October 24, 2008

Does the border matter in a time of recession?

One just can’t avoid the economy these days. By now it is old news that at the end of September and in early October the world was on the edge of a financial precipice not seen since the Wall Street Crash in 1929. The government of the Republic, whose banks and building societies were among the most exposed because of excessive and foolish lending to property developers, was forced to step in to provide an unprecedented blanket guarantee to protect their deposits and loans. Two weeks later the British government introduced a more measured package which involved taking a significant equity stake in the major UK banks.

Similar government interventions all over Europe had the temporary effect of calming the markets. But as Britain’s ‘real’ economy follows Ireland’s into recession, the only question now being debated is how long will it last, with pessimists predicting as long as four years before any significant recovery.

In the aftermath of the dreaded ‘hard landing’, does the border matter any more? In Belfast it might appear that the answer is ‘yes, thank you’. There is a strong temptation for Northerners to gloat quietly (and not so quietly) about the Celtic Tiger coming to a bad end, with the much maligned Northern public sector looking less like an albatross and more like a safety cushion every day. There is a widespread belief that things won’t be as bad in our highly-subsidised little province as in the South, with its huge exposure to the now harsh vagaries of the international economic climate.

Indeed the border is providing something of an opportunity for the North at the moment, especially for its retail sector in the wake of the strong euro of the past 18 months. Recent news stories have pointed to the number of shoppers crossing the border and benefiting local retailers. This is particularly the case in Newry, where Southern shoppers are up 40% in 2008, and in Derry, where the rise is 35% 1.

Inevitably the losers here are the Southern border towns. The success of Newry and Derry (and Belfast and Banbridge) means large losses for retailers in places like Letterkenny, Dundalk and Monaghan (and Dublin and Drogheda). A lack of comparable statistics means that we don’t know exactly what the losses are. However unemployment figures in early 2009 from the Southern border counties could make for grim reading.

It needs to be forcibly pointed out, however, that it is not only the South that is now much more open to the global economy. The closure of a dominant employer like Seagate is considerably more damaging to the North than the departure of one major foreign firm in a more developed and diversified economy like the Republic’s. In terms of future prospects for both foreign direct investment (FDI) into and exports out of Ireland, it is unfortunately very easy to see a worldwide sneeze causing an extremely unpleasant cold all over the island.

Another point which is usually ignored is that the inter-connections between North and South, generally welcomed, could make recession in one jurisdiction largely unavoidable in the other. Official figures show that levels of cross-border trade in 2006-07 rose again by 8% to over €3 billion. Such trade might only account for 2% of total exports from the Republic (given the influence of FDI), but in sharp contrast 30% of Northern exports go to the South2.

Other surveys show that 40% of firms across the island do some trade with the other jurisdiction. For two out of five of these companies, less than 5% of their turnover is tied up in this trade, though for 11% of Northern firms it accounts for more than half their business3. This is where the recession may really start to bite for Northern Ireland’s small and medium firms in particular. And this is without mentioning the close and varied connections between the construction and property development sectors across the island – witness the collapse of the Belfast-based Taggart brothers’ property empire in late October.

So what can be done to make cross-border cooperation work for the two Irish economies during these hard new times? InterTradeIreland’s initiatives to promote cross-border trade (such as Acumen or MicroTrade) will become more significant as firms look closer to home to find new markets. Making the €15 billion all-island public procurement market more open to SMEs would help. Companies will also want to be able to offer new products when the upturn eventually comes around, helped by schemes like the Innova cross-border collaborative R&D programme. At a time of hatches being battened down everywhere, continuing to think globally and acting locally – including across the local border – is as good a business slogan as any.

Andy Pollak

2 Figures taken from InterTradeIreland’s statistical website and DETI’s Manufacturing Sales and Export Survey 2006-07
3 North/South Business Monitor, September 2008