byrne is national vice-president of the National Civic Council.