— WSI_USA (@wsi_usa) March 17, 2016
Here are our excerpts concerning #GCI methodology, et al. of @wef’s The Global Competitiveness Report 2016–2017 (w PDF).
CHAPTER 1.1 Competitiveness Agendas to Reignite Growth: Findings from the Global Competitiveness Index p5-11
Monetary policy is not enough: Insufficient competitiveness is a constraint for reigniting growth worldwide
… Figure 2 shows how economies that perform poorly in the GCI have seen their central banks boost their balance sheets more than better-performing economies, and yet those with higher competitiveness have recovered faster from the financial crisis and ensuing recession, achieving faster growth rates. The fact that monetary stimulus has been more effective and growth has been higher in more competitive economies, regardless of fiscal policies followed, suggests that the constraints may be on the supply side. Improving the conditions for businesses to flourish and increase their productivity is therefore the main policy challenge for advanced and emerging economies alike.
At the dawn of the Fourth Industrial Revolution era, technology and innovation are increasingly driving development
… Innovation and business sophistication are more closely associated with income levels in general, and in emerging economies and commodity-exporting economies in particular, than they used to be. Figure 3 shows how, since 2010, for these two groups, GDP per capita has become more closely correlated with the GCI’s technological readiness, business sophistication, and innovation pillars than it is with the infrastructure, health and primary education, and market-related pillars (goods markets efficiency, financial market development, and labor market efficiency). These results illustrate how sources of productivity within firms and production units that are related to their ability to incorporate new technologies into their production processes, and that change the ways in which those firms and units perform tasks, are playing a larger role than investment in basic physical and human capital and well-functioning factor and goods markets, frequently thought to be sufficient to reignite growth. It also shows how the price changes experienced since the end of the commodity cycle and faster technological change are creating incentives for firms and policymakers to engage in more innovative activities.
Declining openness is endangering future growth and prosperity
An open, trading economy generates incentives to innovate and invest in new technologies because firms are exposed to competition and new ideas and can benefit from the technology transfer that comes from mports and foreign investment. … protectionist measures, especially non-tariff barriers, have increased and global trade has not recovered since the global trade slowdown following the financial crisis. Figure 4 illustrates that, according to GCI data, economies in all income groups have become less open since 2007, driven mainly by non-tariff barriers, including increased legal and normative requirements. Figure 5 shows that economies that are open to foreign competition (as measured by the foreign competition subpillar of the GCI) are also more innovative, suggesting the importance of openness for innovation. …
Appendix A: Methodology and Computation of the Global Competitiveness Index 2016–2017 p35-37
1st pillar: Institutions
The institutional environment of a country depends on the efficiency and the behavior of both public and private stakeholders. The legal and administrative framework within which individuals, firms, and governments interact determines the quality of the public institutions of a country and has a strong bearing on competitiveness and growth. It influences investment decisions and the organization of production and plays a key role in the ways in which societies distribute the benefits and bear the costs of development strategies and policies. Good private institutions are also important for the sound and sustainable development of an economy. The 2007–08 global financial crisis, along with numerous corporate scandals, has highlighted the relevance of accounting and reporting standards and transparency for preventing fraud and mismanagement, ensuring good governance, and maintaining investor and consumer confidence.
6th pillar: Goods market efficiency
Countries with efficient goods markets are well positioned to produce the right mix of products and services given their particular supply-and-demand conditions, as well as to ensure that these goods can be most effectively traded in the economy. Healthy market competition, both domestic and foreign, is important in driving market efficiency, and thus business productivity, by ensuring that the most efficient firms, producing goods demanded by the market, are those that thrive. Market efficiency also depends on demand conditions such as customer orientation and buyer sophistication. For cultural or historical reasons, customers may be more demanding in some countries than in others. This can create an important competitive advantage, as it forces companies to be more innovative and customer-oriented and thus imposes the discipline necessary for efficiency to be achieved in the market.
7th pillar: Labor market efficiency
The efficiency and flexibility of the labor market are critical for ensuring that workers are allocated to their most effective use in the economy and provided with incentives to give their best effort in their jobs. Labor markets must therefore have the flexibility to shift workers from one economic activity to another rapidly and at low cost, and to allow for wage fluctuations without much social disruption. Efficient labor markets must also ensure clear strong incentives for employees and promote meritocracy at the workplace, and they must provide equity in the business environment between women and men. Taken together these factors have a positive effect on worker performance and the attractiveness of the country for talent, two aspects of the labor market that are growing more important as talent shortages loom on the horizon.
8th pillar: Financial market development
An efficient financial sector allocates the resources saved by a nation’s population, as well as those entering the economy from abroad, to the entrepreneurial or investment projects with the highest expected rates of return rather than to the politically connected. Business investment is critical to productivity. Therefore economies require sophisticated financial markets that can make capital available for private-sector investment from such sources as loans from a sound banking sector, well-regulated securities exchanges, venture capital, and other financial products. In order to fulfill all those functions, the banking sector needs to be trustworthy and transparent, and—as has been made so clear recently—financial markets need appropriate regulation to protect investors and other actors in the economy at large.
11th pillar: Business sophistication
Business sophistication concerns two elements that are intricately linked: the quality of a country’s overall business networks and the quality of individual firms’ operations and strategies. These factors are especially important for countries at an advanced stage of development when, to a large extent, the more basic sources of productivity improvements have been exhausted. The quality of a country’s business networks and supporting industries, as measured by the quantity and quality of local suppliers and the extent of their interaction, is important for a variety of reasons. When companies and suppliers from a particular sector are interconnected in geographically proximate groups, called clusters, efficiency is heightened, greater opportunities for innovation in processes and products are created, and barriers to entry for new firms are reduced.
12th pillar: Innovation
The last pillar focuses on innovation. Innovation is particularly important for economies as they approach the frontiers of knowledge, and the possibility of generating more value by merely integrating and adapting exogenous technologies tends to disappear. In these economies, firms must design and develop cutting-edge products and processes to maintain a competitive edge and move toward even higher value-added activities. This progression requires an environment that is conducive to innovative activity and supported by both the public and the private sectors. In particular, it means sufficient investment in research and development (R&D), especially by the private sector; the presence of high-quality scientific research institutionsthat can generate the basic knowledge needed to build the new technologies; extensive collaboration in research and technological developments between universities and industry; and the protection of intellectual property.
Appendix B: Global Competitiveness Index 2016–2017 rankings p43-50
CHAPTER 1.2 Modernizing the Measurement of Drivers of Prosperity in Light of the Fourth Industrial Revolution: The Updated Global Competitiveness Index
p56-57 SELECTED ISSUES: DISCUSSION AND PRELIMINARY RESULTS
According to the latest thinking, innovation occurs in an ecosystem where businesses, regulations, and social norms promote connectivity, creativity, entrepreneurship, collaboration, and the adoption of the latest technologies to generate new ideas and bring new products and business models to market. These concepts are measured by four pillars: technological adoption, market size, business dynamism, and innovation capacity. … As long as new ideas cannot find a practical implementation they might contribute to knowledge accumulation but they do not immediately translate into advances in human welfare. In some cases finding a practical application for a new idea is just a matter of time, because technological progress in other fields has to occur before these ideas can be put into practical use. It is, however, crucial for a country to develop the skills and the conditions that can ignite the process of transforming abstract innovation into new products and processes.
Appendix: Updated Global Competitiveness Index Structure p63-75
CHAPTER 1.3 The Executive Opinion
Survey: The Voice of the Business Community
Here are a part of articles concerning US Presidential Election 2016. Excerpts, et al. are on our own.
Has The American Public Polarized? (w PDF) | Morris P. Fiorina @HooverInst
p16 Maybe We’re Not Polarized Yet
… As social media, personalized search, and other technological “advances” proliferate, concerned observers have expressed the fear that Americans will isolate themselves in “ideological silos” or “echo chambers” that reinforce their views and insulate them from the views of the other side. Given these technological trends, is there a serious danger that Americans will balkanize into two non-overlapping universes, each of which has its own facts and its own interpretations
of reality? …
p19 … if Fox News had been removed from cable TV in 2000, it would have reduced the vote for George W. Bush in the average county by 1.6 percentage points …
p20 … although ideological segregation on the Internet is higher than in offline media, it remains low in absolute terms and is considerably lower than in people’s face-to-face networks. Part of the reason for the failure of the segregation hypothesis is that people with extreme views “tend to consume more of everything, including centrist sites and occasionally sites with conflicting ideology. Their omnivorousness outweighs their ideological extremity, preventing their overall news diet from becoming too skewed. …
p21 … Moreover, since the focus was the segregation hypothesis, people would have to visit “opinion” sites for their views to be affected. … Only a few Americans are even occasional readers of a Paul Krugman or George Will column. Although the trace element of those who visit opinion sites does show ideological segregation, the researchers conclude that the numbers are so small that the fears encapsulated in the segregation hypothesis are largely unwarranted.
… Twitter networks tend to be fairly heterogeneous politically, in part because many of those in them are connected by only “weak ties.” Contrary to the fears expressed by those worried about ideological segregation, social media actually may lessen people’s tendency to live in echo chambers …
p22 … “Ideologically one-sided news exposure may be largely confined to a small, but highly involved and influential, segment of the population. There is no firm evidence that partisan media are making ordinary Americans more partisan.” To which one can add, no firm evidence exists that ideological media are making ordinary Americans more extreme. …
The right’s Trump phenomenon: Why the left won’t spawn a policy-free demagogue any time soon | @SeanMcElwee @Salon
… @DouthatNYT challenges the progressives who have argued in favor of #NeverTrump. He claims that the decision is harder than it initially seems for conservatives, writing, “Asking Rs to vote for Hillary is a little like asking Ds to vote for Newt Gingrich running on Ted Cruz’s platform.” The analogy isn’t entirely accurate. …
However, there are structural, ideological and demographic reasons to believe that Trumpism is a phenomenon unique to the GOP. After all, Trump doesn’t have an ideology, and throughout his career has preferred whichever party is most expedient to him. …
… how the rise of Trumpism is rooted in structural differences between the two parties… @MattGrossmann and @DaveAHopkins… show that we can expect “Republican politicians to discuss policy in broad strokes and Democratic politicians to emphasize particular policies aimed at each constituency.” On the right, candidates are rewarded for commitment to ideology, while on the left candidates are rewarded for policy achievements. …
… differences in views about governance and compromise in the parties. Democrats are consistently more favorable toward compromise than Republicans… Democrats are also more likely to say they want party leaders to move in a moderate direction (rather than a liberal or conservative direction). Trump’s bullying, uncompromising stance plays far better with Republicans than a similar stance would with Democrats.
… how the Democratic coalition is an interest group network politicians must navigate. To win a Democratic primary… a candidate has to win over and woo a number of interest groups: abortion rights groups, labor, the NAACP, and others. On the right there isn’t a network of interest groups but rather a few powerful donors driven by ideology…
… ideologically, the Republican Party has moved dramatically right, while the Democratic Party has moved only modestly to the left… the Democratic moves to the left have largely coincided with public opinion …
… @LeahRigueur has argued, though the GOP has recognized its failure to win black voters for half a century, it has only dug itself deeper in a hole, ignoring dozens of reports suggesting ways the party could change.
