Is social partnership essential to the Irish economy?
YES:Partnership helped to lift economic gloom in the past by creating a shared understanding of the problems, and it can do so again now, writes RORY O'DONNELL
SINCE 1987, governments have entered a series of social partnership programmes with employers, unions, farm organisations and the community and voluntary pillar. Does this approach still have a role to play in dealing with economic difficulties and enhancing long-run prosperity? We should begin by asking what social partnership has provided to the Irish economy and society in the years since 1987. Most would agree that partnership played a role in helping Ireland escape from the deep economic crisis of the 1980s, by delivering agreement on the need for fiscal correction and modest wage growth.
The success of the first partnership programme prompted government and the partners to enter further agreements. Through the 1990s, the focus moved from fiscal correction to employment, long-term unemployment, the European internal market, weathering the exchange rate crisis of 1992-93, building economic and social infrastructure and preparing for the euro.
The partnership approach delivered and reflected a shared understanding of the key mechanisms in the economy. Why does this matter? Because, in a modern social economy, technical measures - the euro, fiscal policy rules, or labour legislation - do not work at a technical level alone. Their effectiveness depends on their acceptance by economic and social actors and the use they make of them.
Furthermore, consensus on overall economic strategy increases the chance of serious discussion of complex supply-side issues, such as public sector reform, training, innovation, social exclusion etc. By contrast, where broad strategy is contested, disagreement predominates and partners refuse to acknowledge the need for change in specific enterprises, sectors and programmes.
In recent years, focus has been on crafting a more unified view of the economy and society. This is reflected in the ambitious social policy goals set out in Towards 2016 and in investments in the National Development Plan. In a globalised world, the strength of Ireland's economy and the attractiveness of our society will rest on the same foundations - the human qualities of participants.
Compare Ireland's economic performance in the partnership years, 1987 to the present, with other periods.
In the 1960s and 1970s, Irish employers, unions and government struck national-level wage bargains. Each had radically different understandings of how the economy worked. Day-to-day interactions were conflict-ridden, and this damaged economic performance.
The national approach to wage bargaining was abandoned in the early 1980s. But this did not yield wage settlements that supported good economic performance. The absence of a shared understanding of Ireland's economy was reflected in inconsistent policy and, as we know, crisis-levels of unemployment, emigration and falling living standards.
Partnership works when the partners focus on their long-term interests and the wider national interest. Co-ordinated bargaining then provides business, government, employees and others with a degree of certainty to pursue these interests. When conducted with skill, and using a shared analysis of the economy, it can reduce the risk of wages over- or under-shooting. Experience shows that deliberation, interaction and negotiation in the partnership process creates the context in which this approach is possible.
Some of the most successful small European countries, such as the Netherlands and Denmark, have what they call a "negotiated economy", with co-ordinated wage bargaining.
Partnership is, and must be, open to criticism. It cannot escape some responsibility where policies fail to achieve desired outcomes. In discussions in the National Economic and Social Council, the partners have noted that over-arching strategies have not always mobilised real change, that "partnership has sometimes been invoked as a veto on change" and that "if partnership is not part of the solution, it will become part of the problem".
The current economic situation is complex, with international instability, a strong euro, rising prices, job losses, a revenue shortfall and a structural shift away from construction and towards services. This creates a number of temptations that, if followed, would yield an inconsistent policy approach and repeat the mistakes of the past. On its record to date, social partnership has a role in managing this difficult conjuncture. It can do this largely because the Government and the partners are able to rely on a shared set of medium-term understandings and goals.
Is social partnership essential to the Irish economy? Life teaches us to be careful about saying that anything is either essential or impossible. Between these extremes, there is reason to believe that it can assist in managing both the uncertain current conjuncture and the next stage of Ireland's economic development.
Rory O'Donnell is director of the National Economic and Social Council and chief officer of the National Economic and Social Development Office
NO:It was a booming economy that enabled so-called partnership, not the other way round, writes JIM O'LEARY
SUCH AN illusory concept may not survive harder times, but social partnership is a wonderful concept. It works really well on at least two levels - firstly, at the level of political propaganda. Who could object to something that is so richly suggestive of mutual understanding and common purpose? More specifically in the Irish case, who could object to something so richly suggestive of virtue when it is closely woven into the story of economic salvation and transformation that we tell ourselves, with such pride?
What was the vital ingredient in rescuing Ireland from the abyss of fiscal suicide in the mid-1980s? What was the key factor in sustaining the Celtic Tiger in the 1990s? The story is all the more compelling, of course, because this "vital ingredient", this "key factor" was something we created ourselves.
Social partnership also works well at the theoretical level. The theory is straightforward. Many economic transactions have consequences for people other than those directly involved. For example, wage agreements between groups of workers and employers may have spillover effects in terms of price increases for consumers or for other firms, and/or in terms of reduced employment opportunities and rising unemployment.
However, the more it is that people affected by such spillover effects are brought into the bargaining arena, the more likely it is that the outcome of negotiations will take these effects into account. When all interested parties at a national level are included in negotiations, as they supposedly are in the social partnership system, the theory suggests that the outcome will reflect the national interest rather than the sectional interest of any one group.
This theoretical perspective suggests that one of the ways in which social partnership might have been expected to work in Ireland was by producing smaller rises in public sector pay than would otherwise have come about. The theory social partnership is based on suggests bilateral negotiations between public sector employers and employees produce higher public sector wages than multilateral negotiations including private sector employers and employees. The main reason for this conclusion is that the taxes required to fund the public sector wage bill are likely to be a much bigger issue for parties in the latter arrangement than in the former.
The result of a social partnership model therefore should be a lower trajectory for public sector wages and lower taxes and, due to lower taxes, more moderate private sector wage growth, since workers bargain in terms of disposable income rather than gross wages.
If this is the way in which social partnership actually worked in practice in Ireland over the past two decades or so, then the big claims made for its powers of economic redemption and transformation would indeed stand up. However, the evidence does not support this conclusion. On the contrary, the evidence suggests that under social partnership, rates of pay in the public sector rose more rapidly than they might otherwise have done, and that the reductions in tax that occurred in the Celtic Tiger period could have been even greater under a different regime.
Why has theory and actuality diverged so sharply? Three reasons come to mind. The first harks back to the point about propaganda, and it is this: successive governments have been so persuaded that social partnership is a sine qua non of a successful economy that they have been prepared to pay a relatively high price to get deals done. The second is that the private sector has been under-represented at the bargaining table. This is especially the case on the employee side: less than one-quarter of private sector workers are unionised, and those that aren't don't have a voice in the hallowed halls of social partnership. The third is that the private sector may have been slow to exercise what bargaining power it did have on the grounds that the economy was growing strongly, taxes were coming down anyway, and rocking a rapidly rising boat did not seem like a sensible strategy.
The fact that social partnership has coexisted with an economic boom has predictably encouraged the view that it was a causal factor. I'm more inclined to the conclusion that, in a number of important respects, causation ran the other way. A booming economy enabled partnership, or perhaps more accurately, the illusion of partnership, to be maintained because it brought comfort, eased scarcity and obviated the need for hard choices. Nowhere was this more evident than in the government's ability to cut tax rates (while rapidly raising public spending) and thereby achieve wage moderation and enhanced competitiveness.
The big challenge, now the boom has ended and the tide of revenue buoyancy has ebbed, could not be more different. It is to improve quality of public services without tax increases or, if that is required, without impairing competitiveness through compensatory wage claims. If social partnership can rise to this, it will prove to be a much more valuable and substantial construct than I think it is.
Jim O'Leary is a senior fellow of the Department of Economics at NUI Maynooth