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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. 1 University of Limerick, 2002. 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. 2 University of Limerick, 2002. 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. 6 3 University of Limerick, 2002. 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 4 University of Limerick, 2002. 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. 5 University of Limerick, 2002. 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 6