… the GOP has remained incredibly white, even as the country has become more diverse. As political scientist @mtretail shows, Trump’s primary coalition was far more racially resentful, opposed to immigration and colder to Muslims than the Romney and McCain primary coalitions. Trump’s rise is rooted in white backlash to the Obama presidency…
… @DouthatNYT wants to imagine a Democratic Trump. However, the causal factors that give rise to him simply can’t be replicated on the Democratic side. …
… Trying to defeat Trumpism without ameliorating the structural causes that created him will only entrench the problem. …
Clinton or Trump: Who does China Want? | @ChathamHouse
– In Beijing’s eyes Clinton is no friend, but a Trump victory would open a new era of uncertainty, writes @nivincent
… There’s a reason for such hostility. Clinton’s advocacy of female leadership in the West has irritated many in China in the past two decades. In 1995, she declared in Beijing that ‘women’s rights are human rights; human rights are women’s rights’… And in 2010, her reiteration of the US’s right to freedom of navigation in the South China Sea provoked lingering anger in China.
Even after she stepped down as President Obama’s Secretary of State in 2013, she continued to cause controversy. For instance, when President Xi Jinping co-hosted a UN meeting on women’s rights last September… ‘shameless’.
In response to this remark, the Communist Party tabloid, The Global Times, claimed the Chinese people ‘despise her a little’. ‘It looks like Hillary is in a panicked frenzy, her eyes have turned red… She has started to copy Trump’s speaking style and allowed herself to become a fierce big mouth,’…
… ‘On a geopolitical level, if American allies in the region, namely Japan and South Korea, refuse to shoulder more financial responsibility for US military protection, it might provide China with a strategic opportunity to expand in the region.’…
And Trump as US president could also give the Communist Party a morale boost, Sun said. ‘On a domestic level, Trump’s controversial rise might reaffirm Communist Party leaders’ belief that China’s cadre selection process has more merit… it’s at least good for domestic propaganda.’ …
Here is an article, Celtic Tiger roars again – but not for the poor (7 October 2004) | @achrisafis @guardian. Italicization, underlines, et al. are on our own.
Darren Dent surveyed the concrete walkways of Stella Gardens, the low-rise Dublin estate…
Stella Gardens is on the edge of Dublin 4, the capital’s best postcode and the heart of Ireland’s economic miracle. Here the Celtic Tiger boom of the 90s roared its loudest and Dublin’s newly rich stepped into the satin slippers of the old British colonial masters, taking over redbrick villas now worth millions.
A tiny cottage costs at least €300,000 (£210,000), coffee costs the same as New York and fast food is among the most expensive in the world at €6.50 for a burger at a greasy spoon.
“All this wealth is sitting in one corner and we are sitting in the other,” Mr Dent said of the boom which transformed the country over the past decade. “We feel excluded, we’re not part of this great rich image.”
Just as Ireland’s economic glory days appeared to be levelling out, a leading economist predicted the dawn of a new “golden period” this week, dubbed Celtic Tiger II: The Sequel.
Ireland, once one of the poorest countries in Europe, could become one of the richest in the EU, according to Dan McLaughlin, the chief economist at the Bank of Ireland. He said employment would rise by 50,000 a year and Ireland would have to lure workers from the EU’s latest members in eastern Europe.
This second round of economic expansion would create huge budget surpluses for Ireland. Businesses would continue to flood in: Google opened its first headquarters outside the US in Dublin yesterday.
… According to the UN the Irish are the richest people in the world after Norwegians and Luxembourgers. Dublin – where house price rises have left many with no hope of owning a home – is one of the most expensive cities in Europe.
But the gap between rich and poor has grown so much that the UN said recently Ireland had the highest levels of inequality of all western countries except the US. In spite of its new-found prosperity, Ireland has the highest proportion of people at risk of poverty in the EU. Some single parent families survive on less than €150 a week. Many say they can’t pay for their children to go to the doctor when they are sick.
The elderly, disabled and young are particularly at risk, while immigrants who arrived with the boom often live in appalling conditions. A European report released last week said one in five Irish people was classed as poor: taking home less than 60% of the average wage. The OECD puts the poverty level at about 15%.
Inequality remains the great taboo in a young state with a recent memory of the injustices of colonialism. The church, anti-poverty campaigners and local councillors have criticised the government for underspending on welfare, health and education. Some say the authorities refuse to accept the facts about poverty while the hedonistic rich enjoy high-spending lifestyles.
The ongoing tribunals into Ireland’s culture of backhanders in the 80s have left many fearful of political greed and corruption.
Newspapers question why spending on social welfare is so low when the government has ploughed more than €250m into horse and greyhound racing over the past four years.
Father Seán Healy, the director of the Conference of Religious of Ireland Justice Commission, which issued a report on poverty this week, urged the government to raise its spending on social provisions, health and education, which currently falls below EU norms, and to offer free healthcare for every child.
He said the government was listening to him, despite the former finance minister, Charlie McCreevy, saying he was “spouting rubbish”. The government says it has measures in place to combat poverty.
Father Healy said: “The per capita income is one of the highest in Europe. But there is a realisation that some people are getting left behind.”
Daithí Doolan, a Sinn Féin councillor in Dublin, said people came to him after being evicted from their homes which were knocked down to make way apartment complexes.
Mr Dent, who counsels addicts from Stella Gardens, said: “I see the same people coming in with the same problems … In the poor areas, history is repeating itself.”
Evaluating Australia’s climate policy action (w PDFs; 12/04/2018) | Ursula Fuentes Hutfilter, Jasmin Cantzler, Fabio Sferra, Bill Hare, Gaurav Ganti, Matt Beer @ca_latest
CLIMATE CHANGE AND ENERGY – POLL 2018 | @lowyinstitute
State of the Climate 2018 – Australia’s changing climate | @BOM_au
CLIMATE POLICIES OF MAJOR AUSTRALIAN POLITICAL PARTIES (PDF; 05/2019) | @climatecouncil
Speech: Climate Change and the Economy (12/03/2019) | Deputy Governor Guy Debelle @RBAInfo
AUSTRALIA AND CLIMATE CHANGE Address (07/07/1997) | The Hon Alexander Downer, MP, Minister for Foreign Affairs @dfat
State and territory government responses to climate change | Parliament of Australia
Climate change, health and wellbeing: challenges and opportunities in NSW, Australia (PDF; 12/2018) | Neil Hime, Aditya Vyas, Kishen Lachireddy, Stacey Wyett, Benjamin Scalley, and Carlos Corvalan @NSWHealth
CLIMATE-READY VICTORIA (PDF; 11/2015) | @DELWP_Vic
DRAFT: Climate change in Queensland (PDF; 2016) | @QldEnvironment
South Australia’s Approach to Climate Change (PDF) | Julia Grant @SAEnvirWater
Climate change and waterways | WA Department of Water and Environmental Regulation
Potential Impacts of Climate Change on Tasmania’s Terrestrial and Marine Biodiversity and Natural Systems (PDF; 08/2008) | Tasmania Department of Primary Industries & Water
CLIMATE CHANGE: MITIGATION AND ADAPTATION OPPORTUNITIES IN THE NORTHERN TERRITORY – DISCUSSION PAPER (PDF; 2018) | Northern Territory Government
Climate Change | @EnvironPlan
Climate change poses risk to Australia’s financial stability, warns RBA deputy governor (12/03/2019) | @murpharoo @guardian
Big Australian finance players sign on to fight climate change (27/03/2019) | @MaggieCoggan @ProBonoNews
Position on Climate Change | @ausbanking
The Economics of Climate Change (w PDF; 2014) | @ceda_news
Analysis: $130 billion per year benefit to GDP by avoiding climate change (w PDF; 24/04/2019) | @TheAusInstitute
How much will it cost to deal with climate change? (06/05/2019) | JOHN QUIGGIN @insidestorymag
Future proofing Australia from the impacts of climate change is an economic issue of significance. (10/09/2018) | @CarbonMarketIns
Transform our economy (w PDF; 11/2018) | @AusConservation
What Will Climate Change Do to the Economy? (w Video; 08/21/2014) | WILLIAM NORDHAUS @YaleInsights
Australia’s economy will suffer if we fall behind on climate action (06/18/2014) | Martijn Wilder @ConversationEDU
Economic consequences of alternative Australian climate policy approaches (PDF; 03/2019) | Brian S. Fisher @ BAEconomics
The political economy of climate change (05/30/2014) | Australian Independent Media Network
The Australian Response to Climate Change: business as usual or legal innovation? (PDF) | Nicola Durrant @QUT
How Climate Change Affecting Australia? (01/12/2019) | @climatereality
Climate Change Impacts on Australia (PDF; 2008) | Garnaut Climate Change Review
Impacts of Climate Change (Word) | Climate Change Authority @ Australian Government
A New Approach in Australia to Just Transition | Tony Maher @WorldResources
Post-political debate?: Expert dissensus and the failure of Australia’s ETS (PDF) | Beck Pearse @ppesydney
Australia is being devastated by climate change. So will it swing the election? (05/08/2019) | Hilary Whiteman @CNN
ClimateWorks is an expert, independent adviser, committed to helping the transition to net zero emissions by 2050. | @ClimateWorksAus
AUSTRALIA’S CLIMATE SECURITY | @centrepolicydev
Australia urged to take lead on climate change (22/02/2008) | Rachel Nowak @newscientist
Climate change | @dfat
Climate change: the case for action | Julie Styles @ Parliament of Australia
Climate change (2017) | Foreign Policy White Paper @ Australian Government
Australia and Climate Change Negotiations: At the Table, or on the Menu? (w PDF; 19/06/2015) | Howard Bamsey (@ANURegNet) & Kath Rowley (Climate Change Authority)
The Carbon Tax in Australia (05/05/2017) | @CPI_Foundation
Directors’ Liability and Climate Risk: Australia – Country Paper (PDF; 04/2018) | Sarah Barker @comclimatelaw
The Politics of Climate Change in Australia (PDF; 09/2013) | MARK BEESON (@MurdochUni) & MATT MCDONALD (@POLSISEngage) @ Australian Journal of Politics and History
Australian Climate Change Regulation and Political Math (PDF; 22/09/2018) | Tim Baxter, George Gilligan, Cosima Hay McRae @MelbLawSchool
A New ‘Normal’ for Australia and Indonesia on Climate Change | Arjuna Dibley @AsiaSociety
Australia, Climate Change and the Global South (PDF; 2011) | LORRAINE ELLIOTT @ANU_APCD
ICONS AT RISK: CLIMATE CHANGE THREATENING AUSTRALIAN TOURISM (PDF; 2018) | @climatecouncil
Climate Change (30/04/19) | @austmus
Australia’s Farmers Challenged by Climate Change: Farmers down under face the first serious threats from global warming (03/19/2015) | Brittany Patterson ClimateWire,@EENewsUpdates,@scientificamerican
Adapting agriculture to climate change (PDF) | National Climate Change Adaptation Research Facility @Griffith_Uni
Australia court refuses coal mine project on climate change grounds (02/11/2019) | Erin McCarthy Holliday @JURISTnews
Climate adaptation in regional mining value chains: A case-study of the Goldfields-Esperance Region, Western Australia (07/2013) | Barton Loechel, Jane Hodgkinson, Suzanne Prober and Kieren Moffat @CSIROnews
Climate change and mining – A Foreign Policy Perspective (PDF; 06/2016) | Lukas Rüttinger (@adelphi_berlin) & Vigya Sharma (@energypovertyUQ) @ClimateDiplo
Arctic cold front to send temperatures plunging 10C across the entire country – as Melbourne and Sydney brace for a week of biting winds and rainfall https://t.co/PnOc6jA8u9
— Daily Mail Australia (@DailyMailAU) May 7, 2019
— BobdadQ+ (@Captbobdad) May 3, 2019
Wavy Jet Stream Update: Australia to feel the effect of less Solar Energy going into the Oceans with Antarctic Blast during Summer period.. https://t.co/gR0d6vMDoe link https://t.co/dUVuqMu4Dy this has nothing to do with CO2 pic.twitter.com/kKFoxUY959
— Climate Realists (@ClimateRealists) February 12, 2019
— John Pratt (@Jackthelad1947) July 1, 2017
— Nine News Sydney (@9NewsSyd) May 1, 2019
— Climate Council (@climatecouncil) May 22, 2017
— WorldSolutions light (@WSlightly) July 7, 2016
— WorldSolutions light (@WSlightly) February 1, 2015
— World Solutions (@_WorldSolutions) January 20, 2015
Here is a paper, WHAT WENT WRONG IN IRELAND? (PDF; May 1, 2009) | Patrick Honohan, Trinity College Dublin. Underlines, italicization, excerpts, et al. are on our own, not the author’s.
