Lessons from Irish economic experience

Ireland’s designation as the Celtic Tiger during the 1990’s arose because of its spectacular economic achievements.  Between 1995 and 2001 Ireland’s growth averaged 10 per cent annually. That country is still the most dynamic European Union state despite a decrease in growth to 5 per cent in 2002.

Ireland’s current status emerged from a poor 20th century  record  characterised by chronic unemployment, large emigration flows, dampened entrepreneurial activity and deteriorating living standards. F Desmond McCarthy, in his analysis of the transformation, states that the newly elected Prime Minister introduced large tax cuts, and as GDP growth responded to these cuts and wage moderation, the budget deficit was slashed and the debt to GDP ratio shrank. A social pact — the Programme for National Recovery (1987 - 90) — resulted in stable labour relations. Pertinent factors included granting massive incentives to foreign direct investment (FDI), engaging in technological development, enhancing industrial organisation, recognising the role of information, becoming a member of the European Community in 1973) and adopting the euro in 1999. 

Foreign business recognised the advantages of an English-speaking, well-educated population with ready access to the large European market and the broad institutional stability provided by the European umbrella. In the late 1980’s major changes in industrial structure occurred as multinationals moved away from the mass production model towards greater flexibility and foreign branches of these companies moved away from relatively insulated units to greater  integration with the local economy. Simultaneously, companies of the “new” economy were fundamentally more flexible, in particular, new technology reduced transport and communications costs, sharply reducing the geographic disadvantage of being an island economy. The Industrial Develop-ment Authority (IDA) developed a policy of attracting high-tech foreign firms and quickly took account of  these new trends. It attracted many leading companies enjoying rapid growth at the global level, such as Intel and Microsoft. The Industrial Development Authority also offered a good platform for many of the large chemical and pharmaceutical multinationals.

Foreign companies were more concerned with the tax structure, in particular the 10 per cent corporate tax rate, and relatively low labour costs, than direct subsidies which the IDA had been providing to foreign investors since the early 1980’s.  The above policy initiatives resulted in foreign-owned firms employing 47 per cent of the industrial workforce out of the total workforce of 1.7 million by 1998 with the US accounting for 75 per cent of FDI. In 2001 Ireland attracted 10 per cent of the EU’s foreign direct investment. The new companies were building links with domestic suppliers and employment in locally owned industry has also risen, primarily in the service sector, which is still linked to and dependent on foreign companies. Ireland ranked in 2002 as the world’s third largest world exporter on a per capita basis behind Singapore, Belgium and Luxembourg. For example, one third of all personal computers sold in Europe were made in Ireland. This was achieved through a series of tripartite agreements between the key economic players — government, employers and labour — designed to moderate wage increases with a formula for increases over three years.

In return the unions sought further tax cuts which resulted in a strong increase in after- tax real incomes.  This further enhanced  economic growth and job creation and, in turn, fiscal restraint and wage moderation slashed inflation. The poverty level declined dramatically in the 1990’s as average real household incomes rose rapidly and unemployment fell sharply. Social welfare provisions rose in real terms but not as much as other incomes. In net terms the number of those on social welfare fell, however, their incomes fell further behind the average which is one negative to observe. Progress achieved may not continue indefinitely. In fact the IMF Staff Report on Ireland advised of an interruption in manufacturing performance in 2001 largely due to the global economic slowdown, the bursting of the Internet communications technology bubble and the rapid increase in Irish wage costs. The IMF also noted that some high-tech industries attracted to Ireland in the 1990’s were permanently relocating away from Ireland, despite the high level performance of a handful of sectors mostly dominated by multinational companies. Irish industrial competitiveness also became vulnerable to fluctuations in the exchange rate between the dollar, the euro, and the pound sterling. Ireland was identified as a country against which Trinidad and Tobago can be benchmarked and there are lessons from the Irish experience, as summarised in this article, which we should assess:

The integrating of the foreign companies into the local economy at an optimum level is vital. The role and effectiveness of TIDCO and the business promotion agencies are significant inputs. The development of a service sector, as espoused by Mary King, must be part of the development equation. A social partnership among government business and labour which establishes definite gains for each  partner is critical to industrial competitiveness. In attracting foreign investment, the key determinants are: a skilled work force, tax incentives and administrative capacity. An adequate supervisory and incentive framework  which promotes transparent and responsible behaviour and better monitoring and accountability, especially in the use of public funds. These factors will steadily strengthen the entrepreneurial spirit.

The views expressed in this column are not necessarily those of Guardian Life. You are invited to send your comments to guardianlife@ghl.co.tt