The Irish Economic Miracle

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The Irish Economic Miracle
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• THE IRISH ECONOMIC MIRACLE
• Dr. Garret FitzGerald,
• Former Prime Minister of Ireland

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Irelands Story

• English-speaking
• Strong banking system low bad debts
• Sterling retained till 1979 low interest rates
• Non-restrictive labour laws job mobility
• Lower social costs than on European continent
• Efficient merit-appointed public service
• Independent judiciary and rule of law
• Politicians civil servants free from corruption
• Because of under-development welcoming attitude
  to foreign investment

Inherited Advantages
Not Exploited for First 35 Years

• Industrial protection new firms high-cost, poor
  design marketing, no professional management
• So, no manufactured exports
• Foreign investment restricted (49 max. in
  manufacturing)

Policy Reversal of 1956-1959

• Development-oriented Secretary of Finance age
  39.
• Youngest revolutionary became PM as initiator of
  protection policy he had moral authority to
  abolish it.
• Vested interests in protection swept aside.

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Ireland Key Policy Decisions of 1956-1987

• Low corporate taxation
• 2. Foreign investment restrictions abandoned and
  FDI promoted.
• 3. Trade Freed with Britain, then EU.
• 4. Education hugely expanded - but high
  standards maintained
• Social contract between government, industry,
  unions, farmers, etc.
• 6. Productivity increase.

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1. Low corporate taxation

• No tax holidays, but
• 1956 50 tax relief on profits from manufactured
  exports
• 1958 100 tax relief on export profits
• 1973 10 tax on all manufacturing profits
• 2003 12.5 tax on all corporate profits

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2. Industrial Development

• Up to 1958 foreign ownership of manufacturing
  firms limited to 49
• 1958 this limit is abolished
• 1959 Industrial Development Authority established
  to promote foreign industrial investment
• Industrial Development Authority
• Research to identify future key industrial
  sectors
• Promotion 14 foreign offices to attract
  high-tech industries
• One-stop shop to help new industries to get
  established in Ireland
• Financial aid grants for technologies
  research development employment training
  modernisation innovation expansion
• Key industries attracted to Ireland by IDA
• Pharmaceuticals (9 of 10 major US companies)
• Electronics
• Computers (one-third of all sold in Europe)
• Software (Ireland worlds largest exporter in
  2000)
• Medicare
• Financial services (Dublins IFSC)

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3. Freeing of Trade

• 1959 new PM saw significance of EU told
  Industries Federation get ready for free trade
• Pilot study of woollen and worsted industry
• Proposal of joint industry/government committee
  to survey 23 industries accepted
• 1961-1965 Committee on Industrial Organisation
  (CIO)
• 1965 - Adaptation Councils set up to help
  industries prepare for free trade in EU
• Follow-up to industry/government co-operation in
  CIO
• 1963 National Industrial Economic Council
  (later National Economic Social Council)
• To encourage preparation for free trade
  unilateral 10 cut in tariffs both in 1963 1964
• 1965 government negotiated free trade agreement
  with UK protection against UK goods to be
  eliminated by 1975
• 1973 EU membership disappearance of all
  protection of Irish industry by 1977
• Out of 170,000 manufacturing jobs, 50,000
  low-paid jobs disappeared most in years after
  protection ended
• But these jobs were replaced by over 100,000
  better-paid jobs in high-tech industries
• Half in totally new industries e.g. instrument
  engineering, computers and software, and half in
  older industries not previously established in
  Ireland, e.g. chemicals, pharmaceuticals, rubber

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3. Freeing of Trade (Cont.) Changes in Irish
Manufacturing Employment
Changes In Irish Manufacturing Employment
1963-2006
Workers (thousands)
Textiles Clothing
Drink Tobacco
Leather Footwear
Food
Pharma-ceuticals Chemicals
Metals
Rubber Plastic
Computers
Instrument Engineering
Other
TOTAL
32 growth
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4. Education

• Primary education universal in Ireland from
  1830s
• But up to late 1960s Ireland under-educated by
  comparison with European neighbours
• Barely 20 completing secondary education, only
  7 entering higher education
• In 1968 Ireland embarked on ambitious expansion
  of educational system
• Secondary schools up to 1968
• 25 public vocational
• 75 private religious academic, with state
  support but also fees
• 1968 free secondary education
• 1995 free university education

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4. Education (Cont.)Level of Education of Irish
Population
Percent of Irish Population in Various Stages of
Education
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4. Education (Cont.)

• Broad-based Secondary Education
• Irish students have to take 6 subjects in
  school-leaving examination
• This contrasts with narrow A-level system in
  England where general education has been
  shortened by unduly early specialisation
  (school-leaving examination in only 3 subjects)
• Higher Education
• Foreign investors prefer broader Irish system to
  narrower English system they feel it produces
  better-educated and more rounded and adaptable
  workers at end of secondary school.
• Higher education much higher Irish entry rate
  than in England (60).
• University standards also better maintained.
• Over half of the 60 of school-leavers going into
  higher education enter the 7 universities, which
  have very low drop-out rates.
• Most of remainder enter 14 regional technical
  institutes greatly valued by industry because
  they provide courses related to needs of
  (especially foreign-owned) firms.

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5. Social Contract

• Like Britain, bad industrial relations until end
  of 1980s
• But in 1987 government, unions and management
  decided to work together to agree at intervals
  broad lines of economic and social policy,
  including pay increases and personal taxation
• Later this social partnership joined by farmer
  representatives and by representatives of the
  socially deprived
• Social contract negotiations take place every 2-3
  years
• Seventh of these negotiated in 2006 and adopted.
• Social contract has helped limit industrial
  unrest.
• During 1990s governments traded cuts in high
  level of personal taxation for pay moderation
• In that decade half of workers real pay
  increases from tax cuts, half from pay increases.

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6. Productivity Performance

• During Celtic Tiger period productivity (i.e.
  output per worker) rose 4 per year
• External factor
• Foreign manufacturing investment involving
• much higher productivity of new high-tech firms
• demonstration effect of this on indigenous
  manufacturing
• Domestic factor
• Privatisation of inefficient state enterprises
  (although Ireland was never socialist, because of
  under-development many activities, including
  manufacturing and transport, had been undertaken
  by the state in its early decades)

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FOOTNOTE What Increases Output Per Head and
Living Standards?

• Competitiveness increases productivity
• But another factor, which in Europe has been
  significant only in Ireland
• reduction in ratio of dependants to workers
• This occurs when participation in labour market
  increases
• Ireland in 1986 in many ways still a developing
  country, e.g.under-employment in farming
• more children
• many fewer women at work
• high unemployment
• Putting these dependants to work increased living
  standards, supplementing simultaneous increases
  in output per worker

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Dependency Ratio
Ireland Dependency Ratio
Thousands of people
Dependency Ratio

• In 1986 every 100 workers had to support (either
  in family or through taxes for social welfare for
  others), 225 dependants as well as themselves,
  i.e. 325 people.
• Now a worker has to support only 107 dependants,
  i.e. 207 people
• So, quite apart from the benefits of increased
  productivity, this has made the average worker
  57 better off.

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KEY IRISH POLICIES

• 1. MAINTENANCE AFTER INDEPENDENCE OF
• High-calibre independent Judiciary.
• Civil Service of integrity, independent of
  politics.
• Foreign investment process free of political
  corruption.

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2. POLICY STABILITY

• Key economic policies unaffected by changes
  of Government.
• Welcoming public attitudes to foreign
  investment.

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3. LOW CORPORATE TAXATION