With its fiscal, competitiveness and banking crisis, Ireland is among the most severely affected countries in the global crisis. Yet its sustained growth achievement for almost two decades has been widely admired. This note explains how and why Ireland has entered the recession so poorly positioned. Until about 2000, the growth had been on a secure export-led basis, underpinned by wage restraint. However, from about 2000 the character of the growth changed: a property price and construction bubble took hold. This boom sustained employment and output growth until 2007 despite a loss of wage competitiveness. The banks fuelled the boom, especially from 2003, exposing themselves both to funding and solvency pressures. Successive Governments had bought industrial peace (and at first wage restraint), with tax reductions, relying increasingly on volatile sources of revenue, thereby making the tax base increasingly vulnerable to a downturn. Among the triggers for the property bubble was the sharp fall in interest rates following euro membership: within the euro zone also the disciplines of the market which had traditionally served as warning signs of excess were muted. Lacking these prompts, Irish policymakers neglected the basics of public finance, wage policy and bank regulation.
WHAT WENT WRONG IN IRELAND?
1. Introduction and overview
During the 1990s, Ireland emerged from a lengthy period of economic stagnation marked by high unemployment, emigration, and crippling public debt despite high tax levels. From 1988 to 2007 real GDP expanded by 6 per cent per annum on average (reaching double digits on average during 1995-2000). Even more astonishing, the unemployment rate shrank from 16 per cent…in 1994 to 4 per cent in 2000 – essentially full employment for the first time in modern history. Non-agricultural employment jumped from 33 per cent of the population in 1993 to 41 per cent in 2000 and 46 per cent by 2007…
But, after almost two decades of rapid growth, Ireland’s economy has collapsed more severely than almost all others in the current economic downturn. Real GDP fell by over 2 per cent in 2008 and is expected to fall 8 per cent in 2009 and a further 3 per cent in 2010. The downturn in the real economy has been reflected in the sudden emergence of a twin crisis in the banking sector and in the public finances. These in turn have fed back negatively into credit availability and rising tax rates deepening the output loss.
What went wrong? …combines hubris formed during the years of solid growth (before about 2000), the unprecedented experience on inward migration and the demonstration effect of financial excess in neighbouring countries. EMU membership plays a subtle role in the story in the way in which it lulled policy makers into a false sense of security. At the same time, having the euro has equally protected Ireland from an even worse financial collapse today.
It was always to be expected that Ireland would be particularly exposure to a global downturn, considering the exceptionally large contribution of exports to GDP and its vertical integration of much of Ireland’s manufacturing sector into the global production chains of major multinational firms. These were characteristics which, when combined with the sustained growth in World Trade contributed to a sustained output boom for over 15 years. Now they had gone into reverse.
Moreover, by mid-2008, the Irish export sector had to cope with a sharp slide in the value of Sterling – the currency of neighboring Britain, still a major trading partner. Indeed, the sudden fall in sterling left even the domestic retail sector exposed as households crossed the border into Northern Ireland to take advantage of suddenly lower prices.
But the Irish crisis from 2007 on was not merely an aspect of international pressures. Ireland was relatively poorly positioned heading into the global recession for three distinct but related domestic reasons: a home-grown banking crisis, a trend loss in wage competitiveness that had been underway since 2000 and a tax structure whose yield was far too heavily dependent on a continuation of the boom.
Two distinct growth phases
To understand what went wrong it is essential to distinguish between two different growth phases. Up to 2000 there was the true “Celtic Tiger” period of exceptional export-led growth with moderate wage and price inflation and healthy public finances. This began back in the late 1980s when, after several false starts, Government finally tackled its over-indebtedness with tough spending restraint, and managed to negotiate a series of centralized social partnership agreements which seem to have bought wage rate moderation in return for income tax concessions. This confidence-restoring policy package, given a competitiveness boost by the successful devaluation of 1986, launched the economy on a belated convergence in living standards towards the highest in Europe. An expanded flow of European Union structural funds amounting to as much as 3 per cent of GDP also helped fund sufficient public infrastructure in those years. The historic pattern of net emigration was dramatically reversed.
By 2000, the convergence phase was over, but rapid growth continued in Ireland – though now the sources of growth shifted sharply. An unsustainable decade-long property price and construction boom, which began before that of the US and UK and went further than these both in price and quantity, had taken over from exports as the main driver of Irish growth. Initially prompted by the increased household formation (related to unprecedented levels of net immigration) and by the sharp fall in interest rates that accompanied the transition to EMU membership, the property boom was increasingly financed after 2003 with foreign borrowing by the banks.
At the same time, the negotiated wage-restraint-for-income-tax-concessions bargain continued to be renewed. Government could afford to offer these concessions because of the buoyant revenue from the construction boom and from corporate profits, on which they became increasingly reliant, insouciant of the increasing vulnerability of the tax base to a downturn. But the apparent restraint in negotiated base wages began to lose relevance as workers negotiated supplementary wage increases. Although international competitiveness began to be eroded, the effects were not yet felt in aggregate unemployment while the domestic boom continued.
Poorly positioned for the global crash
Thus, the international pressures on the Irish economy since early 2008 have been strongly exacerbated by the unwinding of the property price and construction boom, and by the tax collapse and uncompetitive wage structures it has left in its wake.
Real residential property prices peaked in late-2006 and a strong reversal set in both in prices and in activity. The collapse of the construction and property bubble, has brought banking difficulties in its wake. This would all have resulted in a recession even without the global crisis, though the banks would have been better placed to survive without exceptional intervention, and the government would have been able to take offsetting fiscal action had it not been for the collapse in construction-related tax revenues. …
2. Fiscal crisis
The fiscal crisis has been driven partly by an autonomous surge in the share of spending in GDP (after 2004), but more spectacularly by a remarkable collapse in tax revenues in 2008-9. While tax revenue has shrunk in many countries in the recent economic downturn, the revenue collapse in Ireland has been much more pronounced.
Much of the reason for the revenue collapse lies in the systematic shift over the past two decades away from stable and reliable sources such as personal income tax, VAT and excises and towards cyclically sensitive taxes. There has been more and more dependence on corporation tax, stamp duties and capital gains tax (in that order). These three saw their share in total tax revenues rise steadily from about 8 per cent in 1987 to 30 per cent in 2006 before falling to 27 per cent in 2007 and just 20 per cent as soon as the economy turned down in 2008.
Although corporation tax is charged at a very low rate (currently 12½ per cent), revenue from this source grew from little over 1 per cent of GDP in the late 1980s to almost 4 per cent a decade later. A large fraction of this has come from multinational corporations in financial and non-financial sectors. Indeed, Ireland became quite a location of choice for firms seeking to shelter sizable profits from higher tax rates elsewhere. The surge on corporation tax was due not only to the property boom of the 2000s, but benefited significantly from internationally-oriented manufacturing and services, and from the high profitability of the domestic private service sector. …
To an extent, the growing reliance on these “fair weather” taxes has been an almost automatic albeit unintended consequence of the combination of the Social Partnership process combined with an almost unbroken period of rapid growth. From 1987, the former process of triennial tripartite national pay agreements was resuscitated with a view to achieving economic recovery. In each negotiation, in order to obtain or cement agreement of the unions to moderate basic pay trends, Government offered policy concessions, generally including an explicit or implicit understanding that income tax would be reduced. These tax reductions did help to buy wage restraint in the 1980s and 1990s, but left the government accounts exposed to a downturn. The sustained output, profit and asset price boom which extended for two decades from 1988 – with only two brief hesitations in 1993 and 2001/2 – lulled policymakers into a false sense of security as to the sustainability of the revenues from cyclically sensitive taxes, and induced them to take advantage of the extra revenues by narrowing the base of the personal income tax and lowering rates. To be sure, lower tax rates were in the air of international policy discussions from the 1980s, and this thinking also influenced policymakers in Ireland, but Ireland brought them further than most. Thus, at pay rounds, Government negotiators could offer concessions in those taxes that are felt by the working person — especially income tax but also some expenditure taxes. …
In 2008, tax revenue fell by almost 14 per cent — but the percentage fall in the cyclically sensitive taxes was much larger, at 36 per cent. The differential falloff in revenue continued and even intensified into the first two months of 2009.
Had Ireland’s tax structure been less cyclically sensitive, the fall in revenue would have been much lower. Indeed, if cyclically sensitive taxes had been back at their 1987 share of total revenue, the fall in revenue in 2008 would have been much lower: 8 per cent instead of 14 per cent.
…the sudden collapse in taxation. …the way in which Government spending had a strong upward momentum. It doubled in real terms between 1995 and 2007 for a real growth rate of 6 per cent per annum. With GDP and GNP growing even faster, this made for a generally falling or stable ratio until 2003, but thereafter the ratio grew, especially as soon as this started to slow in 2007.
Actually, spending grew by over 11 per cent real in both 2007 and 2008, reflecting an unfortunate late relaxation of spending which has worsened the deficit in the crisis just when it began to matter.
It is clear, then, that a return to budgetary stability requires not only a tax adjustment but also a reining in and rollback of spending; such a policy has been announced by the Government in the supplementary budget of April 2009.
3. The property bubble and the banking crisis
Even if the lower real and nominal interest rates from 1998 meant that any given income could support the servicing of much higher loans, the three-fold increase in average real property prices from 1994 to 2006 was the highest boom in any advanced economy in recent times. Long before it peaked, it looked unsustainable to most commentary. Nevertheless, from 2003 on, banks continued to ease loan conditions such as maximum loan-to-value ratios. These continued to fall right through 2006 despite the increasingly evident vulnerability of the bubble. Competitive pressure on the leading banks to protect market share came especially from reckless expansion by one bank, Anglo-Irish (whose market share among Irish-controlled retail banks jumped from 3 per cent to 18 per cent in a decade, as it grew its total portfolio by an average of 36 per cent real). Foreign controlled banks, especially the local subsidiary of HBOS also contributed.
