Welcome to the New Year. Calm is returning to the world economy. Markets are up. The Euro is off the launching pad.
And then there is a quiet success story called Ireland.
Ten years ago, this island’s population of 3.6 million suffered 18% unemployment. Its economy was based mainly on farming and natural resources. Talented folks did what generations before them had done to get ahead – leave, just as many of our own have done on the Prairies.
In 1987 Ireland chose a radical new policy direction and turned its back on decades of state-induced stagnation. Not coincidentally, across the Irish Sea Britain was nearing the zenith of its free-market modernization under Margaret Thatcher.
Ireland took a different tack — slashing corporate tax rates to 10% to attract foreign investment, at a time when its membership in the European Union had begun to work rapidly in the country’s favour. It was also well positioned as a low-cost English-speaking beachhead for multinationals looking to invest in Europe’s emerging unified market. As the poor man of the EU, Ireland qualified for development subsidies to build up and modernize infrastructure. By 1998 almost 1,100 overseas companies had set up shop.
Many of these corporations also cited Ireland’s skilled workforce as a reason for locating there. Since unemployment was high and tuition free, many young people had spent more time in university, 60% of them specialized in useful "hard" fields like business, engineering and science.
Today the Irish reap the benefits of an emerging knowledge-based, high tech economy, the hottest in Europe. Corporate tax revenues have doubled since 1990. Growth exceeded 9% in 1998. Since 1993 the economy has expanded at an average eight percent a year, exceeding 9% in 1998. Unemployment has dropped to a low (by European standards) 7.8% and is projected to fall to 5% in the next few years. Ireland’s per capita income now exceeds Britain’s. December’s budget cut taxes while raising public spending.
The Emerald Isle’s mix of low corporate taxes, education investment and public sector restraint has produced a result contrary to what our own central planning mavens would predict. Government spending as a percentage of the economy has plummeted from a stifling 54 percent in 1987 to 33 percent today.
Admittedly, the benevolence of the EU sugar daddy was a stroke of Irish luck. He’ll never visit here, but there are a few lessons for us.
Investments in education, particularly post-secondary education, are critical for leading-edge economies. Ireland’s success points to the need to renew our own sclerotic academic institutions, rekindle their intellectual fires and make them more relevant to a rapidly moving world market based on knowledge and technology. More cash might help them, but even more to the point would be reform that shifted control to consumers from producers, movement towards performance based compensation and a flexible replacement for tenure. The public school monopoly, with its decidedly mediocre results, has no place in a skills-intensive future. It’s time to replace the dinosaur with competitive vouchers or a bulk funding system, both of which would restore choice to parents.
Finally, substantially lower taxes can give us Irish growth levels. We can get there if we intelligently slim down the public sector by buying our government services on a competitive, performance-oriented basis. Let’s face a harsh reality – the microscopic nicks chipped hesitantly into the flanks of the tax monolith by our cautious politicians will scarcely be noticed.
And if government ends up leaner in proportion to our whole economy as the rest thrives, so be it. After all, Ireland’s shrinking public sector is a byproduct of a prospering community.