Monday, January 28, 2008


Dani Rodrik recently published a post entitled How Ireland does it, where he cited an article from The New York Times about the competitive and growing entrepreneurship in Ireland. The article emphasized the combination of pro-growth economic policy, economic liberalization and tax cuts that empowered the growth of innovative and competitive entrepreneurship.

The central question concerning the economic policy is whether government agencies such as Enterprise Ireland really support growth and innovation or do they actually present a barrier to the entrepreneurial edge. There has been different evidence in different countries. The answer to this particular question rather depends on the size of government spending as a share of the GDP. For example, Ireland is known for restrictive fiscal policy, low corporate tax rate and low public spending while countries in continental Europe have had quite different experience. In Slovenia, public spending equals almost 50 percent of the entire output and public administration accounts for a considerable part of the GDP. In fact, cuts in public spending revived Ireland's "the-sickest-and-poorest-of-the-rich" economy to become a roaring Celtic tiger (link).

Different quantitative studies suggested that there is a positive correlation between the efficiency and quality of services provided by public administration and low public spending. The empirical evidence has confirmed that the inefficiency of services provided by the public administration strongly correlates with oversized and inadequate staff with poor track on productivity performance.

There is hardly any externality that could justify the existence of government agencies as information providers. True, the coordinative, productive and cooperative government inputs are essential to the core public products such as the rule of law, sound regulatory environment and administrative quality. New economy and the age of IT have succinctly eliminated a large slice of the information asymmetry and markets can successfully provide the needed information to entrepreneurs and start-up companies.

Should government agency support R&D activities at the university and at the company level. Again, it depends on behavior. Cooperative behavior may definitely enhence the efficiency of such incentives while rent-seeking behavior may definitely provide political incentives to manipulate with the information resulting in a growing rate of inefficiency.

The question is to which extent can government agencies such as Enterprise Ireland promote the entrepreneurship. First, it is important to rely on private-decision making instead of the enhencement of government ownership and intervention. Second, competitiveness is a microeconomic phenomena that emerges from the product and service quality of the companies competing on a rock-bottom incentive to provide the largest possible quantity and the lowest possible price. Third, the ultimate way to promote the entrepreneurship is the economic policy. Restrictive fiscal policy, lower public spending, product market deregulation, administrative reforms, tax cuts and the liberalization of the productive capacity, the rule of law and efficient institutions provide important incentives to launch the productive behavior such as saving, investment, labor supply and entrepreneurship nonetheless.

There is also a doubt whether public funds are truly as efficient as the conventional wisdom claims. Honestly, the best and most attractive R&D projects are privately funded. Google Inc. has been started by Sergey Brin and Larry Page. Apple was started by Steve Jobs, Jerry Yang started and Pierre Omidyar succeeded with eBay without government funds and public R&D programs. Also, cutting-edge innovation in pharmaceutics and life sciences is usually pioneered by providing private funds.

Rok SPRUK is an economist.

Copyright 2008 by Rok SPRUK

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