Bank regulation, although on the surface compliant with international standards, was complacent and permissive. Certainly it should have impeded the growth of Anglo-Irish bank. And it should have acted more vigorously to restrain the relaxation of lending standards: by 2006, fully two-thirds of loans to first time buyers had loan-to-value in excess of 90 per cent; one-third were getting 100 per cent loans. Regulatory stress tests were too timid (for example employing only a 20 per cent fall in house prices). …
Banks funded the surging loan demand by huge foreign borrowings. By early 2008, net foreign borrowing by Irish banks had jumped to over 60 per cent of GDP from 10 per cent in 2003. Irish-controlled banks, long active in the retail market in Northern Ireland and in Britain, were also vigorous lenders in these and other property markets in Europe and North America during these years.
More or less simultaneously with Britain and the US, real residential property prices in Ireland peaked in late 2006. Loan demand slowed and construction – which had employed over 13 per cent of the workforce – began to contract.
At first, the banks were relatively unconcerned, their share prices peaked in February 2007, but remained high through the remainder of that year. Although they had become highly dependent on property-related lending (which now accounted for over 60 per cent of their total lending, up from less than 40 per cent only four years before), the perception was that most household mortgages would continue to be serviced even if house prices fell back by 20-30 per cent. The growing international banking crisis cast doubt on such complacency, and especially after the rescue of Bear Stearns, the liquidity of Anglo Irish bank came under repeated pressure. After the collapse of Lehman Brothers in mid-September 2008, Anglo was unable to secure funding and effectively failed, requiring a government rescue.
Fearing a contagious reaction on confidence in the other banks, the authorities decided not to put Anglo into a government-controlled winding-up, but instead, extended a systemwide bank guarantee on, and with effect from end-September 2008.
The prospective budgetary cost if this guarantee (should it have to be called), together with the dramatic collapse in tax revenue which was becoming increasingly evident, began to put upward pressure on the secondary market yields of Irish Government securities. The spread over German Federal Government bonds at 10 years maturity jumped from about 30 basis points in September reaching 284 basis points in March 2009 before falling back.
Although all of the banks are currently reporting a healthy capital position, bolstered in the case of the two biggest ones by the Government’s injection in the form of preference shares of a total of €7 billion (or over 2 per cent of their aggregate balance sheet), there is a large discrepancy between these reported figures and the market’s assessment of the true value of equity shares in the banks, considering the likely scale of future loan losses beyond those currently acknowledged by the banks. The banks’ share prices have fallen to as low as 1 per cent of their peak value of just two years ago. …
The Government announced in April 2009 that a National Asset Management Agency would be created to acquire the development property portfolio of the banks at a written-down value. The book value of the loans to be purchased was put at €80-90 billion, or about 50 per cent of GDP. If (as seemed likely) the valuation process for the loans resulted in write-downs bringing capital below regulatory levels, the Government will inject common equity, likely taking a substantial majority stake in the banks, though they have indicated reluctance to become outright owners,
4. Loss of wage competitiveness
From 1986 to 2000, wage restraint, generally attributed in part to the effect of the centralized pay negotiations, but owing something also to the high initial level of unemployment and the dampening impact of immigration (econometric work is inconclusive on these points), helped generate and sustain an era of full employment.
But after 2000, wage competitiveness deteriorated. By 2008, hourly wage rates had raced ahead of those in competitor counties, when measured in a common currency, by as much as 36 per cent.
Sooner or later, this loss of wage competitiveness was sure to affect employment expansion, but this was masked and delayed by the construction boom. Employment in the construction sector itself grew strongly from about 6-7 per cent of total employment in the early and mid-1990s to over 13 per cent in 2007. This is what sustained overall employment levels despite the loss of wage competitiveness.
An interesting feature of this pay process was that public sector workers were able to maintain a significant average wage premium relative to private sector workers during the Celtic Tiger period. …
5. The subtle role of EMU membership
Although growth remained strong for most of the first decade of Ireland’s membership of the eurozone, the analysis we have presented suggests that the seeds of the crisis were sown around the time the single currency began at the beginning of 1999. But was this a causal factor or a coincidence?
Elements of eurozone membership certainly contributed to the property boom, and to the deteriorating drift in wage competitiveness. Low interest rates and the removal of exchange rate risk facilitated the boom; the insensitivity of the exchange rate and of interest rates to domestic developments removed a traditional external constraint or at least warning sign. The enlargement of the EU also meant that the boom could continue longer than otherwise, fuelled as it was by strong inward migration.
Specifically, real interest rates 1998-2007 averaged minus 1 per cent, compared with over 7 per cent in the ERM period (even excluding the crisis of 1992-3) and 3¾ in the floating rate period between the two. The fall in nominal interest rates was even steeper. No wonder long-lived assets like residential property, capitalized at permanently lower discount factors, seemed and were appropriately valued more highly than before. …
Up to 2003, the property boom was financed without significant recourse to foreign borrowing, but after then the banks started to borrow heavily from abroad. This was an effortless undertaking thanks to the removal of currency risk and went essentially unnoticed by analysts, the focus of policy attention having shifted away entirely from balance of payments concerns. Unlike imbalances of the past, overborrowing did not lead to interest rate increases, again because currency risk had been altogether removed. Only when credit risk became an issue after September 2008 did the financial markets belatedly sound a warning sign.
… To be sure, all of these imbalances and misalignments could have happened outside of EMU – indeed, similar problems were experienced in other non-euro countries in the EU and the EEA. But the policy antennae had not been re-tuned in Ireland, and corrective action that could and should have been taken (fiscal policy, bank regulation, centralized wage negotiations) were neglected as a result. A costly error that will not be repeated in Ireland and should not be repeated elsewhere..
6. Concluding remarks: Lessons
The Celtic Tiger period represented a solid convergence of Ireland to the frontier. But it ended in 2000, to be succeeded by an old-fashioned property bubble. The lengthy period of success lulled policy makers into a false sense of security, not to say invulnerability. Captured by hubris, they neglected to ensure the basics: a robust tax system, a mechanism for ensuring wage rates—especially those in the public sector and as such under government control—did not get out of line internationally, and above all, they largely ignored the need for conventional prudential regulation of the main banks, allowing a rogue bank’s reckless expansionism to destabilize the whole sector. …
Macro-modellers simulating possible recovery paths have concluded that the future path of GDP in Ireland will be lower than had been projected before the crisis by at least 10 per cent, and that, while recovery could begin by 2011, the economy will not have return fully to its equilibrium growth path before 2015. It should thereafter be possible to maintain the fundamental conditions that allowed the Irish Economy to reach the high levels of output and productivity attained by 2000, including the quality of education, social and physical infrastructure. The main domestic threats to this (that is, apart from the risk of a more prolonged global recession, especially if accompanied by protectionist policies abroad), would be the danger that policy is insufficiently decisive in correcting the public finances and cleaning-up the banks, and that wage determination processes are insufficiently flexible to deliver the declines in real wages now needed at a time when prices are falling.
On these matters, government, employers and trade unions are currently feeling their way towards politically and socially acceptable solutions.
Here is an article, Warning that house prices may fall by 80% (Jan 13, 2009) | Laura Slattery. Underlines, italicization, et al. are on our own.
HOUSING MARKET: IRELAND WILL see more demolition than construction of houses over the next decade, as the economy struggles to recover from the collapse of the housing market and the emergence of “zombie” banks, UCD economist Morgan Kelly told the conference.
In a presentation that drew several collective intakes of breath, Mr Kelly predicted that house prices would fall by 80 per cent from peak to trough in real terms.
“Construction, but not demolition, of residential and commercial property will fall to zero for the foreseeable future,” he said.
Low levels of education among those employed in construction – where worker numbers peaked at about 280,000 – meant retraining would not be straightforward.
Recovery will be slow: “It has taken us 10 years to get into this situation – it will in all likelihood take us 10 years to get out of it.”
Mr Kelly said he had been hailed as being extremely prescient as a result of his warnings in relation to the property bubble, when in fact he and a handful of other “amateurs” were merely stating what was obvious.
Sparing no blushes, he said professional economists in the Central Bank and the Economic and Social Research Institute “need to look very closely at their analyses of the Irish economy and figure out what went wrong”.
Mr Kelly said Ireland’s “reputational capital” had been damaged by “chancers” such as ex-Anglo Irish Bank chairman Seán FitzPatrick, who had been abetted by “buffoons” such as former financial regulator Patrick Neary, Minister for Finance Brian Lenihan and the Taoiseach.
In discussing the €110 billion given in loans to developers, Mr Kelly said a typical regional housing collapse in the US saw banks sustain a 20 per cent loss on these loans, but the narrowness of the Irish market increased the risk of “substantially larger losses” for Irish banks.
“The guarantees of Anglo and [Irish] Nationwide liabilities have a strong chance of being called in over the next 21 months,” he said. Extending the Government guarantee to these two financial institutions was “extraordinarily unwise” and could produce losses that the State cannot afford to repay.
The global financial crisis may have been positive for the Irish economy as it “stopped us dragging ourselves even deeper into our hole,” he said. “If it had taken another year or two, we would have ended up in an Icelandic-shaped hole, which is not to say that we won’t end up in one.”
Mr Kelly said the Government should abolish stamp duty on property, compile proper price and quantity statistics and restore competitiveness through a public sector pay cut of 10 per cent.
A paper by TCD economist Patrick Honohan on the banking crisis (What Went Wrong In Ireland?) argued that capital injections in the banks were a prerequisite for recovery. The financial regulator needed to decide now which banks had systemic importance to the economy – in other words, are “too big to fail”, and which are “zombie” banks.
“The goal is to avoid the continued operation of an undercapitalised, error-prone bank with a flawed business model and administrative practices, a problematic customer base and a compromised management facing distorted incentives,” the paper stated.
Here is an article, Entrepreneurship Takes Off in Ireland (JAN. 17, 2008) | JAMES FLANIGAN @nytimes. Excerpts, underlines, italicization, et al. are on our own.
DUBLIN — Ireland is now alive with enthusiasm for entrepreneurs, who seemingly rank just below rock stars in popularity.
For evidence, consider the Ernst & Young accounting firm’s award for Irish Entrepreneur of the Year. The award show was prime-time television fare in October. (The winner, Liam Casey, runs a business…
The change began when Ireland entered the European Union in 1973. In subsequent years, the government rewrote its tax policies to attract foreign investment by American corporations, made all education free through the university level and changed tax rates and used direct equity investment to encourage Irish people to set up their own businesses.
“The change came in the 1990s,” said James Murphy, founder and managing director of Lifes2Good, a marketer of drugstore products for muscle aches, hair loss and other maladies. “Taxes and interest rates came down, and all of a sudden we believed in ourselves.”
The new environment also encouraged Ray Nolan, who founded Raven Computing in 1989 to provide software for lawyers to keep track of billable hours. He sold that company and founded another that created software for companies to manage billing and receipts. And in 1999, he founded Web Reservations International to provide booking and property management for hostels that cater to backpackers and economy travelers.
“Hostel owners needed to keep track of people sharing rooms, and bookings for Americans coming to Dublin for three nights,” said Feargal Mooney, chief operating officer of Web Reservations. “Hostel accommodations go for 10 to 20 euro a night,” he said, or $15 to $30 at today’s exchange rates, “so booking reservations in them wasn’t profitable for the big travel companies.”
