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University of Limerick, 2002.
Chapter Two – The Irish Experience.
2.1 – The Battle for Self Sufficiency.
The policies employed by the Irish government during the first decade of
Independence were by nature conservative. Agriculture was viewed the most important
vehicle for growth in the economy. In theory, the country would thrive in a free trade
environment that allowed for the cheap importation of raw materials and open access to the
world market1. The governments finances were closely managed and no “adventurous”
initiatives were undertaken in monetary or financial areas. Some tariffs were introduced to
protect industries that faced tough competition from abroad, but over all, the states role in the
economy was limited. The United Kingdom was Irelands largest export partner, dominating
Irish exports for the next 30 years (see figure 1).
Percentage
Destination of Irish Exports
100%
80%
60%
40%
20%
0%
1924
1926
1931
1936
1938
1950
Time
UK
Other
Figure 1 – Source: Barry, F. and Bradley, J., 1997.
It was during the Great Depression and the collapse of the global free trade system in
the early 1930’s that more radical policies were adopted2. The Fianna Fáil government of
1932 implemented a set of policies that discouraged, to the point of exclusion, any kind of
foreign investment. This was mainly achieved through the Control of Manufacture Acts
(1932-4), and the high tariffs that were imposed on imports. The level of protection of Irish
1
2
Leddin A. J. and Walsh, B. M., 1998.
Ibid.
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industry would remain inordinately high for the proceeding 30 years. During the period of the
second world war, there was little concentration on industrial development, since the
government was primarily concerned with organising the economy in light of considerable
shortages of both raw materials and of manufactured goods.
The industries that arose under protectionism proved, however, to be almost
exclusively home-market oriented so that the protectionist policy had run out of steam by the
1950s3. Growth in the manufacturing industry diminished to a mere 0.8% per annum during
the 50’s, and approximately 13% of the overall population emigrated. Many firms that did set
up during this period were merely Irish residents that participated in joint ventures with
British firms and formed subsidiaries that supplied the existing Irish market.
“This period in Irish industrial development was characterised by a rather narrowly
nationalistic view of economic growth. What was important was not industrial development
but Irish industrial development. Little notice seemed to be taken of the competitive structure
of the industry, the degree of monopoly, nor the scale or efficiency of production.”4
2.2 – Transition (1949 – 1960).
After the very obvious failure of the protectionist policies during the 1950s, the
government moved towards a more outwardly oriented strategy. The creation of the Industrial
Investment Authority (1949), Córas Tráchtála (1951) and the establishment of Shannon
Airport were some of the major contributions of this change in orientation.
The IDA’s main functions were advisory and fact finding. The Act functions to be
pursued by the IDA include the initiation of industrial development schemes, advice to the
Minister for Industry and Commerce on steps for establishing new industry and modernising
existing industry, and guidance to businesspeople wishing to set up production in Ireland. In
1956, the Industrial Grants Act extended the role of the IDA to include the allocation of nonrepayable grants to individual firms in the developed areas of the country. This Act remained
3
4
Barry, F. (Ed.), 1999.
Bristow, J.A. & Tait, A.A. (Ed.s), 1968.
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in force for three years, until 1959 when the Industrial Grants Act transferred all grant giving
powers from the IDA to An Foras Tionscal and repealed the previous Act.
The year 1958 was an important milestone for the Irish economy as it marked the
publication of Economic Development, the report prepared by Dr. Whitaker which resulted in
the first programme for economic expansion5. The main elements of this programme are still
in place today: attraction of foreign investment, corporation profit tax concessions initially to
exporting and later to all manufacturing firms, capital and other grants to new and expanding
firms, absence of controls on foreign ownership of firms or on profit repatriation and free
trade with Europe.
Developments in Europe towards the creation of the Free Market and the prospect of
Great Britain (Irelands chief export market) joining the EEC, forced the Irish government to
review its policy on external trade – especially the tariff barriers, which were gradually
dismantled . “The core policy dilemma was not about whether the Irish Economy should be
open to trade and factor flows with the wider world economy… Rather, the issue was the
nature of this involvement and whether there was to be a break with the heavy dependence on
the UK market as the destination for exports of a very restricted variety of mainly agricultural
products”6.
