REPUBLIC OF IRELAND: And now comes the hard part ...

REPUBLIC OF IRELAND: And now comes the hard part ... - Ireland's run of economic success since the mid-'80s has been astonishing. But now doubts are being voiced about how long it will last.

by Trevor Merriden.
Last Updated: 31 Aug 2010

Ireland's run of economic success since the mid-'80s has been astonishing. But now doubts are being voiced about how long it will last.

Fifteen years ago it had 15% inflation and 15% unemployment. An uninspiring number for a small low growth economy on the western edge of Europe. Today Ireland's numbers are much more exciting. Since 1992, economic growth has averaged over 6%, inflation has held steady at around 2%, external trade is in rude health and public finances are sound. Even the rate of unemployment, long the Achilles' heel of the economy, has fallen and is now close to single figures. One business magazine recently enthused that the Irish economy had moved 'from basket-case to emerald tiger'. But does the performance of the Irish economy merit such hyperbole?

How much mirage is there in the 'miracle'?

There is little doubt that Ireland has enjoyed an astonishing run of economic success. In 1987, income per head in Ireland was less than two-thirds the levels enjoyed by Britons. Only 10 years later, Ireland broadly matches us on this measure and is also close to the EU average. Furthermore, the usually cautious OECD predicts that the Irish economy should continue to expand over the next two years. Exports will continue to enjoy rapid growth. The OECD predicted GNP growth of 6% this year followed by 6.3% in 1998. Meanwhile, the World Economic Forum's latest Competitiveness Report ranks Ireland the 16th most competitive economy in the world (up from 25th place last year).

Foreign investment is cited as the saviour of the Irish economy and by any analysis, it is. Foreign-owned firms are now said to account for nearly 40% of exports and exports themselves account for 80% of Ireland's GDP.

Yet for John Beggs, chief economist at the Allied Irish Bank, the story is more complex: 'Ireland has achieved what it has through key policy changes, and not only through the subsequent management of inward investment.' And it has done so in an environment of high personal taxation and consensus wage deals, the anti-thesis of the free-market approach of the UK's former Conservative government.

The success story began in the mid-1980s. Then tax amnesties simultaneously triggered a huge jump in government revenues and broadened the tax base.

Fiscal policy's new even keel was mirrored by a similar steadying of monetary policy, with the Irish punt behaving impeccably within the confines of the Exchange Rate Mechanism (ERM). Meanwhile wages have been kept broadly in line with the European Union average - according to the Economist Intelligence Unit (EIU), real wages in Ireland rose by an average of 1.4% per annum between 1992 and 1996 - keeping the lid on inflation.

The EU has also undeniably been helpful to the Irish. When Ireland joined in 1973 (at the same time as the UK), its poverty ensured generous helpings of subsidies. Between the late '70s and the early '90s, EU transfers amounted to between 4% and 7% of Ireland's GDP every year, higher than anywhere else in the EU. Following the arrival of Spain, Portugal and Greece as member states, this flow of funds has dwindled, but Beggs thinks that getting into the marketplace for funds first is the reason why Ireland still enjoys substantial net contributions from the EU. 'The reason we've done well out of the EU is that we were the first country to put forward a plan for assistance. That's how to get the best from bureaucracies.

They had the funds - and we already had a plan.'

With the other poorer countries in the EU now also receiving assistance, says Beggs, Ireland doesn't get as much money now. Even so, Ireland seems to have done well with the funds available. Massive extra spending on roads, gas pipelines and retraining the unemployed (unemployment is still higher than in the UK at about 11%) has increased the productive potential of the economy to the extent that, while Ireland grew rapidly last year, the direct contribution of current structural fund spending was only about 1% of GDP. Today's help from the EU is not insignificant, but it is certainly not the major story.

Foreign investment is, though. For example, the country has received 40% of all US investment in European electronics since 1980. In recent years companies such as IBM, Intel, Gateway, Dell, Fujitsu, Motorola and other leaders of the computer and electronics industries have built new facilities in Ireland.

The investment is also fairly well spread - Apple and several pharmaceutical companies are based in Cork, while Cabletron and Dell are in Limerick.

Galway too hosts various healthcare and electronics companies. Undoubtedly there are powerful attractions for multinationals in Ireland - not least the tax breaks.

Corporation tax on non-manufacturing industries is officially 36%, but internationally traded services and all manufacturing activities enjoy the inducement of an effective tax rate of 10%, which is expected to remain in place until at least the year 2010.

