| Fifteen years in the making: the Irish economy today |
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| Dominic Sutton examines the key factors that have shaped Ireland's economy over the past 15 years including the technology boom and looks at how enlargement in the EU may impact our economic fortunes. |
The last fifteen years have seen a dramatic change in the economic landscape of Ireland as it mutated from being ‘The Poorest of the Rich’ (in the words of a notorious survey by The Economist in the late 1980s) to ‘The Celtic Tiger’. Many factors - both external to Ireland and more international in context - have produced the economy that we see around us today. From this multitude I have chosen five that I consider to have been particularly significant.
Consolidation of the public finances
Without healing the public finances everything else - EMU, foreign direct investment, tax cuts and infrastructure investment - that we now almost take for granted would not have been possible. This was not only necessary for it’s own sake - Ireland at that time was in near crisis and the outlook was bleak - but proved to be a crucial facilitator for other positive developments, such as the cuts to personal taxation and the maintenance of a very low corporate tax rate. It was also undertaken at a particularly favourable time and allowed the state to benefit from the mid-1990s economic upswing without the strait jacket of attempting to rein in public deficits, something that stripped many of our EMU colleague countries of their vitality during this period.
The currency crisis
The currency crisis of 1992/93 may not seem an obvious choice for many but it held several important lessons for the economy. One was the over-reliance on the British market for exports, and another the full realisation that Irish exchange rate policy would have to be made in isolation from the UK, whatever the historic and trade relationships. This latter factor may have been the confirmation of the decision of 1979 to split from sterling parity and to join the European Monetary System (EMS) but it also foreshadowed the decision to join the European Single Currency without Britain, a highly contentious concept at the time. Finally, the currency crisis and the subsequent punt devaluation gave the Irish economy a long lasting exchange rate competitiveness boost just as the fruits of the fiscal retrenchment and open policies were bearing fruit and so provided fuel for the subsequent expansion.
The European Single Market project
Although now nearly forgotten the European Single Market project was greeted with fear around the world when it was first proposed. This was a time of anxiety, with the US economy beleaguered in the face of apparently slumping competitiveness, the inflation of the Japanese Bubble Economy and the ‘East Asian Economic Miracle’. A generalised fear was that the world would rapidly split into regional trade blocks and that the Single European market would quickly mutate into ‘Fortress Europe’. It was to counter this threat that US firms sought to entrench manufacturing divisions within the EU at a time when the Ireland was actively enticing overseas firms to invest. The combination of tax incentives, educated workforce etc. undoubtedly helped to attract firms but the Single Market project accelerated the process at a time when the Irish economy was reaching its most attractive.
The technology boom
The emergence of the technology, media and telecom boom during the 1990s had particular significance for Ireland. Many of the firms attracted here were in the TMT sector (but not exclusively, with pharmaceutical investment, for instance, also being notably strong). This investment had several effects. One was the emergence of a growing shareholder class, as many of these firms used share options as part of their remuneration strategy. The TMT boom saw the value of these options soar, creating a new class of wealthy individuals and the emergence of private banking-type services. Even for those not as fortunate as the option holders the growing shortage of skills helped generate rising affluence and the emergence of services to cater for this new affluence. Second, it allowed the Irish economy to leapfrog the potentially polluting ‘industrialised’ stage of economic development and move directly to a ‘post industrialised’ economy. Not only did this yield higher investment returns but also facilitated economic growth at the same time as growing environmental protection. Finally, the combination of high investment interest in TMT start-up firms and a growing Irish technological base saw the emergence of a new class of Irish entrepreneurs. Every society needs these to drive progress forward and to more economic development beyond the inward investment stage.
European economic and monetary union
With EMU fully in place it is sometimes easy to forget how radical a step this was. Locking the exchange rates of the twelve Euro zone countries remains a gamble: a bet that the benefits of a restraint on government borrowing and unified monetary policy will outweigh the loss of the exchange rate adjustment mechanism. Indeed, a definitive conclusion is likely to have to wait many years, possibly decades. The process has already been beneficial to Ireland: credibly sustainable lower interest rates and much lower bond rates that supported fiscal retrenchment as well as a permanently competitive currency parity rate against our Euro zone competitors. The competitive wild card of British Euro entry remains, however, and is likely to cast a long shadow until finally resolved over the next few years.
Many of these developments were not foreseen fifteen years ago and even those that were had an influence far greater than suspected at the time. The European Single Market project is a good example of this. Similarly, the forces that will shape the next fifteen years remain shadowy even if two are already increasing in focus.
The enlargement of the European Union
This has already had an impact in Ireland owing to the rejection of the Nice Treaty but this is minor compared to its full potential fall-out.
To start, the accession of large but undeveloped agricultural countries - particularly Poland - will stretch the Common Agriculture Policy beyond breaking point. Either CAP will have to be dramatically revised or subventions are likely to soar.
This means a real choice between higher taxation to fund the CAP or a (potentially dramatic) fall in aid to agriculture, possibly at a time of opening trade barriers. But the cost of enlargement does not end there - it will also stretch the political and general budgetary resources of the EU to the limit. Much of this underlies the Nice Treaty, particularly the move from one commissioner per member state.
If all of this sounds negative it must be weighed against the gains: the further reunification of Europe, the locking in of the democratic process in many former totalitarian states and a massive increase in the potential size of European markets. Many of the reforms (particularly in the EU Budget and CAP) are required in any case and to energise this reform process in the name of a freer and unified Europe makes it even more desirable. Just as for the ascension countries there will be a price to pay for enlargement, but everything suggests that it will be well worth the price.
Adaptation to the post-Celtic Tiger realities
The last fifteen years can, perhaps, be thought of as a period in which Ireland finally caught up with its potential - the potential of its people and its geographic and political positions. However, that catch-up period came to an end as the last century closed. The challenge for the new century is to adjust to the new realities of high employment and labour force participation, the bottlenecks in the economy and the potential this creates for inflation and fiscal deterioration.
This is as hard a task as to achieve the ‘Tiger’ phase in the first place. Indeed, it is sobering to consider the fate of so many of the original ‘Tiger’ economies in East Asia and the crises they had to endure for not correcting their economic policies to reflect changing realities.
Ireland has many advantages they did not enjoy. Membership of the EU and EMU, for instance, with the latter’s restraints on fiscal deficits a particular boon, even if it may not seem so at the time. A stable political system and sophisticated financial institutions, markets and clients along with a top grade sovereign credit rating.
Nonetheless, it must not be taken for granted that everything will automatically be fine. Japan remains a sobering reminder of how easily a country can get into trouble even at a time of record prosperity.
Careful, positive, often difficult decisions will need to be taken in order to deliver a continually prosperous future. The starting point for a bright future is in place but only time will tell if it can be delivered. |
Dominick Sutton is contactable at sutton@iolfree.ie
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| Article appeared in the June 2002 issue.
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