2.3 – The First Growth Spurt
The result of all of these policy changes, was an unprecedented level of sustained
economic and industrial growth during the 1960’s and 1970’s. The manufacturing industry
was to come to the fore during this period. Manufactured exports grew twice as quickly as
merchandise exports as a whole, and between 1963 and 1973, manufacturing employment in
Ireland increased at an annual rate of 1.7 percent – almost three times the OECD average for
the time7.
5
Bristow, J.A. & Tait, A.A. (Ed.s), 1968.
Nolan, B. (et al), 2000.
7
Main Economic Indicators 1960-1979, OECD.
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During the 1970’s, Ireland had the highest level of GDP growth in the European
Community (see figure 2). Government policy, however, was not solely responsible for these
achievements, the favourable international economic environment up to the oil crises was an
essential backdrop.
Annual Percentage Change in GDP
30
25
IRL
20
FRA
15
GER
10
BEL
5
19
79
19
77
19
75
19
73
19
71
19
69
19
67
19
65
19
63
19
61
0
Figure 2 - Source: European Economy, No. 71, 2001
Trade liberalisation began in the 60’s and the Irish government cut tariffs in 1963 and 1964.
The Anglo-Irish Free Trade Area Agreement was negotiated in 1965 and the government
subscribed to the General Agreement on Tariffs and Trade (GATT) in 1967. These moves
were made in preparation to join what was then the European Economic Community (EEC).
It was acknowledged that this actions would force some firms out of business, especially in
some of the traditional industries such as clothing where Ireland would loose its comparative
advantage.
The Committee on Industrial Organisation was set up in 1965 in order to assess the
position of indigenous industry. It reported that the majority of firms were poorly equipped
and managed. It was on the basis of these findings that the government set up “adaptation”
grants to help the indigenous firms modernise. It was the combination of these factors and the
corporation tax rate of 10% that began to induce foreign companies to set up subsidiaries in
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Ireland. By 1974, new industry accounted for over 60% of industrial output, and Irelands rate
of manufacturing production was almost twice that of the USA8.
The final aspect of government policy to be targeted was wage restraint. This was
deemed necessary to keep industrial costs low and at a competitive level. In the 1970’s, the
government centralised wage bargaining under the National Wage Agreements. Considering
the mobility of the Irish workforce, the scope of manoeuvrability here is small. If the
government forced real wages below the British level, it would exacerbate emigration and
would be unsustainable.
2.4 – Recession and Recovery.
Ireland joined the EU (or the EEC as it was known then) in 1973. This coincided with
Unemployment as a Percentage of Total Labour
Force.
Percentage
10.0%
8.0%
IRL
6.0%
US
4.0%
UK
2.0%
0.0%
1960
1968
1973
1977
Time
Figure 3 – Source: OECD, Historical Statistics, 1999.
the first oil shock, when the price of oil went from $3 to $12 per barrel. A sharp recession in
the world economy was to follow. The government immediately employed counter cyclical
policy (a Keynesian manoeuvre) by increasing government current spending. One adverse
result of this political policy was that the current budget deficit rose from 0.4% of GDP in
1973 to 6.8% by 1975. It also failed to prevent the unemployment rate from increasing from
8
Source: Bureau of Economic Analysis – US Department of Commerce.
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5.7% in 1973 to 9% by 1977 (see figure 3). Irelands exports for the period, however,
continued to grow from €684 million in 1973 to €4,415 million in 1979. Employment in
manufacturing sector increased from 320 thousand to 363 thousand. The services sector also
experienced an increase of 457 thousand to 585 thousand (see figure 4). By 1978, the world
economy had recovered from its recession, and Irelands unemployment rate fell back to 7.2%
and the budget deficit fell to 3.6% of GDP.
Figure 4 – Source: Department of Finance, Statistics Release, 2002.
Figure 2
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