The republic has also been very effective at promoting itself - establishing one of the first inward investment agencies in 1969, the Industrial Development Agency (IDA). 'In Ireland,' says IDA spokesman Michael Flood, 'the first priority is to win investment for Ireland, the second is to make sure that the investments are spread around the country.' The IDA claims that it creates 13,000-14,000 new jobs each year through its success in attracting companies to Ireland against the 3,000-4,000 jobs the republic loses every year. One area in which it has had a lot of success is financial services, another is the teleservices business. 'In that industry,' says Flood, 'we recognised ahead of the competition that there were opportunities to centralise sales of marketing operations in Europe, provided we had good enough telecoms links and enough people with a second or third language.

We got into the market quickly and have done a lot of business over the past few years.'

Getting in quickly is all very well, but you need to have the right product as well - which means the right economic conditions and the right kind of workforce. Says Beggs: 'One big reason why they (inward investors) have come is that Ireland has invested heavily in education since the early '60s. We have one of the highest proportions of graduates in the world. Before we had unemployment and emigration. Now we've got the jobs to give young people, and so many have come back.'

Demography is now working in Ireland's favour. The republic's high birth rate, so long a source of worry for politicians (as the young went from school via social security and straight onto the scrap heap), is now a virtue. As Raymond Bowe, manager of the policy unit at FORFAS, the government body responsible for economic policy advice, puts it: 'We have a big demographic advantage over the rest of Europe. Most of Europe has an ageing population who have no idea about what the Internet even is.' While continental Europe is trying hard to ignore adverse dependency ratios, Ireland, in spite of a falling birth rate, is in an ideal position to take advantage.

'Ireland is about 25 years behind on the pension time bomb,' says Beggs.

So far so good, but every silver lining has one or two clouds. A low level of investment by indigenous manufacturing industry still appears to be a problem, for all Bowe's protestations to the contrary. 'It's true that a lot of the old indigenous industry was subject to protectionism,' he says. 'This sort of industry died in the '70s and what's left is not really in decline any more.' Yet a draft report by the National Economic and Social Council (NESC) leaked to the Irish Times in June painted a different picture. It suggested that the overall level of domestic investment in the Irish economy was lower than in the '80s. The NESC claims that subsequent versions of the report have been substantially altered, but given the amount of international investment Ireland has attracted, the main reason for the weak figures seems to lie in home-based investment.

The nature and quality of foreign investment also raises doubts. Just as in Britain, success in attracting foreign investment is marred by claims that much of it is low value-added assembly-line fodder. Kevin Hannigan, economist at the NESC, doesn't really think this is fair. In the computer industry, he says, 'it is true that there is an assembly-line dimension, but there is a fair share of value-added too'. Beggs agrees: 'Over time we have been developing our own independent industries around these multinationals and in many cases we now have not only the European headquarters of these companies but the R&D facilities too.' He gives the example of Intel, which recently announced a fourth plant south of Dublin, with an investment of £150 million and an extra 2,000 jobs. The entire European supply of Pentium chips comes out of south Dublin and says Beggs: 'The process is extremely hi-tech - if you go in their plant it's like being inside NASA.'

There is, perhaps, a more serious danger. In the same way that key economic policy changes underpinned a positive change in Ireland's fortunes, so a breakdown in the economic consensus could herald an end to the country's golden period. In particular, a breakdown of the national pay agreements looks closer than it has for some time. The EIU's expert on Ireland, Andrew McDowell, believes there is a risk that trade union militancy, especially in the public sector, will derail the current national wage agreement before 2000, when the next deal is due to be negotiated. And if the current deal does break down, the EIU estimates that this could add another 10% to wage increases - a potentially crippling blow to economic competitiveness.

Finally, there is the euro. Ireland is well placed to join the single currency project when it starts, but one popular fear is that the advent of the euro will effectively create a new, smaller single market which excludes the laggards, including (perhaps) the UK. For Ireland to have even contemplated such a move would have seemed unlikely in the past, when the UK was by far the republic's largest export market. Now multinational investment has meant that more exports are going elsewhere in Europe, but there is still caution on the subject. Says Beggs: 'Certainly joining the euro without the UK is a calculated risk. More trade goes to continental Europe but a higher proportion of the exports of indigenous companies still goes to the UK, so the employment prospects of the people working in those companies may be more dependent on the UK than the overall export figures suggest.' Bowe agrees: 'It would be a nonsense to diversify too much away from Britain. It is still our biggest trading partner and you have to remember that there is an inequality of size here. Ireland still needs Britain. Britain doesn't really need Ireland.'

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