As the business grew — its 100 employees and banks of computers now handle reservations for some 50,000 hostels in 166 countries — Web Reservations was offered an equity investment by Enterprise Ireland. “But we said this is our baby, we didn’t want to give up equity,” Mr. Mooney said. …
Government help for Irish entrepreneurs grew out of an overall economic policy devised in 1987 that reduced personal taxes, said Kevin Sherry, a director of Enterprise Ireland who specializes in start-up companies.
Income tax rates in Ireland today are 20 percent on the first $50,000 of income and 41 percent on income above that. But there are value-added taxes of 21 percent levied on all goods and transactions, with the exception of health and medical services, children’s clothing and food.
The tax on corporate profits, though, is 12.5 percent, which is an incentive to own a business. And government helps out. “We have helped over 300 people or groups in the last dozen years or so,” Mr. Sherry said.
Enterprise Ireland has also put up initial capital for venture investment funds and supports research and development. “We must support new approaches, nanotechnology, biotechnology and other sciences,” Mr. Sherry said, “because we cannot succeed in the future using what got us here in the past.”
Colm O’Gorman, who teaches entrepreneurship in master of business administration courses at Dublin City University, said the government agency is at the heart of several trends. Enterprise Ireland “supports research and development at Irish companies and universities,” Professor O’Gorman said, “and it is encouraging more women to become entrepreneurs, as the role of women has changed in Irish life.”
One reason for many changes in Ireland is its membership in the European Union, which has brought new perspectives and regulations from its governing councils in Brussels.
Elaine Doorly, for example, founded Radiation Safety Ireland three years ago to advise industry on effects of radiation in building materials, scanners and other sources, an evolving field that is driven by regulation from Brussels.
Ms. Doorly runs her consulting company part time while also working as the health officer specializing in radiological protection for the University of Dublin-Trinity College, the institution that is a leading site of Irish scientific research. She has held that post for 10 years. …
Mr. Murphy, 46, of Lifes2Good is one of the entrepreneurs who has expanded his business beyond Ireland’s borders. He qualified as a chartered accountant in the 1980s and worked in several countries in Europe before returning to Ireland in 1991 looking to own a business. …
Mr. Murphy founded Lifes2Good in 1997. Using infomercials to promote micro-current pain relief and health and beauty aids, the business spread throughout Britain and the Continent and grew to 40 employees and $30 million in annual revenue. Now he is trying to expand in the United States. …
Mr. Sherry of Enterprise Ireland said the passion behind the efforts to support entrepreneurs comes from a desire to make Ireland a better place. “We’re old enough to remember when times weren’t good. We don’t want to go back there.”
Here is an article, The luck of the Irish (Oct 14th 2004) | @TheEconomist. Underlines, italicization, et al. are on our own.
The economic boom that spawned the “Celtic Tiger” has transformed Ireland. But, asks John Peet (interviewed here), can it last?
SURELY no other country in the rich world has seen its image change so fast. Fifteen years ago Ireland was deemed an economic failure, a country that after years of mismanagement was suffering from an awful cocktail of high unemployment, slow growth, high inflation, heavy taxation and towering public debts. Yet within a few years it had become the “Celtic Tiger”, a rare example of a developed country with a growth record to match East Asia’s, as well as enviably low unemployment and inflation, a low tax burden and a tiny public debt.
The Economist proved no better than anyone else at predicting this turnaround. Our most recent previous survey of Ireland, “The poorest of the rich”, published in 1988, concluded that the country was heading for catastrophe, mainly because it had tried to erect a welfare state on continental European lines in an economy that was too poor to support one. Yet only nine years later, in 1997, Ireland featured on The Economist‘s cover as “Europe’s shining light” [Ireland shines: Lessons and questions from an economic transformation (May 15th 1997)]. It goes to show how remarkable has been the transformation of a sleepy European backwater into a vibrant economy that in some years grew by as much as 10%.
That transformation has made the Irish republic, with just over 4m people, a place of great interest around the globe. Many rich countries, not least Ireland’s sclerotic neighbours in western Europe, would love to achieve a similar change of image. The eight central European countries that joined the European Union in May seem fascinated by Ireland. Civil servants and businessmen in Dublin talk wearily of a procession of visitors from such places as Vilnius and Bratislava, anxious to emulate Ireland’s leap from one of the EU’s poorest members in the 1980s into one of its richest. They all promise that they will make good use of EU money, as Ireland did, and avoid the fate of Greece, which in the 1980s was not far behind Ireland but has since been left standing.
Punching above its weight
The world’s interest in Ireland is not confined to its rags-to-riches story. Thanks partly to the Irish diaspora, created by a century and a half of emigration, the country has far more clout than its small population might suggest. It had a notable stint on the United Nations Security Council in 2001-02. And Europeans were impressed by the Irish presidency of the European Union in the first half of this year, which took in not only the eastward expansion of the EU and the choice of a new commission president, but also a deal on a new EU constitutional treaty, brokered by the Irish taoiseach (prime minister), Bertie Ahern. On a less elevated level, the main streets of cities the world over feature “Irish pubs” serving draught Guinness.
Over the border, Northern Ireland, which has a population of 1.7m, offers a valuable case-study in how to resolve an entrenched terrorist problem. The peace process in the province remains partial, bumpy and incomplete (only last month British, Irish and Northern Irish leaders failed yet again to agree on a precise formula for the revival of devolved government in Belfast). Yet ten years of painstaking diplomacy, by both the British and the Irish governments and by politicians and paramilitary leaders on both sides of the sectarian divide in the north, have largely put an end to the violence that for two decades disfigured Northern Ireland. Other countries with intractable terrorist problems might take note.
Peace in Northern Ireland has helped to boost the economy of the whole island. A visitor to Dublin, so lively and cosmopolitan today, would find it hard to believe that only a few decades ago it was gloomy and depressed. In the 1960s Ireland’s heavily agricultural economy, almost wholly dependent on exports to Britain, was only just emerging from the misguided protectionism that since the 1930s had been the main plank of Eamon De Valera’s ill-advised economic policy. Ireland had missed out almost entirely on Europe’s post-war boom; living standards were stagnating and emigration was in full flow. In 1960 the republic’s population was down to around 2.8m, the lowest in two centuries and a pale shadow of the 8m (for the whole island) in 1840, when this was one of the most densely populated countries in Europe. Many wondered if Ireland had a future.
In fact, the 1960s proved something of a turning-point. Corporate tax on foreign multinational companies investing in Ireland was cut to zero in 1957. Belatedly, the country embraced free trade with Britain and, by joining the European Economic Community in 1973, with much of the rest of Europe. The combination of zero corporate taxes, a low-wage economy inside the EEC and a shared language proved a strong lure for American manufacturers. Ireland’s long love affair with foreign direct investment (FDI) began in the 1960s. Free secondary education for all arrived in 1967, and after 1973 Irish farmers benefited from Europe’s munificent farm subsidies.
This promising start, however, was kyboshed by the two oil shocks of the 1970s, and even more by a knuckle-headed policy response. Successive Irish governments sought to offset the cut in living standards imposed by higher oil prices through fiscal and monetary expansion. The result, ultimately, was the high inflation, high unemployment, slow growth and even electoral instability that marred the 1980s. Emigration, especially of graduates, hit new highs. At the start of the third Haughey government in 1987, a grim joke made the rounds: would the last Irishman to leave please turn out the lights? Yet only a few years later the Irish miracle had arrived. What caused it? Can it be replicated? And can it last?
Here is an article, Cowen must be Mister Fix-It, not a master of disaster (28/12/2008) | RICHARD ALDOUS. Excerpts, underlines, italicization, et al. are on our own.
The year ended with the death of Conor Cruise O’Brien, arguably Ireland’s greatest public intellectual and a political force more honoured abroad than in his own country. As the most prominent anti-IRA member of the Cosgrave government, O’Brien would have had some sympathy for any government minister held hostage at gunpoint.
Like O’Brien, the TD in question, Dick Roche, showed a certain coolness in the face of danger. Perhaps it seemed like déjà-vu. For in 2008 the political establishment has spent most of the year with a gun to its head.
That’s certainly what the Mahon Tribunal felt like for the first four months of the year. In the end, then Taoiseach Bertie Ahern decided to pull the trigger himself for the sake of the political process and the country. Troubling questions remain about the democratic deficit involved in this turn of events. Politicians clearly must be held to account — that is why the tribunal was established in the first place. …
But Mahon was not the only assault on the political establishment this year. Declan Ganley, who many had laughed off, emerged as the most successful campaigner of the year. His triumph in the Lisbon referendum was in turn a humiliation for the political elite. The ‘Yes’ campaign’s message that the treaty was a tidying up exercise was dull to the point of inertia. Nobody seemed to be in charge. …
If the resurrection of the treaty remains a possibility, one death looks final and irreversible. The Celtic Tiger has now gone the way of the dodo. A year ago all the talk was of soft landings and money-making resilience. Now the only question is whether the country can avoid a depression.
In September, having been the golden haired child of EU economic vitality, Ireland became the first western European country to go into recession. Worse followed. Bank bailouts, rising unemployment and emigration, increased taxes (a.k.a. the ‘income levy’), a black hole in the public finances, shrinking taxation revenues, ballooning national debt, out of control public sector spending: all the news was bad with a promise of worse to come.
Global economic woes and the humiliation of Lisbon played havoc with Brian Cowen’s first hundred-plus days in office. …
The challenge now for Mr Cowen is to show that he represents Ireland’s future rather than the fag end of the Ahern years. Events further afield in 2008 will have given him cause for despondency and encouragement.
Who’d have thought that Offaly would produce both the sitting Taoiseach and the US President-elect? But Brian Cowen won’t like the precedent set by the victory of Barack Obama.
Obama was swept to power on a change agenda that saw off his own party establishment in the Clintons and then, in John McCain, crushed just about the only Republican able to claim a reform mandate. It is easy to forget that even as late as September, Senator McCain was narrowly ahead in the opinion polls. Then came the collapse of Lehman Brothers. McCain’s campaign went into instant meltdown and never recovered. Senator Obama may have been untested and offering the kind of liberal economic programme that in previous elections had seen Democrats like George McGovern trounced. The electorate didn’t care: change coupled with Obama’s personal dynamism was better than continuity of any kind.
That’s bad news for Mr Cowen after more than a decade of Fianna Fail government. For encouragement, he needs to look not across the Atlantic but instead over the Irish Sea.
For much of 2008, the British Prime Minister, Gordon Brown, found himself in a similar position to the Taoiseach. Opinion polls seemed apocalyptic. His performances in the House of Commons were leaden. Having been an impressive ‘Iron’ Chancellor of the Exchequer, the premiership appeared to have diminished him. It seemed only a matter of time before he was replaced.
Then the banking crisis hit. The prime minister found a new energy and purpose. He even took up yoga. Where previously there had been no direction, now there was vision and strategy. Gordon Brown visibly bucked up. Opinion polls reflected a sense that after all, he might be the right man for the job.
There’s a lesson in this. We forgive mistakes that come from brave decisions. It is inertia and despair that earns our contempt. Early on, the Cowen government took the courageous route. The guarantee to the banks was bold and imaginative. It drew international criticism followed by quiet imitation. Since then, however, there has been only drift.
