Mapping the potential gains from north-south cooperation

Although cross border cooperation acquired greater political legitimacy, thinking about the nature of the economic benefits that could arise from closer all-Ireland relationships remained rudimentary. More work started to be done on this matter and arguments started to crystallize about how north-south cooperation would allow for the capturing economies of scale and the reduction of market failures on the island. These need further explanation.

Economies of scale

In broad terms, economies of scale refer to the cost advantages organizations gain when they become more efficient. Economies of scale can be captured in different ways. One way is through realizing administrative economies, which involves increasing output or developing new services with the same number of people or producing the same levels of output with fewer people. In relation to north-south cooperation, administrative economies were seen as mostly arising from public sector organizations in the two jurisdictions pooling resources and jointly delivering existing services more cost-effectively and developing new services to address untapped needs in areas such as health and education. These administrative economies were seen most likely to arise in geographical areas straddling the border that were divided by a constitutional boundary but which nevertheless constituted natural hinterlands (Bradley 1996). Thus, for example, a person living on one side of the border and in need of medical services might be able to access these more rapidly if they were able to use, for example, the emergency unit of a hospital on the other side of the border.

A further route to capturing economies of scale is by orchestrating dynamic efficiency effects. One popular argument developed was that north- south economic cooperation should seek to remove remaining tariff and nontariff barriers to trade thereby effectively creating a single market on the island (NIEC 1995). The assumption is that a series of dynamic effects would arise from these market-widening and deepening moves. A more open, integrated all-Ireland market would allow firms to exploit fully unexplored business opportunities. Additionally, companies would be encouraged to redesign logistical strategies and treat Ireland as one business zone rather than two. New logistical policies may involve companies changing suppliers, improving the operation of sub-contracting networks, reorganizing distribution networks or even moving to a new location. Changes of this kind are likely to have competitiveness boosting effects (Michie and Sheehan 1998).

Greater all-island cooperation was seen as potentially inducing greater economic specialization, which in turn may promote agglomeration economies or external economies of scale (Morrissey 2000). Agglomeration economies not only embed particular industries within defined geographic areas, but do so in a manner that generates significant economic benefits. Financial systems become sensitive to the peculiar capital needs of the dominant business activity in the region and as a result firms have better access to investment funds. The local training and learning system provides a continuous pool of skilled labour that is fully aligned with the business activities of local companies, thereby ensuring that corporate strategies are not thwarted by skill shortages. Social institutions or commercial organizations in the region may continuously interact with local firms and in so doing may play a pivotal role in the creation and maintenance of these dynamic agglomeration effects. Through orchestrating inter-firm relationships these social institutions may foster knowledge spill-overs across business organizations with the effect of deepening the intangible assets of each. All in all, north-south cooperation was viewed as creating opportunities to capture agglomeration economies within Ireland (O’Donnell and Teague 1993).

Market failures

Additionally, deeper north-south economic cooperation was considered beneficial as it held out the promise of reducing market failures arising from the two economies on the island operating in very different ways. At the centre of this argument is the observation that borders continue to matter in the modern world as they represent the interface between different national economic and social systems. On this view, separate national territories create distinctive institutional support structures for economic and social activities. These institutional arrangements are used to resolve bargaining problems that arise in the course of business activity, promote incentives to encourage particular forms of strategic behaviour or action and enhance the flow and processing of information across businesses. Effectively, separate national business systems are created, leading to business activity being supported in distinctive ways. While separate national business systems can enhance the competitive performance of a domestic economy in far-reaching ways, they also run the danger of fragmenting markets on a territorial or geographical basis. As a result, the transactions costs (the non-production costs) of doing business across different jurisdictions can increase, sometimes markedly so. Borders in effect create market failures (Grahl and Teague 1990).

Market failures can take a number of different forms. One way market failures can arise is from information asymmetries. Consider decentralized forms of business activity, even in so-called tradable parts of the economy. These markets are characterized by limited information, which tends to result in buyers and sellers not exploring all possible transactions. Instead, they maintain a restricted number of commercial deals. Thus, decentralized markets often give rise to close and repeated ‘customer’ connections that normally lead to long-term relationships. Decentralized business activity thus becomes socially embedded within distinctive national jurisdictions. This can increase the transactions costs associated with doing business on a cross border basis: businesses are not aware of market opportunities that they could potentially exploit in another jurisdiction.

Another market failure takes the form of a coordination deficit. As already pointed out. national business systems use different rules to regulate and support domestic economic and business activities. These different rules almost always embody contrasting social preferences and as a result are invariably an institutional expression of domestic social and economic priorities. Ensuring that an alignment exists between institutional rules and underlying business activity is an on-going challenge encountered by nearly all national business systems. But the challenge becomes even more complex when the matter of cross border economic and business cooperation or integration is placed on the policy agenda. Incompatible national rules, which can range from different public expenditure priorities to contrasting forms of employment regulation, can constrain the scale or scope of cross border economic cooperation. Seeking greater cross border cooperation in the context of institutional misalignment, or even incongruence, between different national business systems can be viewed as a coordination deficit. As a result, addressing such coordination deficits should be factored into any programme for cross border economic activity.

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