Lessons from Ireland

Manufacturing is core base of the economy

Ireland, the third largest island nation in the EU, was the darling of the 1990s, but it is now a headache for Europe. The financial crisis in Ireland is a fresh reminder that manufacturing should be the backbone of the economy. Its heavy reliance on finance has triggered its current woes. It may take longer than expected for Ireland to recover from its trouble due to the lack of a manufacturing base.

The global financial crisis in 2008 originated from a heavy emphasis on greedy financiers over diligent manufacturers. The recovery was uneven among the nations. Countries with strong manufacturing bases like Germany, Korea, and China, withstood the global economic downturn. The United States and the EU have yet to move out of the deep economic downturn because they relied heavily on finance, rather than manufacturing.

Three countries ― Ireland, Iceland and Dubai of the United Arab Emirates ― share one thing in common. They pursued regional financial hubs. They could not withstand the tide of the global economic tsunami.

Ireland’s per-capita income jumped five-fold in the go-go decade of the late 1980s and the 1990s. It provided all possible incentives to foreign financiers, making it a financial hub of Europe. It, however, encountered a serious setback following the global crisis in 2008. For the past three years, its economy has contracted. Its fiscal deficit of 32 percent of the GDP is 10 times above the EU guideline. Its jobless rate rose to 13.2 percent.

The bursting of a property bubble has almost detonated banks. Its radical financial liberalization enslaved the economy to hot money. The country must now make a decision whether or not to save the banks or the country itself.

Korea is strong in electronics, automobiles, steel and shipbuilding. Statistics point to the falling role of manufacturing in the economy. For the past 11 years since 1999, the number of manufacturing firms and workers has fallen. This should also be a cause for alarm for policymakers. The so-called `jobless-growth’ is attributable to the gradual erosion of the manufacturing base and automation. Policymakers should not consider the gradual industrial decline as the inevitable global trend of a post-industrial age. Koreans must be critical of the myth that the knowledge economy will replace the industrial economy. Instead, knowledge and ideas should be added to the industrial economy. The service-sector growth needs to be backed by industrial production.

Manufacturing is no longer the smoke-stack industry that pollutes the environment. Making things has become environment-friendly. Through a marriage with IT, steel and shipbuilding could become high value-added areas.

It is also true that the economy cannot exist without a strong finance sector. A parallel growth of finance and manufacturing is necessary. The world needs to reduce the speed gap between finance and the real economy. Long-term investment and real growth must be emphasized. Finance should not be become the tail that wags the dog.