Another lesson from Mr Brown is that bold decisions require political heft. When the British prime minister was polling badly, there was precious little of that in his cabinet. His response, to widespread amazement, was to bring his old foe Peter Mandelson back from Brussels. Blairite advisors Alistair Campbell and Jonathan Powell also returned to the fold. The turnaround in fortunes was immediate and dramatic.
Mr Cowen has plenty of talent in a young team, but the more experienced cabinet heavyweights, notably Micheal Martin, have been kept at an arm’s length from economic policy making.
If imitation is the sincerest form of flattery, Mr Cowen could do worse than bring Charlie McCreevy back from Brussels. Like Mandelson, he is a controversial figure, but he has chutzpah and is a bold thinker. More than any other individual in Fianna Fail, Mr McCreevy has the ability to get the government on the front foot again. And to cheer everyone up.
That last point is more important than we might think. An observation often made of Mr Brown is that he has visibly perked up since the financial crisis began. That may seem odd in the middle of a global meltdown, but it reflects his renewed sense of confidence and purpose.
Some of that may be to do with the early morning yoga in Downing Street. More likely, it is because he finally believes he’s up to the job.
History teaches us that optimism is one of the most important aspects of political leadership when times are hard. Franklin D Roosevelt, whose New Deal steered the US through the great depression of the 1930s, is considered among America’s very finest presidents. Yet in reality the economy in that decade remained a disaster, with unemployment stuck at 20 per cent even as late as 1938. But Roosevelt, with his breezy fireside chats and sense that he was doing everything possible continued to be trusted — in 1936, he was re-elected with the greatest landslide in the history of the two-party system.
The Taoiseach needs to find a similar kind of optimism and direction. No-one is suggesting yoga in government buildings — although don’t knock it if it works — but what he does need to convey is the sense that he is the master not the servant of events.
Mr Cowen is not afraid of a fight. But he may need to mix it with a smile on his face.
He could find worse role models than Dick Roche and Conor Cruise O’Brien.
Here is an article, How Ireland Became the Celtic Tiger (June 2006) | Sean Dorgan (@Heritage). Underlines, italicization, et al. are on our own.
In just over a generation, Ireland has evolved from one of the poorest countries in Western Europe to one of the most successful. It has reversed the persistent emigration of its best and brightest and achieved an enviable reputation as a thriving, knowledge-driven economy.
As a result of sustained efforts over many years, the past of declining population, poor living standards, and economic stagnation has been left behind. Ireland now has the second highest gross domestic product (GDP) per capita within the European Union (after Luxembourg), one-third higher than the EU-25 average, and has achieved exceptional growth.
One of the biggest successes of the Irish economy has been new job creation. From 1990 to 2005, employment soared from 1.1 million to 1.9 million. Economic growth, more Jobs, and rising living standards meant the resolution of the emigration problem, which had bedeviled Ireland for generations.
The population increased by almost 15 percent from 1996 to 2005 in a striking reversal of previous trends. In one year alone (July 2004 – June 2005), employment increased by 5 percent. Ireland is now seen as the land of opportunity by many workers from the 10 newest EU member states. Its unemployment rate of 4.4 percent is less than half the EU average. Public budgets are in balance, and foreign investment was equivalent to 17 percent of GDP in 2003.
Ireland achieved this success through a combination of sensible policies and pragmatism. At the heart of these policies was a belief in economic openness to global markets, low tax rates, and investment in education. While economic success over the past 15 years can be ascribed to a range of domestic and international factors, it was not a fluke. Ireland has long had, and intends to sustain, low tax rates to attract investment. Its current 12.5 percent corporate tax rate evolved from the zero rate on export sales in the 1950s and the 10 percent rate on manufacturing and some internationally traded services introduced in 1980.
Ireland’s transformation was national in scope, with individuals, businesses, institutions, and government sharing the same ambition. It involved parents deciding that their children would have choices that they did not have and would not be forced to leave their home communities because of economic necessity. Political decisions were driven and sustained by the public will for success. There were some deviations from sensible policies at times, but through the many difficult years, the threads of consistent development can be seen. This paper explains how the transformation occurred.
For a generation after achieving independence from the United Kingdom in 1922, Ireland sought to be economically self-sufficient. It relied on small-scale agriculture, exporting primary produce to the U.K. market and manufacturing mainly for the home market of less than 3 million people. trade barriers such as high Tariffs and a policy of import substitution sought to make this reliance on economic nationalism successful. Inevitably, it failed.
Ireland’s population was just short of 3 million people when the new state was established in 1922. It fell marginally each decade thereafter until the 1950s, when 400,000 people (one-seventh of the population) emigrated in a single decade. There could be no clearer evidence of the failure of economic policies and opportunities and of the inadequate fulfillment of national aspirations.
By the mid-1950s, it was clear that economic nationalism was not sustainable. The stagnation and emigration, and the despondency they caused, were in stark contrast to other, fast-recovering economies of postwar Europe. As a result, radical policy change was introduced, and the previous protectionism was abandoned in favor of openness, driven by the need for progress from an intolerable position that offered few prospects for economic success.
The policy changes were drawn together in Economic Development, an official paper published in 1958 that overturned much previous policy thinking by advocating free trade, foreign investment, productive (rather than mainly social) investment, and growth rather than fiscal restraint as the prime objective of economic management. In 1956, to spur business development, tax relief on profits from export sales from Ireland was offered for the first time. In 1958, all controls on foreign ownership of businesses were lifted.
In the early 1960s, Ireland unilaterally lowered its import Tariffs and started to negotiate a free trade agreement with the U.K. This agreement was concluded in 1965, and Ireland joined the General Agreement on Tariffs and trade in 1967. In 1961, Ireland expressed its ambition to join the European Economic Community (EEC), which had been founded by the six member states in the previous decade. The U.K. had the same ambition, but this was thwarted by a French veto for some years, and Ireland’s application did not proceed. The U.K., Ireland, and Denmark finally joined the EEC in 1973.
These policy changes were facilitated by a transition from the generation that had won independence (although Sean Lemass, the political leader who made the most changes in a few years, was himself part of that generation) and by Ken Whitaker, the young and forward-looking head of the civil service, who led the Department of Finance from 1956 to 1969. Whitaker was the primary author of Economic Development.
The Transition to Openness
More open markets spurred improved economic performance in the 1960s, compared to the previous decade. Annual average growth in national income – both GDP and gross national product (GNP) – was 4.2 percent. The Industrial Development Authority (IDA) sought out new modern industry overseas, which benefited from the attractions of abundant English-speaking and low-cost labor and the exemption from corporation tax of all profits from exports. Pfizer, which established its first plant in 1969, was one of over 350 overseas companies that set up in Ireland by 1970.
However, this progress did not initially spur employment or stop emigration. In fact it came at a price: Many companies that had been set up in earlier years to serve the small closed national market were uncompetitive in the face of free trade. Moreover, Ireland still depended heavily on agriculture, which had low output and income levels, and the migration of people from the land was greater than job creation in new businesses. As a result, there was no net increase in employment in the 1960s, and net emigration from the country continued, although at a lower rate than in the 1950s.
The role of the state also increased during the 1960s. Public expenditure grew from 32 percent of GNP in 1960 to 42 percent in 1973. Social services and education, in particular, expanded with the state. The Organisation for Economic Co-operation and Development (OECD) sponsored an influential report on education in Ireland, Investment in Education, which was published in 1965. This report emphasized that education was key to the future of Ireland’s society and economy. Although not directly recommended in the report, beginning in 1967, the state paid for all secondary schooling and transportation to school. This measure resulted in a rapid rise in the level of education attained by the younger population.
Attempts were made to adjust to the new openness. The National Industrial and Economic Council, comprising government, business, and other interests, discussed the challenges of restructuring industry now faced with free-trade competition. Underlying the extensive processes of consultation and engagement was a clear commitment to change, even if that change had inevitable problems and costs.
With hindsight, the path to openness was irreversible, although it may not always have seemed so at the time. The establishment of the first (state-owned) television service in 1960 quickly facilitated debate on, and sometimes a questioning of, long-established societal norms and values. The country, which had been introspective and highly sensitized by its history, now began to see the possibilities that others enjoyed.
Joining Europe and Going Forward
When Ireland joined the EEC in 1973, its confidence and sense of its own status grew. Now it could deal with large and successful states as a partner, no longer burdened by its colonial history. Business now had free access to a much larger market, and exports could be diversified away from dependence on the U.K. Moreover, through the EEC’s Common Agricultural Policy, agriculture gained from access to wider markets at good prices. An improvement in Ireland’s living standards and prospects lifted spirits.
The 1970s reversed past trends. For the first time since independence, the population increased, rising by 15 percent for the decade. National income increased at a sustained annual rate of about 4 percent. Unlike previous decades, employment increased by about 1 percent per year, although a large part of this increase was in the state sector, contributing to financing problems in subsequent years.
The IDA played a central role in the new drive for success. While still funded by the state, the IDA was established in 1970 with its own board, staff, and operating freedoms, separate from the Department of Industry and Commerce of which it had been a part. It was the first dedicated state agency in the world to undertake a massive and sustained campaign to establish a modern manufacturing base by attracting large-scale foreign investment.
The IDA adopted pragmatic, business-like, focused marketing methods. The key decision was to focus on companies that represented the future-high technology, high output, and high skills. The main targets included the computer industry, pharmaceuticals, and medical technology, followed by international services. Soon investments were won from leading companies, including Amdahl, Baxter Travenol, Digital, Merck Sharpe, Wang, and Warner Lambert. All of these companies were persuaded of the value of using Ireland as an export platform to serve Europe and other markets. By 1975, more than 450 foreign-owned industrial projects, covering a wide range of manufacturing sectors, accounted for two-thirds of Ireland’s total industrial output.
While the new multinational companies brought success, many older indigenous businesses had considerable difficulty in adjusting to the new open trading conditions. An apparent dichotomy in the performance of new and old, foreign and Irish companies would be the subject of debate and some policy reassessment in the following years.
The 1970s also saw a rapid expansion in public (state) expenditure on social welfare, health and education, housing, telecommunications and other infrastructure, and administrative services. Public-sector employment represented a third of the total workforce by 1980, partly because Jobs were created to deal with rising unemployment, which stood at 9 percent of the workforce in 1977.
All of this happened against a backdrop of high inflation, which averaged 13.6 percent per year from 1971 to 1980 and was driven partly by international factors such as oil crises and partly by domestic demand and an expansionary fiscal policy. Public budget deficits and high public borrowing were features of the latter years of the decade, creating the basis for the crises that erupted in the 1980s.
Unsolved, the underlying economic problems of the 1970s rolled over into the 1980s, producing disappointment. The causes were the return of high unemployment, emigration, steady worsening of the public finances, and the seeming inability of any government to manage the nation’s affairs and find a solution to the worsening situation. The atmosphere of the 1980s was more redolent of the dark years of the 1950s than of the optimism that had permeated the two decades in between.
The feeling of failure was exacerbated by the waves of emigration of young people, just as in a generation earlier. Whole classes of university graduates would frequently leave the country. There was a disheartening drain of human capital. A net 200,000 people left from 1981 to 1990. In the worst years, more than 1 percent of the country’s population fled. This was not what the policies of the previous 25 years had been designed to achieve. What had gone wrong?
