Download Irish Economic Transformation

How a Small Country Transformed Itself – the Case of Ireland
and the Role FDI played in that Transformation
David O’Donovan
Director
Investment Promotion Agency Development, Communique
International, Dublin, Ireland
BCCI/BELTRAIDE Business Mixer
June 13, 2012 Belize
www.communique.ie
Six Broad Themes
I.
Brief Facts
II.
Irish Economic Transformation WHAT Happened
III. HOW it Happened
IV. The Current Crisis
V.
Looking Back – Lessons
Learned
VI. Summary Conclusions
Brief Facts – Republic of Ireland
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Small island on the western
edge of Europe
Area: 70,275 sq km (Belize X 3)
Surrounded by much larger
neighbours
Population: 4.5m (Belize X 14)
Capital: Dublin (1.5m)
800 years of British rule
Independence: 1921
EU member since 1973
GDP (2010): US$197 billion –
per capita US$44,000
Brief Facts – Republic of Ireland
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Two major famines in 19th
century
Mass emigration
Population halved from 8m
to 4m in 100 years
Irish diaspora much larger
than population - 77m
worldwide, of which 44m in
USA alone
Brief Facts – Republic of Ireland
First 50 Years of Independence:
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Trade protection policies dominated
Economic stagnation
Continued mass emigration – up to
100,000 per year in 1950s
By 1961, population reached record
low of 2.8 million
Little natural resources
Virtually no modern industry
Irish income per capita of US$3000
– one of the poorest in Europe
Ireland on verge of economic
collapse
Similarities with Belize
Ireland’s initial conditions were similar to Belize today
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Peripheral location
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Low population density
Emigration and brain drain – significant diaspora
English speaking
Common law traditions
Little modern industry and unsophisticated export basket
Lagging convergence with higher income countries in region
High tourism potential
Irish Economic Transformation
Major policy shift from
late 1960s onward:
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Widespread recognition of failure
of past policies
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Realisation that major policy
changes were required
Deep economic crisis meant that
all politicians were under
pressure
Need for national consensus
recognised
Resulted in cross-party
agreement to create the right
climate for investment
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Irish Economic Transformation
As a result, Ireland moved:
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From isolated and remote government to dialogue and social
partnership
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From short-term policies to long-term strategic policies
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From protection to competition & economic openness
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From little to massive investment in education
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From import substitution to export promotion
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From limiting FDI to attraction of FDI
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From high taxes to low taxes both corporate & personal
Irish Economic Transformation
Result – from poor to rich in one generation:
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Today Ireland, despite the current economic
downturn, is still one of the richest countries in the
world
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GDP: US$197 billion
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Per Capita: US$44,000 well above the EU 27
average
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Population has risen 60% to 4.5 million – from 2.8
million in 1961
Irish Economic Transformation
Per capita GDP as a % of EU average
200
180
160
140
120
100
80
60
40
20
0
Source: World Development Indicators
Irish Economic Transformation
Irish exports have changed dramatically:
1972
Primarily agricultural
products
2012
High value added, high
technology products and
services
Irish Economic Transformation
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2011 Exports of US$117 billion (59% of GDP)
2011 Trade Surplus US$56 billion
80% of exports coming from FDI located in Ireland
Cumulative FDI Stock of US$237 billion or 120% of
GDP, almost 4 times the EU average of 33%
Source: Central Statistics Office, Ireland – www.cso.ie
Irish Economic Transformation
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The Irish economy is one of the most open
in the world:
- International trade is 80% of GDP
- Per capita exports of $26,000 - one of
the highest in the world
• “Ireland has one of the world’s most
pro-business environments,
especially for foreign business and
foreign investment”
2006 Index of Economic Freedom – Wall Street Journal and
Heritage Foundation
Irish Economic Transformation
• “It takes only 5 procedures and
14 days to establish a foreignowned limited liability company
in Ireland”
World Bank, Investing Across Borders Indicators of FDI
Regulations, 2010
Irish Economic Transformation
• “Ireland’s share of global FDI
has been about five times its
share of global GDP”
Kasra Ferdows, Professor of Global Manufacturing,
Georgetown University, USA 2003
Irish Economic Transformation
The 2011 World Competitiveness Yearbook
showed Ireland to be:
1st for corporate taxes
1st for the availability of skilled labour
1st for business legislation for foreign investors
3rd for inward direct investment flows
3rd for availability of financial skills
4th for labour productivity
4th for exports of commercial services
7th for the flexibility and adaptability of people
Irish Economic Transformation
The 2010 Ernst & Young Globalisation Index
ranked Ireland the second most globalised
location in the world*:
1st Hong Kong
2nd Ireland
3rd Singapore
4th Denmark
5th Switzerland
*Based on the 60 largest economies across 20 indicators and measures
the extent to which they are connected to the rest of the world
Irish Economic Transformation
HOW DID THIS
PHENOMENAL
ECONOMIC
TRANSFORMATION
HAPPEN?
