Many analysts who seek to find the reasons for Ireland’s recent phenomenal economic success start with things that happened in the comparatively recent past – 1987 is suggested as a start date in one partisan version of events. My own belief is that many of the ingredients of Ireland’s success originated further back.
The achievement of political independence, following over a century of political and some military agitation, was a key event. It gave Ireland power to make its own decisions and pursue its own individuality. Some mistakes were made.
The wholesale introduction of industrial tariff protection in the 1930’s was a mistake, although it did create a native industrial base that helped Ireland to survive the Second World War.
From the 1930’s on, the role of the state in the economy was expanded by the establishment of state companies to provide state services as diverse as seaweed gathering, bus and train services and the production of industrial alcohol.
The introduction of tariff protection and the heavy emphasis on state led economic development prevented the growth of a strong independent entrepreneurial class in Ireland for most of the first 50 years of the state’s independent existence.
Talent went into professions and services rather than business.
Although Ireland’s political links with Britain were severed, Ireland’s economic links with Britain continued to be very strong right up to the late 1970’s.
Ireland continued a currency union with Britain up to 1979, when we joined the European Monetary System and allowed our own pound to float independently of sterling within that system.
The proportion of Irish exports going to Britain was very high. For instance, in 1950, 75% of Irish exports went to Britain, and in 1960, 60%. In 1979, when we broke the currency union with Britain 39% of our exports went to Britain. Today 20% go there.
The key determinant of change in Ireland was the gradual freeing of trade and the diversification of Irish exports. Up to the 1950’s there were heavy restrictions on foreign ownership of Irish firms, as well as heavy tariffs to protect Irish manufacturers.
During the 1950s, the restrictions on foreign ownership were removed, in 1956 tax-free status was granted to export firms. In 1966, a Free Trade Area with Britain was negotiated. This led on in 1973 to Ireland’s joining the wider European Union, which gave Ireland access to a huge continental European market and made the country a magnet for US, Canadian and Japanese firms wishing to have secure access to the European market from an English speaking work base.
But this inward investment would not have happened but for an important decision that had been taken earlier. In 1949 Ireland’s first ever multi party coalition Government set up the Industrial Development Authority. This independent State Authority took decisions about the grant aiding and location of industry out of the realm of political patronage. Political patronage had flourished under industrial tariff protection and Ireland’s economic takeoff would never have been possible without the establishment of the IDA.
I would also stress the importance of the tax-free status for exports initiated in 1956. This created a powerful incentive to export and move away from protectionist attitudes. This tax-free status of exports continued until 1980 when the EU required Ireland to replace it by a 10% Corporation Tax on Manufacturing for home and export markets. In 1997 the E.U. went further and required Ireland to replace the 10% tax on Manufacturing Companies by a 122% tax on all incorporated businesses. We never had to slash taxes on corporate export business, as some countries have done, because we never had high tax on it in the first place.
The surge of inward investment that followed Ireland’s EU membership led to a dramatic internal change in Ireland’s economy. The proportion of the working population in agriculture has fallen from 46% in 1949 to 8.6% today. Conversely the proportion working in information technology, pharmaceuticals and financial services has risen dramatically.
Ireland has urbanised. The proportion of women working outside the home increased.
In 1966 another very important decision was taken. Belatedly, Ireland introduced free secondary education. Most European countries had done this after the Second World War. The economic benefits of free secondary education proved to be enormous, but were slow in coming.
They were slow in coming because of another factor – emigration.
Between 1949 and 1989, it is estimated that 815,295 people emigrated from Ireland. This represents 22% of our present population. The fact that Irish people speak English meant that they knew about, and were attracted by, better earning opportunities elsewhere in the vast English speaking world.
Initially, the emigration from Ireland was of unskilled people, unable to find work at home and unwilling or unable to live on the meagre unemployment benefits that the Irish state could then afford. Later, the emigration was of well-educated and highly motivated young people.
But by the 1990s, this earlier emigration proved to be a boon to Ireland. It provided a safety valve for our economy as it moved into a phase of rapid expansion. Instead of having to reduce competitiveness by bidding up wages to recruit staff, expanding firms found that they could recruit easily among the well educated Irish working abroad, who were more than willing to return home, bringing with them additional skills and international experience that could never have been found on the domestic scene.
The ultimate effect of free secondary education, introduced in 1966, was to create an open-minded workforce that was ready to adopt new technologies and work patterns. It opened the door to third level education. Whereas in 1965 10% of the relevant age group were in third level education, by 1995 this figure had risen to 50% .
Another problem Ireland has faced is its proclivity for accumulating Government debt. At one time Ireland’s debt reached 125% of our GDP, a debt of crisis proportions, but I am glad to say that it is now back down to about 55% of our GDP.
Looking back on that difficult process of debt control in Ireland, I believe it’s effect was ultimately to be positive, even though it stopped our economic growth in the early 1980s.
In the wake of the 1973 oil shock, the initial borrowing enabled us to maintain its social infrastructure through hard times. Irish educational standards were maintained, and so too was the social safety net which avoided radical political upheaval at a time of a fall in real national income.
There were, however, some highly questionable elements in Ireland’s rapid accumulation of debt in the late 1970’s.