A number of internal and external factors were conspiring to slow down progress and undermine confidence. Global conditions were weaker after the oil shocks of the 1970s. The momentum from EEC entry had faded. Persistent inflation averaged close to 11 percent per year between 1981 and 1986. Jobs created by new foreign investment, while substantial, were inadequate to employ the growing workforce and counter the failure rate of older businesses.
Attempts at government intervention proved to be no better. Continued increases in public spending, tax increases, and deficit financing through borrowing soured the investment climate and failed to raise employment while increasing the drag on the underperforming economy.
Between 1980 and 1986, total government expenditure grew from 54 percent to 62 percent of GNP, and public debt increased from 87 percent to 120 percent of GNP while annual budget deficits exceeded 10 percent of GNP. Over one-third of all tax revenue (over 90 percent of income tax revenue) was being used to service this debt. Meanwhile, the economic dependency ratio rose to 2.3 persons per person employed in 1985, and unemployment stood at 15 percent.
While the IDA continued to attract foreign investors (IBM, Lotus, Microsoft, and Bausch & Lomb, among many others) into the 1980s, some high-profile failures of recent investments raised questions about this strategy. In particular, a specially commissioned investigation by Telesis on behalf of the National Economic and Social Council (NESC) raised some troubling issues.
Telesis found that the value of inward investments tended to be overstated-employment prospects were too often exaggerated at a time of high unemployment-and that promised linkages to the domestic economy were frequently weak. It also criticized what it saw as an excessive attention to overseas companies relative to indigenous businesses. While initially stung, the IDA responded well to the report and increased its attention to Irish-owned industry.
The political parties were not successfully addressing the gathering gloom. Fianna Fail, the opposition party since 1982, won the general election in 1987. When in government in the late 1970s, Fianna Fail had been largely responsible for the excessive and misguided public spending. This time, however, the party tried a different path. On election to government in 1987, they surprised many, including their own supporters, with a program of severe cuts in expenditure accompanied by some novel consensus-building and developmental measures. Within a few years, these steps began to show dividends, helped by a coincidence of other factors.
Recovery and Success
Smaller government became part of the road to success. There was surprise with the first moves to cut spending severely across a range of programs and abolish a number of government agencies. These steps were strongly criticized initially, especially when they seemed to affect (state-provided) health and social services, but the depth of the budgetary crisis allowed the momentum to be sustained. The government was assisted by a consensus that had been built in the NESC, comprising business, farming, trade union, and social interest groups. The main opposition party, whose leader had been minister for finance before the election, also supported any measures that restored fiscal discipline.
A second element of the new government’s action plan was moderate wage increases in return for modest reductions in direct income taxes, in effect allowing take-home pay to increase more than the pay raise granted by employers. This three-year Program for National Recovery involved government itself, employers, unions, and farmers. This helped to break the spiral of inflationary wage increases and ensured industrial peace. The program also served to create agreement on the nature of the crisis facing the state and on steps needed to deal with it. The wider benefits of consensus on development priorities and the shared efforts involved to achieve national goals proved to be of lasting value, and similar national partnership agreements have been put in place repeatedly up to 2005.
While cutting back on spending, the government took steps to promote business investment. A notable example was the adoption of a proposal to create the International Financial Services Centre (IFSC) in the old Docklands area of Dublin. The successful development of the IFSC shows the strength of cooperation between business interests and all parts of the state system that is such a strong characteristic of Ireland.
Development steps in financial services and other sectors were assisted by a series of investments in telecommunications from the 1980s onward, although the sector remained largely state-owned until the late 1990s. Late entry to heavy investment in this sector ultimately served Ireland well in that it provided the most advanced and comprehensive digital network in Europe (much as the relevance of the education system was also greater as a result of its late expansion).
Here is an article, The death of neoliberalism and the crisis in western politics: In the early 1980s the author was one of the first to herald the emerging dominance of neoliberalism in the west. Here he argues that this doctrine is now faltering. But what happens next? (21 August 2016) | @martjacques. Excerpts are on our own.
The western financial crisis of 2007-8 was the worst since 1931, yet its immediate repercussions were surprisingly modest. The crisis challenged the foundation stones of the long-dominant neoliberal ideology but it seemed to emerge largely unscathed. … Subsequent economic policy, especially in the Anglo-Saxon world, has relied overwhelmingly on monetary policy, especially quantitative easing. It has failed. …
… Although it failed the test of the real world, bequeathing the worst economic disaster for seven decades, politically and intellectually it remained the only show in town. Parties of the right, centre and left had all bought into its philosophy, New Labour a classic in point. They knew no other way of thinking or doing: it had become the common sense. It was, as Antonio Gramsci put it, hegemonic. But that hegemony cannot and will not survive the test of the real world.
… The effect of the financial crisis was to undermine faith and trust in the competence of the governing elites. It marked the beginnings of a wider political crisis.
… They go to the heart of the neoliberal project that dates from the late 70s and the political rise of Reagan and Thatcher, and embraced at its core the idea of a global free market in goods, services and capital. The depression-era system of bank regulation was dismantled, in the US in the 1990s and in Britain in 1986, thereby creating the conditions for the 2008 crisis. …
It should be noted that, by historical standards, the neoliberal era has not had a particularly good track record. The most dynamic period of postwar western growth was that between the end of the war and the early 70s, the era of welfare capitalism and Keynesianism, when the growth rate was double that of the neoliberal period from 1980 to the present.
… And the problem has grown more serious since the financial crisis. On average, between 65-70% of households in 25 high-income economies experienced stagnant or falling real incomes between 2005 and 2014.
The reasons are not difficult to explain. The hyper-globalisation era has been systematically stacked in favour of capital against labour: international trading agreements, drawn up in great secrecy, with business on the inside and the unions and citizens excluded…
As Thomas Piketty has shown, in the absence of countervailing pressures, capitalism naturally gravitates towards increasing inequality. In the period between 1945 and the late 70s, Cold War competition was arguably the biggest such constraint. …
… This popular revolt is often described, in a somewhat denigratory and dismissive fashion, as populism. Or, as Francis Fukuyama writes in a recent excellentessay in Foreign Affairs: “‘Populism’ is the label that political elites attach to policies supported by ordinary citizens that they don’t like.” …
…a cri de coeur from those who feel they have lost out and been left behind, whose living standards have stagnated or worse since the 1980s, who feel dislocated by large-scale immigration over which they have no control and who face an increasingly insecure and casualised labour market. …
… For many decades, the idea of the “working class” was marginal to American political discourse. Most Americans described themselves as middle class, a reflection of the aspirational pulse at the heart of American society. According to a Gallup poll, in 2000 only 33% of Americans called themselves working class; by 2015 the figure was 48%, almost half the population. …
The re-emergence of class should not be confused with the labour movement. …
The neoliberal era is being undermined from two directions. First, if its record of economic growth has never been particularly strong, it is now dismal. … Economists such as Larry Summers believe that the prospect for the future is most likely one of secular stagnation.
…the recovery has been so weak and fragile… the neoliberal era has delivered the west back into the kind of crisis-ridden world that we last experienced in the 1930s. … Second, those who have lost out in the neoliberal era are no longer prepared to acquiesce in their fate – they are increasingly in open revolt. We are witnessing the end of the neoliberal era. It is not dead, but it is in its early death throes, just as the social-democratic era was during the 1970s.
… From the mid-70s through the 80s, the economic debate was increasingly dominated by monetarists and free marketeers. But since the western financial crisis, the centre of gravity of the intellectual debate has shifted profoundly. This is most obvious in the United States, with economists such as Joseph Stiglitz, Paul Krugman, Dani Rodrik and Jeffrey Sachs becoming increasingly influential. … Thomas Piketty … Tony Atkinson and Angus Deaton … Ha-Joon Chang …
… But the zeitgeist had changed. The membership, especially the young who had joined the party on an unprecedented scale, wanted a complete break with New Labour. One of the reasons why the left has failed to emerge as the leader of the new mood of working-class disillusionment is that most social democratic parties became, in varying degrees, disciples of neoliberalism and uber-globalisation. …
But as David Marquand observed in a review for the New Statesman, what is the point of a social democratic party if it doesn’t represent the less fortunate, the underprivileged and the losers? New Labour deserted those who needed them, who historically they were supposed to represent. …
… Labour, like everyone else, is obliged to think anew. The membership in their antipathy to New Labour turned to someone who had never accepted the latter, who was the polar opposite in almost every respect of Blair, and embodying an authenticity and decency which Blair patently did not. …
Corbyn is not a product of the new times, he is a throwback to the late 70s and early 80s. That is both his strength and also his weakness. He is uncontaminated by the New Labour legacy because he has never accepted it. But nor, it would seem, does he understand the nature of the new era. …
… the condition of the Conservatives is not a great deal better. … It has no idea in which direction to move after Brexit. …
… Meanwhile, the Conservatives seem to have little understanding that the neoliberal era is in its death throes.
… Donald Trump … His message was straightforwardly anti-globalisation. He believes that the interests of the working class have been sacrificed in favour of the big corporations that have been encouraged to invest around the world and thereby deprive American workers of their jobs.
He proposes that US corporations should be required to invest their cash reserves in the US. …
… Given that their wages have been falling for most of the last 40 years, it is extraordinary how their interests have been neglected by the political class. Increasingly, they have voted Republican, but the Republicans have long been captured by the super-rich and Wall Street, whose interests, as hyper-globalisers, have run directly counter to those of the white working class. …
… As in the case of the Republicans, the Democrats have long supported a neoliberal, pro-globalisation strategy, notwithstanding the concerns of its trade union base. Both the Republicans and the Democrats now find themselves deeply polarised between the pro- and anti-globalisers, an entirely new development not witnessed since the shift towards neoliberalism under Reagan almost 40 years ago.
… He points to Japan and South Korea, and Nato’s European members as prime examples. …
…Trump’s position represents a major critique of America as the world’s hegemon. His arguments mark a radical break with the neoliberal, hyper-globalisation ideology that has reigned since the early 1980s and with the foreign policy orthodoxy of most of the postwar period. These arguments must be taken seriously. They should not be lightly dismissed just because of their authorship. But Trump is no man of the left. He is a populist of the right. …
Trump may well… But this does not mean that the forces opposed to hyper-globalisation… will have lost the argument and are set to decline. In little more than 12 months, Trump and Sanders have transformed the nature and terms of the argument. Far from being on the wane, the arguments of the critics of hyper-globalisation are steadily gaining ground. … And, above all else, what will continue to drive opposition to the hyper-globalisers is inequality.
Here is an interesting information:
Here is a paper, Economic Crises and the Changing Influence of the Irish Congress of Trade Unions @irishcongress on Public Policy (PDF, 2010) | Dr John Hogan, Dublin Institute of Technology @ditofficial. Underlines, italicization, excerpts, et al. are on our own.
