Download Economic Overview The two economies on the Island of Ireland

Economic Overview
The two economies on the Island of Ireland have experienced substantial economic downturns
since the financial crisis in 2008. While the experience of property bubbles and subsequent bank
failures were notable similarities, the scale of externally imposed austerity and outcomes in the
labour market were notably different.
House prices in Northern Ireland increased substantially in the two years prior to the crash
before reaching their peak in 2007. In contrast prices in the Republic of Ireland reached their
peak following trend growth from the previous decade. Northern Ireland’s property prices still
remain just under 50% below their peak value in 2007. Unemployment, which reached a peak
of 13% in the Republic of Ireland, only rose to just above 8% in Northern Ireland in early 2013.
While banks and financial institutions in Northern Ireland faced heavy losses the cost of any
bank bailouts was borne externally by either the UK or Republic of Ireland governments. While
Northern Ireland did experience significant cuts in government expenditure since 2008, this has
not been of the same magnitude as that experienced in the Republic of Ireland. Austerity
measures totalled almost 18% of GDP in the Republic of Ireland in contrast to 9% at UK level
and slightly less and the regional level of Northern Ireland.
Northern Ireland however saw the largest fall in income of any UK region over the course of the
recession, and is now the lowest income region of the UK. Incomes in the Republic of Ireland
have also fallen substantially, but the downward trend in incomes occurred in 2008/09 in the
Republic compared to 2010/11 in Northern Ireland and the rest of the UK.
- Identify potential barriers to island wide trade and mechanisms through which to
reduce the impact of such barriers;
Main barrier to all island trade is currency which has become more of an issue due to large
fluctuations over the last 10 years. Trade in manufactured goods was roughly equal between
both economies from mid-1990s until 2000/01. From 2001 on trade from the Republic of
Ireland to Northern Ireland dropped off significantly aided by a sharp depreciation of sterling in
2002. Exchange rates stabilised until a further substantial reduction in sterling’s value in 2008
and 2009 following the global financial crash. The advent of the Euro has meant that exchange
rates between Northern Ireland and the Republic are now less sensitive to changing economic
circumstances within and between both economies. While this may have had a beneficial impact
on wider trade between the Republic of Ireland and the European Union, it may have had
unintended consequences here. The more recent depreciation of the Euro following ECB
quantitative easing highlights the volatility that plagues efforts toward increased all-island trade.
- Examine methods to enhance island wide trade such as a Border Development
Zone;
In regional analysis for both the Republic of Ireland and Northern Ireland the Border region has
maintained some of the highest unemployment rates and some of the lowest productivity levels
of any region on the Island. However the experience of ‘development zones’ from the UK has
shown scant evidence that favourable tax treatment or increased capital allowances can make
any significant in-roads in economic development. Perversely, where enterprise zones were
found to be successful the increased economic activity was found to be matched by decreased
activity in surrounding areas. Therefore there is a danger that focusing on supply side initiatives
in one particular geographic region may ultimately create areas of economic underdevelopment
in surrounding regions.
That being said, there are opportunities to harness cross-border co-operation to enhance the
border region. In particular creating complementarity between public services such as health,
education and skills may engender greater cooperation and remove a false limit on economic
growth that the border imposes.
- Identify good practice in maximising island wide trade and job creation.
The NERI has been producing research on the need for a significant rethinking of industrial
policy both North and South. In particular for Northern Ireland the current trajectory of policy
would indicate that the goal of the Northern Ireland Executive will be to attempt to compete
with Republic of Ireland in terms of attracting foreign direct investment. In particular the
current plans to devolve and reduce corporation tax powers in Northern Ireland signal a
dangerous shift away from all-island co-operation and a race to the bottom in terms of policy.
The Northern Ireland economy has suffered years of under-investment in both the public and
private sectors and any claims that Northern Ireland could emulate the success of the Republic
of Ireland economy in the 1990s simply be reducing corporation tax is simply misleading.
Rather than attempt futile competition there should be agreement between both parts of the
Island on a joint innovation and industrial policy. Northern Ireland will need significant
investment in terms of infrastructure and skills, but there is substantial room for co-operation in
terms of identifying key growth areas and prioritising and focusing state research budgets and
grants to promote mutually beneficial economic development in these sectors.