Food prices were subsidized from 1975 on in order to keep consumer price inflation artificially low and thereby secure wage moderation. To win an election in 1977 Fianna Fáil promised to abolish motorcar taxes and domestic property taxes. These decisions, which narrowed the tax base, were financed by further borrowing, and they created immense difficulties in the 1980’s when international interest rates trebled following the second oil shock. Debt grew further during the 1980’s but this was due almost entirely to the accumulated additional interest burden on debt that had previously been contracted at lower interest rates.
The early 1980’s were a period of retrenchment. Public service members were frozen and the remaining taxes had to be increased. This stringency did, however, prevent Ireland falling into some of the costly political errors of continental Europe at that time, like taking on unrealistic pension commitments and creating overprotected labour markets.
In 1987, the necessity of continuing debt control brought about a social partnership between employees, employers and Government which kept wage increases well below the European average, at a time when Irish productivity was growing at a rate well above the European average.
This spurred a dramatic increase in employment during the 1990s.
The superficially miraculous transformation of Irish economic performance from 1987 to 1990 can be explained to a great extent by the fact that international interest rates, which had been very high from 1980 to 1987, started to fall dramatically thereafter. This released Government resources in what appeared to domestic and international observers alike, to be a miracle. It was no miracle, just the mystery of compound interest applied in reverse!
Some sceptics about Ireland’s economic success, particularly in Britain, point to the fact that Ireland has been a recipient of net transfers of funds from the European Union. The net annual transfers in Ireland’s case (including the European Common Agricultural Policy) come to 3.5% of GDP. The motive for these transfers has been to narrow the gap in incomes between regions within the European Union, and to build political cohesion.
There is, however, a price to be paid for being a recipient of largesse. The natural process of economic adjustment is interfered with.
In Ireland’s case, the Common Agricultural Policy, while it maintained agricultural incomes and prices at a far higher level than would have been possible using Irish taxpayer’s money, inhibited the development of efficient units and encouraged bulk commodity production rather than top quality specialist agriculture. Irish agriculture is now less efficient, in comparative international terms, than it was in 1972. Structural adjustment in agriculture has been artificially postponed.
The EU investment in Irish roads and infrastructure has been significant. Some would argue that this is something the Irish Government would have to have done anyway, and that the net effect of the EU funds has been indirectly to bolster local funding of other programmes, like health, education and social security. In any event, Ireland still has a massive infrastructure deficit as can be seen in the appalling traffic jams and overcrowded trains around Dublin.
The European Union has no federal system of Employment Insurance as Canada does. If there was a uniform rate of Unemployment benefit for all of Europe, set at rates that would be acceptable in (say) Germany, both minimum wage rates and unemployment in Ireland would undoubtedly have been much higher than they are now. The reservation wage would have been higher. Ireland’s economic miracle would not have happened.
Ireland still has some long-term unemployment, despite the recent arrival of labour shortages. Lack of education, skills, motivation and contacts exclude a proportion of Ireland’s population from economic growth. This long-term unemployment is hard to overcome when it becomes a way of life affecting more than one generation in a family.
If I were asked to identify the success factors in Ireland’s recent history that could be followed in Canada, I would pick the following:
- A youthful population that is willing to travel abroad to work, but equally willing to return home if opportunities come up at home. The age structure of Ireland is one of the least remarked reasons for our present economic success. Because we now have a youthful population of working age, our dependency ratio has fallen.
- In 1981 there were 0.7 old people or children in Ireland for every adult of working age.
- In 2001 there will be less than 0.5 old people or children for every adult of working age.
This means that taxes can be much lower in 2001 than they were in 1981.
- Good quality education, backed by a single, broadly based and uniform, competitive examination at the end of second level. This exam regulates third level entry, and promotes great effort by students. The competitive nature of the Leaving Certificate is the single biggest factor in Ireland’s educational success.
- A political consensus that supports a low rate of corporation tax (12½%) that is guaranteed regardless of changes of Government. This, along with wage moderation and productivity growth, attracts overseas and domestic investment.
As long as things are going well, the entire absence of party political or partisan controversy about economic development policy is a strength. It gives business what it needs most from government, predictability. This is fine as long as things are going well. But if hard decisions have to be taken because of some adverse shift in the terms of trade affecting Ireland, political leaders alone will have the legitimacy needed to take such unpopular decisions. At that stage it will be much harder to maintain consensus between Government and opposition, although a very good precedent of consensus in difficult times was set by my party in opposition in the 1987 – 89 period.
- A wise industrial strategy, operated free of patronage by the IDA, which puts effort into new expanding sectors, like pharmaceutical, financial services and electronics, and which is not burdened by commitments to too many old industries in declining sectors. The IDA has yet to face its biggest challenge. Renewing our industrial base, while experiencing full employment, will be much more difficult than was establishing a modern industrial base in the first place. Full employment does create rigidities.
- A recent economic history that is comparatively devoid of the class warfare between employers and employees and of the culture of "entitlements" from the state, both of which characterise other European countries that industrialised earlier than Ireland did. An entitlements culture can, however, develop quite quickly, as is being seen now in the dramatically fast growth in health spending in Ireland.
- The fact that we speak English, the language of world commerce. When things are going well, this attracts talented people to Ireland. They can also, of course, go abroad again just as quickly if things change.
- Access through free trade at a large market. Ireland is now the most open economy in the world. We have been slow, however in liberalizing protected state-dominated sectors like telecommunications, public transport and electricity.
- An effective competition policy, forced on us by the EU and not of our own making, which prevents Government from subsidising loss making industry, even state-owned industry. An effective competition law is a vital component of success.