What Works: Success in Stressful Times. Hamish McRae
The associated massive increase in global capital flows, which Ireland was able to tap into.
Favourable demographics, for in the 1980s half of Ireland’s population were under the age of twenty-five;12 that many were unemployed further increased the potential labour supply.
The strong investment in education (at all levels) going back many years, but with a change of emphasis in the 1980s to encourage more maths, science and business studies.13
EU structural and regional funds,14 which Ireland spent well on infrastructure, especially roads-even if most Dubliners would say these initiatives did not move nearly fast enough.
Political stability, which has ensured that ever since 1957 the country has encouraged outsiders to invest in Ireland.
So the potential was there. It just needed the right policies. Here, Ireland had been unfortunate. Following its political independence from the UK, it had adhered to a policy of economic independence that ran right through to the 1960s. One key element to this was protectionism.
To give just one example, in the 1950s and 1960s nearly all the cars in Ireland were assembled there. Kits were imported in CKD (completely knocked down) form. The cars were made first on the original production lines in the UK, France, Germany or wherever, then taken to bits and packed into crates to be reassembled, painted and trimmed in Ireland. The rare imported vehicles suffered a large duty to protect the local industry. But there was no rational reason for the industry to exist at all. The quality was worse even than the same cars assembled in the UK-quite an achievement-and they cost more. Eventually, but not until the end of the 1970s, the industry was swept away.
From the 1970s onwards, after entry to the European Economic Community in 1973, the principal flaw in Irish economic policy was financial ill-discipline. Public spending rose, budget deficits soared, then tax rates were increased to try to curb the deficits … and the result was stagnation. There was a short-lived property boom at the end of the 1970s but that was followed by a slump in the early 1980s. By 1987, Ireland’s unemployment had risen to 17.5 per cent and its GDP per head was only two-thirds that of Britain’s, producing a vicious circle wherein public funds were pre-empted to pay social welfare and interest on the debt. Emigration eased the pain but many educated young people left.15 The following year The Economist magazine dubbed its survey of Ireland ‘The Poorest of the Rich’.
Then came the miracle. Just nine years later the magazine returned with another survey, and the title said it all: ‘Europe’s Shining Light’.
So what changed?
It started with politics. Ireland, like the UK in 1979, had hit an economic wall. The country’s political leadership knew it could not carry on with high-tax and high-spending policies. There was a real threat it would have to go to the International Monetary Fund for a loan to bail it out, as the UK had done in 1976. But by the middle 1980s change was in the air. In 1985 a pro-business, low-tax party called the Progressive Democrats16 had been formed and that helped create the momentum for change. It was started by Desmond O’Malley and Mary Harney to try to break the mould of the two major parties, Fianna Fáil and Fine Gael. Along with Fine Gael they also provided a constructive approach to the ongoing conflict in Northern Ireland. They won seats in the Dáil (the Irish parliament) in 1987, the same election that put in a Fianna Fáil government into power under Charles Haughey, the hugely controversial veteran rascal of a politician, who fought the election vowing not to cut public spending and then did exactly the opposite when he got in. Arguably he made the great boom possible, but my own hero of that period of Irish politics was the leader of Fine Gael, Alan Dukes, who lost the election but agreed to support the new government provided it followed Fine Gael’s economic policies. That was bad for the party-he lost the leadership soon afterwards-but great for Ireland.17
Thus the policy of cutting VAT, income tax and, perhaps most important, corporation tax has been sustained and expanded by all subsequent governments, whatever their political make-up. The mission and the market came together and the Celtic tiger was born.
2. WHAT ARE THE LESSONS?
As you might imagine, this is a story that has been picked over thousands of times. Every country with a sluggish economy wanted to know how to fix it, and the Irish model seemed the best one to bet on.
The problem is that this is a subtle tale. For it to be helpful as a model, you have to get beyond saying it was the result of low taxes and good education. You also have to acknowledge the mistakes that were made and finally to see how the country has set about correcting those mistakes. The way it has coped with its excesses is almost as useful to others as the success story itself.
We start with success. There have been several elements to this and the trick is to judge which of these were crucial and which merely nice to have.
The easy part, and one emulated by the new EU member states, is to be ‘business friendly’. That means low taxation. Ireland became a magnet for inward foreign investment thanks in fair measure to its low corporation taxes, 12. 5 per cent in 2009, less than half the average EU rate. For the new EU members it has been a flat-tax system, a single low rate on both individuals and companies.
While any country can cut its taxes at a stroke, the other general element of Ireland’s success, the availability of educated young people, takes time. Ireland reformed its education system back in the 1960s, improving secondary schooling and pumping money into its universities. The depression provoked longer stays in the education system producing a steep rise in the education levels of the Irish workforce which, accompanied by low wage expectation on its part, presented good value to potential employers. For many years another large part of the resulting human capital had left the country. Skilled people emigrated. But when growth did take off, that very emigration became a benefit, for people returned, thereby boosting the local labour pool but also bringing back the practical skills they had learnt working abroad.
Beyond these two core elements there is a well-known litany. Students of the Celtic tiger point to EU subsidies being spent rather more effectively. They cite deregulation of the service industries, the development of a new financial centre with associated tax benefits, and so on. There is also the advantage of size: it is much easier to turn round the economy of a country of three or four million people than one of fifty million plus. But while all this is true enough, I think to focus on the mechanics of the story is to miss its cultural and romantic element. That is much harder to replicate; indeed it cannot be done.
Ireland is one of the most powerful ‘brands’ in the world, with people from completely different cultures yearning for something Irish. Some thirty-five million people in the USA claim Irish ancestry.18 St Patrick’s Day is celebrated around the globe. There are Irish pubs all over the world, which bear little resemblance to the bars we went to in Dublin. (We did not even call them pubs. Pubs are an English tradition, not an Irish one. In Ireland it is a bar.) Many of the most successful rock groups are Irish, with U2 top of the league. One of the prime reasons why US companies chose Ireland as their base for the European market was that they liked the place. The tax and other incentives prodded them into doing what they rather wanted to do anyway.
But if other countries cannot be Irish, they can learn from Ireland’s experience. They can reconnect with their own citizens who have emigrated. They can promote their own cultures and identities. They can cherish, promote and benefit from their own unique qualities in an ever more homogenized world.
They can also learn how to cope with success. Many Dubliners would greet that thought with a hollow laugh, and there are certainly some negative lessons too. Dublin suffers hugely from traffic congestion, partly