Esmond Birnie: The Protocol steers Northern Ireland towards being a less productive economy

Hardly a day goes by without a news story about how some firm is (allegedly) benefitting from the protocol’s market opportunities and (perhaps more occasionally) there are stories about businesses facing difficulties.

Much less common are attempts to assess the overall impact on the economy.

In an article published this week in an online UK economics publication I indicated evidence which suggests the operation of the protocol has not been associated with any improvement in NI’s relative growth performance: whilst the protocol has been in operation NI’s economic growth has been less than the UK average.

(The article was published on July 18 in the ESRC-funded Economic and Social Research Council online publication Economics Observatory)

If anything, since January 1 2021 (ie when the protocol came into force) the sectors of NI’s manufacturing which have relatively lower productivity have been the ones growing most rapidly.

Is the protocol a wrong way round industrial policy?

I make two points:

1. During the period when the protocol has actually been in force, ie. since beginning of 2021, NI’s overall economic growth has actually been lower than the UK average. This is contrary to arguments which have been advanced by the Irish deputy prime minister, the Scottish first minister, the Financial Times and the National Institute for Economic and Social Research who have all tried to argue that Northern Ireland has been out-growing the rest of the UK and that this proves the benefit of the protocol.

2. The latest Index of Production data indicates that in the period since the protocol started to operate some branches of NI manufacturing have apparently done very well (food processing) and some (electrical engineering) have experienced output decline.

Both parts of the proposition — that Northern Ireland has had above average growth and that the protocol is the explanation — are questionable.

Note that the first quarter of 2020 was the last period before the pandemic had any substantial impact on the economy.

Similarly, the last quarter of 2020 was just before the implementation of Brexit on 1 January 2021, when Great Britain left the single market but Northern Ireland remained given the protocol.

It is true that compared with pre-pandemic output levels, Northern Ireland has registered significantly more growth than the UK average. But much of the explanation for this pre-dates the application of the protocol.

The Northern Irish economy suffered much less from Covid-19 than the rest of the UK (possibly because it has a larger public sector).

During the five quarters since the fourth quarter of 2020, with the protocol in operation, Northern Ireland’s growth — at 6.2% — fell short of the UK average (7.5%).

The protocol is likely to affect different sectors or industries in various ways. It may hurt sectors that are dependent on inputs coming to Northern Ireland from the rest of the UK but help those that buy from or sell into the Republic of Ireland or the rest of the EU.

Given this, it is worth looking at the pattern of growth within manufacturing during the period of the protocol.

There is a lot of volatility in the data and other factors that may be influencing these figures, for example the rapid decline in chemical and pharmaceuticals may reflect a reduction in Covid-19 testing.

That said, the contrast between the recent performance of food, drink and tobacco (predominantly food processing), which has most likely benefited from the trade diversion effects of the protocol, compared with electrical engineering (which is heavily reliant on inputs from Great Britain) (Duparc-Portier and Figus, 2021) is striking.

It is also worth noting that if a structural shift is happening, it is one from sectors that generally have high productivity levels — for example, branches of engineering — to ones that are generally lower value added per person, such as food products (Forth and Aznar, 2018).

One might say the protocol has produced winners and also produced losers. And that is true but we cannot leave it at that.

The protocol may be contributing to a backwards movement in the economy.

Some of us have long called for Northern Ireland policy makers to take the issue of productivity seriously.

Now, at last, in the shape of the protocol we may have a policy which is impacting on NI’s comparative productivity.

The problem, alas, is that it is the wrong way round — it may be encouraging lower productivity sectors and discouraging higher productivity ones.

l Dr Esmond Birnie, Senior Economist Ulster University Business School

l Jonny McCambridge will return later in the summer