Academic journal article Independent Review

Why Ireland Boomed

Academic journal article Independent Review

Why Ireland Boomed

Article excerpt

The great economic success story of the past ten years has been the Republic of Ireland. At the end of the year 2000, Ireland could look back on fourteen years of uninterrupted economic growth, which had accelerated to nearly I0 percent annually in the closing years of the i990s. With this growth came markedly lower inflation, one of the lowest unemployment rates in the European Union (EU), and a growing government-budget surplus. Most dramatic, however, was the return to Ireland of young workers in increasing numbers to fill new jobs awaiting them at home.

Contrast this happy state of affairs with that of the mid-1980s, when the unemployment rate reached i7 percent, emigration soared, the government's finances were a shambles, and submission to a draconian International Monetary Fund (IMF) program was considered as a means of getting the economy back on track.

How did the dramatic turn of events come about? What lessons, if any, might the Irish events teach others? In this article, I examine the sources of the apparent transformation of the Irish economy. How much was the result of conscious, farsighted government policies? To what extent did historical trends or external events play a part?

The analysis here demonstrates that the adage "fortune favors the well prepared" applies especially well to the Irish case. To be sure, Ireland had been well prepared by virtue of sound, sustained policies in matters such as taxes, education, and telecommunications. These policies, though improvements, were not revolutionary by any standard, nor were they part of a grand, overarching plan. Even when dramatic results followed from the adoption of market-oriented measures, as in the case of deregulation of Ireland--United Kingdom air routes, the lessons were not applied with vigor elsewhere in the economy. In short, Ireland illustrates how large the payoffs from better policies can be in a few critical sectors in the presence of favorable external factors.

Starting Points

The Republic of Ireland is a small, relatively new nation on the western edge of Europe. After emerging as the Irish Free State in 1922, following a long history of conflict with Great Britain, it promptly plunged into a civil war that lasted until 1923. At that time, the population included fewer than three million people and was dwindling. The new nation's desire to demonstrate economic "self-sufficiency" as well as political independence contributed to the adoption of inward-looking, protectionist policies: high tariffs, bans on majority foreign ownership in industry, and the establishment of state-owned enterprises in areas such as power generation, shipping, banking, and insurance (Foster 1988; MacSharry and White 2000). These policies were pursued well into the 1950s, with increasingly perverse results. The economy stagnated, emigration soared (more than four hundred thousand people left Ireland between 1951 and 1961), and foreign trade remained tied in large part to the United Kingdom (UK).

By the mid-1950s, the hopelessness of the situation, combined with the emergence of the Common Market (even though Ireland was not a member at the time) brought about the first significant change in government attitudes. Foreign investment, particularly in exporting industries, was made welcome. In 1956, new investors' export-derived profits were made tax free for a fifteen-year period. Restrictions on foreign ownership of industry were phased out, with full repeal in 1964. Recognizing the importance of low-cost imports for the exporting industries, tariff barriers began to be lowered. Still outside the Common Market, Ireland entered into a free-trade agreement with the UK in 1965.

The Industrial Development Authority (IDA), established in the 1950s, played an active role in soliciting foreign investment and provided substantial--and frequently controversial--subsidies for many firms in the form of nonrepayable capital grants, ready-made facilities, training, and research-and-development (R&D) grants. …

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