EU Membership from 1973
• EU membership helped but was not
decisive
EU Membership from 1973
• Many other poor, peripheral countries
also joined the EU but did not
experience such rapid catch up and
structural transformation
• There was something special about
Ireland
Irish Economic Transformation
GDP per capita as a % of EU average
200
180
160
140
120
100
80
60
40
20
0
Source: World Development Indicators
Ireland
Greece
Portugal
Irish Economic Transformation
Ireland adopted a holistic,
rather than piecemeal,
approach to economic
development
Irish Economic Transformation
Joined-up thinking at policymaking level
Followed by:
Joined-up action at the
implementation level
Irish Economic Transformation
With 7 Key Foundations:
1. NATIONAL CONSENSUS
2. SOCIAL PARTNERSHIP
3. SPECIFIC BODIES FOR SPECIFIC
FUNCTIONS
4. LOW TAXES
5. INVESTMENT IN EDUCATION
6. EU MEMBERSHIP FROM 1973
7. AGGRESSIVE CAMPAIGN FOR FDI
1. NATIONAL CONSENSUS
National Consensus
•Policy failures from 1930’s led to
state of national crisis by 1960’s
•Severity of crisis brought national
consensus
•New direction for economic and
industrial policy agreed
•Evidence-based approach
•Acid Test for any new policy was
‘show us where it has worked’?
National Consensus
New Direction Adopted:
•Free trade and expansion of
market access
•Private sector led growth, not
government sector growth
•Private sector with strong state
encouragement to be the engine of
growth
•FDI attraction as the fastest and
best route to gain investment, jobs,
technology and expertise
2. SOCIAL PARTNERSHIP
Social Partnership
•Cornerstone underpinning rapid
Irish economic growth
•Virtuous circle between
Government, employers, labour,
farmers and voluntary sector – all
have voice in developing strategies
•Under the umbrella of the National
Economic and Social Council
(NESC) since early 1970s
•Chaired by Head of Prime
Minister’s Department
Social Partnership
• Representation within NESC:
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Government – Secretaries General of 7 departments (ministries)
Private Sector – 5 from business associations
Labour – 5 from trades unions
Farmers – 5 from farmer organisations
Voluntary – 5 from NGO organisations
Other – 5 independent representatives, normally technical
experts or academics
• Term of Office is 3 years
Social Partnership
• NESC receives technical and administrative support
from semi-autonomous secretariat of 9 people
• Funded by Prime Minister’s Office (US$1.5m per
annum)
• Meets once a month for a half day
• Meetings held in private
• No transcripts kept – only final agreed reports are
published
• Decisions taken by consensus – no need for Chairman
to use casting vote
Social Partnership
Real Secret of Success:
A Shared Understanding
Problem Solving Approach
Consensus
Social Partnership
Recognition of:
• Interdependence between
social partners
• Tradeoffs both between
and within interest groups
Social Partnership
• Partners’ core mandate is
problem solving
• A common definition of the
problem is reached
• Consensus and understanding
not a pre-requisite of the
partnership but rather a result of
it
Social Partnership
• Trades unions included in policy making for first time
• New deal with trades unions in mid 1980s – no strikes
and wage moderation in return for cuts in personal
taxation and prospects for share in future growth
Social Partnership
• Led to industrial peace, wage moderation and
low inflation with strong ‘buy-in’ from Trades
Unions
DAYS NOT WORKED
STRIKES
250
1,600,000
1,400,000
Social Partnership
200
1,200,000
150
Social Partnership
1,000,000
800,000
100
600,000
400,000
50
200,000
Source: ILO (International Labor Organization)
0
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1994
1996
1998
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2002
2004
2006
2008
2008
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2006
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1998
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1976
1978
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1970
1972
0
Social Partnership
•Led to development of coherent, long-term
strategies
•Helped to instil common vision in
implementing agencies
•Facilitated social cohesion
•Facilitated ‘joined-up’ policy making
followed by ‘joined-up’ implementation specific State bodies for specific functions
3. SPECIFIC BODIES FOR
SPECIFIC FUNCTIONS
Specific Bodies for Specific Functions
Objective:
• Joined-up thinking at
the policy-making level
Followed by:
• Joined up action at the
implementation-level
Specific Bodies for Specific Functions
• Combination of government
departments, state
agencies and advisory
councils
• Each with its own specialist
function
• All well funded by
government with focused
operational budgets
• Professional, permanent
staff who do not change
with changes of
government
Specific Bodies for Specific Functions
Specific Bodies for Specific Functions
• Issues recognized as
cross-cutting, interlinked
and interdependent
• All institutions linked by
cross board memberships
• Institutions attempt to
provide a complementary
division of labour
• Each institution has its own
specialist focus within
overall national strategic
framework
Specific Bodies for Specific Functions
• Forfas (Planning, Policy Advocacy) - US
$85m, 120 staff
• IDA-Ireland (FDI) - US$309m, 170 staff
• Enterprise Ireland (Indigenous Industry &
Export Development) US$336m, 900 staff
• Science Foundation Ireland (Innovation) US$175m, 44 staff
4. LOW TAXES
Low Taxes
• 1956 – zero tax on profits from
exports
• 1981 – 10% corporation tax on
profits from manufacturing and
internationally-traded services
• 1990 – 10% tax extended for 20
years to 2010
• 2003 – 12.5% tax on all trading
profits (companies on previous
10% rate retained this to 2010)
5. INVESTMENT IN
EDUCATION
Investment in Education
• Adoption of universal free secondary
education and low cost tertiary
education in 1967
• Built universities/regional technical
colleges in 10 enterprise zones
• Adoption of free University education
in late 1990s
Investment in Education
• Government spends 16% of budget
on education – one of the highest in
Europe
• 34% of population under 25, one of
the highest in Europe
• Almost 25% of population in full-time
education
• 90% complete second level to age 18;
54% go on to higher third level
education
• At 3rd Level 60% in Technology or
Business
6. EU MEMBERSHIP FROM 1973
EU Membership from 1973
• Allowed duty-free access for first time to
Continental markets
• Late 1970’s to early 1990’s net transfers
from EU to Ireland represented 4% to 7% of
Irish GDP - helped to fund massive
investment in Irish development
• Brought benefits of Single Market
• Stability from introduction of EURO currency
7. AGGRESSIVE CAMPAIGN
FOR FDI
Aggressive Campaign for FDI
• Strong belief that massive Government financial support
for new investment would, over time, be self-funding
• All incentives measured for cost/benefit to the economy
• Benefit to cost ratio must be minimum of 4 to 1
• Evaluation carried out before, during and after
investment
Aggressive Campaign for FDI
• Empirical data showed State got its money back in 47 years
• Long-term, highly attractive incentive package
designed and implemented consistently over 40 years
by all Irish governments
• Incentives apply equally to FDI and Indigenous Irish
SMEs
Aggressive Campaign for FDI
• See www.idaireland.com
• Dedicated, professional State agency, IDA-Ireland,
founded in 1970 to market Ireland around the world to
targeted foreign investors
• Separate Statutory Body
• Clear Mandate
Aggressive Campaign for FDI
• Operational freedom but with accountability for results
• Well funded
• Staff paid market rates similar to private sector
Aggressive Campaign for FDI
• IDA Expenditure 2010:
Of Which:
Grants to Industry
Property Development
Administration , Promotion
& Advertising
US$309m
US$165m
US$84m
US$60m
Total Corporation tax paid in 2009 by
companies grant assisted by IDA:
US$3.3 billion
Source: IDA-Ireland Annual Report, 2010
Aggressive Campaign for FDI
• Following initial mistakes in the early years,
mainly as a result of a lack of sector
selectivity, IDA policy then focused strongly on
two questions:
1. Which industries offered best potential for
attraction to Ireland?
2. Why those industries - what was to be the
basis for Irish international competitive
advantage in those sectors?
Aggressive Campaign for FDI
• Conclusion - concentrate on high value
added sectors as:
1. Availability, quality and cost of an
educated workforce is key driver of
international competitive advantage in
those sectors
2. High value-to-weight ratios suit Ireland’s
peripheral geographic location
Aggressive Campaign for FDI
• Three high value added sectors chosen:
1. INFORMATION TECHNOLOGY (Hardware &
Software)
2. LIFE SCIENCES (Pharmaceuticals & Medical
Devices)
3. INTERNATIONALLY TRADED SERVICES
(Financial and non-financial)
Aggressive Campaign for FDI
STRATEGY:
• Market leaders targeted first
• If successful, others would follow
• Create self-reinforcing clustering effect ‘Silicon Isle’ mirroring ‘Silicon Valley’
Aggressive Campaign for FDI
STRATEGY:
• Sector-based staff both in HQ and overseas –
20 offices in 13 countries with 40 staff
• Sector targets by country, by office and by
staff member
• ‘What gets measured, gets done’
• Performance evaluation based on
performance against targets
• Promotion, merit bonuses tied to performance
against targets
Aggressive Campaign for FDI
STRATEGY:
• IDA Project Officer acts as OSS for his/her
clients
• No separate OSS office
• Project Officers have established relationships
with concerned Government bodies
• Have all necessary forms for investor
• Monitor progress through procedures of
concerned Government bodies
• Bring in senior IDA management when undue
delays occur
Aggressive Campaign for FDI
IMPACT:
• Built critical mass of firms in each
sector
• New entrants choose Ireland, in part due
to skill concentration, thus further
reinforcing those advantages
• Strong demonstration effect of
successful early investors
Aggressive Campaign for FDI
IMPACT:
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“On a per capita basis Ireland is now ranked the
number 1 global destination for jobs by inward
investment”
Source: 2010 IBM Global Location Trends Report
Aggressive Campaign for FDI
IMPACT:
• 985 foreign companies employing
144,000 directly with a total impact of
250,000 jobs in the economy
• They spend US$23.7 billion in Ireland
annually
Source: IDA End of Year Statement 2011
Aggressive Campaign for FDI
Of which:
• Irish Services
• Payroll
• Irish Raw Materials
US$11.8 billion
US$9.3 billion
US$2.6 billion
Source: IDA End of Year Statement 2011
Aggressive Campaign for FDI
This expenditure of foreign companies in Ireland has had
important beneficial spin-off benefits:
• spurred rapid growth of Irish SMEs supplying the
FDI sector in Ireland
• brought in modern management techniques and
practices and improved competitiveness
• spawned a wave of first time entrepreneurial startups by ex senior managers of multinationals in
Ireland
• critical mass of investors in targeted sectors
resulted in strong export-oriented, clustered sectors
in ICT, Pharmaceuticals, Business and Financial
Services
Aggressive Campaign for FDI
IMPACT:
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Much faster economic
development than would
otherwise have been the case
More effective integration into
the international economy
Rapid gains in productivity
Thousands of Irish emigrants
attracted home
Improved competitiveness of
Irish firms
Widened the local tax base
Aggressive Campaign for FDI
IMPACT:
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Full employment reached in 2007
with immigrants from Eastern
Europe accounting for 10% of
workforce
However, current crisis has seen
the return of unemployment now at
14% and the re-emergence of
emigration
The Current Crisis
•Irish economy severely hit by international
financial crisis
•Banks had massively overlent money to
Irish property developers
•Property market has collapsed
•Government revenues in crisis – shortfall of
up to $28 billion
•EU/IMF Rescue ‘Austerity’ Program
underway
•Unemployment rising and emigration reemerging
The Current Crisis
•Mistake was the shift from
Investment/Export-led economy to
construction-based economy
•Good news is that Ireland has managed to
retain almost all of its existing foreign
investment
•New investment continues to arrive
•Exports rising again, despite crisis
•Massive existing foreign investment
sustaining economy today
Looking Back – Lessons Learned
• Success did not come quickly –
putting the ingredients together
was a long slow process but was
well worth the effort
• Social Partnership emerged only
in response to economic crises
• Could it have been done sooner
without crises?
• Social Partnership facilitated
policy consensus and was
absolutely crucial
Looking Back – Lessons Learned
Success in Investment Promotion, even for a low
corporate tax country like Ireland, also required:
• A professional well-paid civil service
• Strong investment in key strategic
public goods especially education
Looking Back – Lessons Learned
•At the start, mistakes were made in going
after all sectors for investment – real value of
selectivity not realised until later
•Showed the importance of leveraging
national comparative advantage – playing to
national strengths – while, at the same time,
removing administrative barriers to
investment and creating financial incentives
for investment
Looking Back – Lessons Learned
•Irish economic policies and
institutions change very little with
changes in Government
•Civil servants and staff of state
agencies do not change with
change of Government
•Enabled long term, strategic and
consistent policies to survive
outside political/electoral
timeframes
•Gave all investors great
confidence in country
Summary Conclusions
•Investment Promotion is the job of the
Government
•Its a highly competitive business worldwide
and getting even more so
•Requires wide stakeholder consensus and
support
•Must have adequate Government Budget
Summary Conclusions
•Done professionally, the money comes
back to the economy in less than 7 years
•Deciding early who does what and with
what resources is crucial
•Leadership with joined up policy followed
by joined up action is real key to success
THANK YOU!