This chapter examines the dramatic changes in the Irish Congress of Trade Unions’ (ICTU) influence over public policy during the latter half of the twentieth century. The chapter focuses upon the impact economic crises have had on the ICTU’s role in policy-making. The chapter concentrates, in particular, upon four periods, the late 1950s, 1970, the early 1980s and 1987, when the ICTU found its influence over public policy radically transformed. By the late 1950s the trade union movement was invited into the policy-making process by a government desperate to revive a sclerotic economy. During the following decade the ICTU played an integral part in the development of economic and social programmes. In 1970, due to concerns over inflation and the increasing level of industrial disputes, the ICTU, initially under government pressure, became a party to centralised bargaining. The National Wage Agreements that the ICTU was a party to during that decade were marked by their integration with government budgetary policy. With active state involvement in industrial relations came ICTU involvement in policy-making. However, by the early 1980s the Irish economy was in serious difficulties again. This, combined with trade union and employer disillusionment that the centralised agreements were not achieving their respective objectives of full employment and low inflation and a new collation government determined to remove the unions from the corridors of power, led to the collapse of the national agreements and ICTU finding itself shut out of the policy-making process. The years afterwards saw the economy continue to stagnate and the ICTU marginalised as a policymaking influence. By 1987, with Ireland teetering on the brink of bankruptcy, a new Fianna Fáil government came to power seeking to promote a three year national pay agreement with the unions and employers, in the hopes of reviving the economy. The ICTU, weakened through marginalisation and membership losses, favoured a return to centralised pay agreements. However, these agreements ultimately came to encompass a wide range of economic/social policy commitments that went far beyond the agreements of the 1970s.
Over the last half century, there has been a series of dramatic changes in the influence of the Irish Congress of Trade Unions (ICTU) on public policy. This chapter examines those changes, highlighting the circumstances under which they occurred and the kinds of influence the ICTU gained and lost, as a result of its fluctuating fortunes.
By the late 1950s, the Irish economy was in serious difficulty and a mood of despair pervaded society. Into this environment came Seán Lemass, the new Taoiseach and leader of the largest party, Fianna Fáil. Lemass introduced new ideas on how to manage the economy and how to reform the country’s relationship with the world. His ideas and influence transformed economic policy and had a profound influence on the role of trade unions in the formulation of public policy.
The growing economic openness of the 1960s produced incentives for new patterns of collective bargaining. Ireland had come to rely on foreign direct investment (FDI) to promote industrialisation and employment. In response, from the 1970s onwards, public policy was directed towards minimising strikes and restraining pay increases: ‘the then Fianna Fáil government of Jack Lynch brought the trade union movement into the policy-making process as a way of ensuring economic stability’.
However, by the early 1980s, the economy had deteriorated. Although centralised agreements between the employers, the government and the ICTU were the hallmark of industrial relations during the 1970s, they were not achieving the unions’ objectives. This led to reluctance on the part of the ICTU to continue participating in these agreements. Irrespective of the unions’ attitude, they were excluded from the policy-making environment by the Fine Gael and Labour coalition government (1982-1987) as economic decline gathered momentum.
By 1987, the economy reached a historic nadir. In response, a new Fianna Fáil minority administration sought a centralised pay agreement with the ICTU and the employers, bringing the unions’ influence directly back into the corridors of power. This was to be the first of a series of such agreements. The social partnership born of these agreements contributed to the transformation of society over the following decades.
The chapter is divided into four sections, each one of which deals with a particular period – the late 1950s–mid 1960s, mid 1960s–late 1970s, the early 1980s and the late 1980s – that saw the ICTU’s influence on public policy transformed. Each section begins with a discussion on the economy at that time and the impact that this had upon government thinking. Thereafter, the section moves on to examine how economic circumstances impacted upon the relations and interactions between the government and the trade union movement.
THE TRANSFORMATION OF THE TRADE UNIONS’ ROLE IN SOCIETY (1950s – MID 1960s)
The trade union movement expanded with industrialisation in the 1930s. However, with industrialisation came inter-union rivalry. During the 1940s Seán Lemass, then Minister for Industry and Commerce, sought to encourage trade union rationalisation. However, efforts to rationalise the unions created tensions that fissured the movement. In April 1945, 15 Irish-based unions withdrew from the Irish Trades Union Congress (ITUC) and established the Congress of Irish Unions (CIU). The existence of two rival congresses weakened the movement’s efforts, dissipated resources and rendered a common front against employers impossible. However, in 1956, a Provisional United Trade Union Organisation was set up to co-ordinate the activities of both congresses, with a view to reunification.
The general election of 1957 resulted in a Fianna Fáil victory, and saw its 75-year-old leader, Éamon de Valera, form his final administration. The year ‘1957 is conventionally thought of as the end of an era, marking the final exhaustion of the ideas of the first generation of political leaders’. Two years later, de Valera was succeeded as Taoiseach by Seán Lemass. Lemass, although almost 60, and a lifelong follower of De Valera, was nevertheless to stand for a clean break with the policies of the past and was to oversee the opening of the country’s economy. The transformative impact of his innovative leadership, upon a then poor and insular Ireland, was to constitute the foundations upon which modern Ireland is built.
The Economic Stagnation of the 1950s
From the late 1940s onwards, the Irish economy stagnated. Ó Gráda and O’Rourke argue that ‘in the 1950s, Ireland’s relative [economic] performance was disastrous, poorer than the European average’. The benefits from protection had been reaped by the industrial expansion of the 1930s. The post-war economic boom petered out at the end of the 1940s. By the 1950s, Irish industry was supplying as much of the domestic market as it could.
OECD analysis showed agricultural production was abnormally low, while industrial output was faltering. Per capita GNP grew at 2.4 per cent throughout the 1950s, but only because of ‘the exceptional demographic experience during this period when net migration averaged forty-one thousand persons a year’. Yet, even this growth rate was among the lowest in the OECD. Although employment in the economy was falling, the cost of living was still high. The impact of these disastrous figures upon the populace at large cannot be underestimated.
In 1957, manufacturing output was no higher than in 1953, while building activity declined. Between 1951 and 1958, GDP rose by less than one per cent per annum, employment declined by 12 per cent, unemployment rose and half a million people emigrated. By the late 1950s, the outlook for the economy was depressing, while Europe was achieving strong and sustained growth.
The Government’s Response to the Economy
Upon his appointment as Minister for Industry and Commerce, in the new Fianna Fáil government of 1957, Lemass began implementing policies opening the state to foreign investment. Despite fears over the competitiveness of protected Irish industry, the pressure for change increased. By the end of the decade, both the government and opposition recognised the crisis facing the country. During the Dáil debate on Lemass’s nomination as Taoiseach, Daniel Desmond of the Labour Party argued that it was time for the political establishment to realise that solving the problems with the economy superseded their own struggles for power. On becoming Taoiseach in 1959, Lemass stated that the task was to consolidate the economic foundations of independence. He brought to government vigorous entrepreneurial leadership.
The crisis in the economy prompted a fundamental reappraisal of the policies pursued up to that time. Into this pessimistic environment came T.K. Whitaker’s report, Economic Development, in 1958. Whitaker, then Secretary of the Department of Finance, was committed to export-led growth. He advanced a strategy within the finance department of more planning, fewer tariff barriers and greater emphasis on productive investment: ‘It was in the atmosphere of a new government and a more active and interventionist Department of Finance, that Economic Development was born’.
This document was ‘a watershed in the modern economic history of the country’. It proposed the gradual transition to free trade, stimulation of private investment, the reorientation of government investment towards more productive uses, the introduction of grants and tax concessions to encourage export orientated manufacturing and the inducement of FDI oriented manufacturers. The document advocated abandoning the protectionism Fianna Fáil had pioneered since the 1930s. These measures were incorporated into the First Programme for Economic Expansion in November 1958. This White Paper, based on Whitaker’s document, ‘was drawn up by Charles Murray of the Department of Finance, supervised by a four-member Government subcommittee headed by Lemass’. The fact that Lemass was involved in the White Paper ensured that the essence of Economic Development’s recommendations remained intact:
While there were some significant differences between Economic Development and the [First] Programme for Economic Expansion, which arose out of their different parentage, such differences were for the most part cosmetic as the main thrust of both documents was the same.
The ICTU Brought in from the Cold
The ITUC and CIU eventually reunited after 15 years apart. The absence of ideological and organisational differences between the congresses made the process of reunification easier. …
Soon after Lemass became Taoiseach he sought a meeting with the ICTU to discuss the challenges facing the economy and how co-operation might be fostered between the various economic interests. The number of meetings between the new Taoiseach and the unions increased thereafter, whereas there had been little interaction with de Valera. These meetings covered a range of issues, from the economy to the prospects of Ireland joining the European Economic Community (EEC). This development was in line with the calls for consultation between state, unions and employers contained in the First Programme for Economic Expansion.
The Fianna Fáil government’s 1958 and 1959 budgets reflected a change in fiscal policy. Lemass’s speeches in 1959 often paralleled the positions adopted by the ICTU. These included the need for state involvement in development and the expansion of the state sector. The ICTU argued that the government should pump-prime the economy for growth and that capital investment should not be pursued to the detriment of social spending. Within a year of Lemass becoming Taoiseach, budgets began expanding, with increased investment in areas identified by Congress. By 1961, the reshaping of public capital expenditure, to give increased emphasis to directly productive investment, something the trade unions had argued for, stimulated economic growth. A policy of grants and tax exemptions attracted foreign capital and the government also pursued an increasingly liberal trade policy.
The Unions and Their Role in Policy Development
Until the 1950s, the unions’ influence was largely indirect. However, during the late 1950s, the government’s policies began to reflect those of the unions. Lemass’s perspective on economic development was close to that of Congress. In June 1959, Lemass remarked on the need for change in industrial development policy. The government began to regard the trade union movement in general, and the united Congress in particular, as both an ally and supporter of its programme for national development. The task of adjusting industries to competition led public policy into the realms of labour practices, industrial relations and pay bargaining. In return, Lemass was prepared to offer the unions an integral part in the development of economic and social programmes:
He [Lemass] clearly understood that the government would have to play a more active, even hegemonic, role in the Irish economy, but he also realised that the success of government strategy assumed a new partnership with different interest groups, which would (in time) become players in the policy game.
In 1961, the ICTU and the Federated Union of Employers (FUE) reached agreement on the formation of the Employer-Labour Conference (ELC), which the government subsequently facilitated. This body became central to corporatist control. The unions’ increasing influence was visible in all areas of government policy. For instance, the 1961 budget saw increases in social welfare payments at the behest of Congress.
Lemass argued that social progress would follow from economic development… With the move towards the liberalisation of trade and economic planning, Lemass was instrumental in creating consultative bodies involving the unions and employers…
Union membership, declining throughout the 1950s, increased after 1959 and would go on rising for the next 21 years. After 1959, the number of committees on which the ICTU was represented expanded. The Irish National Productivity Committee (INPC) was a joint consultative body charged with improving productivity. The Committee on Industrial Organisation (CIO) was set up in 1961 to examine the ability of Irish industry to compete within the EEC. The National Industrial and Economic Council (NIEC) was established in 1963 as a consultative body in economic planning. These bodies, paralleling ‘the state’s commitment to economic planning as contained in the first two programmes for economic expansion’, permitted the unions to co-operate with the state on a range of problems posed by economic expansion. Thus, the period between 1959 and 1965 was to witness a new pattern of Congress participation in state institutions, such that ‘[t]he institutional setting soon became largely tripartite, with the representatives of business, of labour and of government discussing the issues of employment, output, prices and trade’.
THE MOVE TO CENTRALISED BARGAINING (MID 1960 – LATE 1970s)
In the 1960s, the economy performed well, real Gross Domestic Product (GDP) increased by 4.4 per cent per annum, economic openness grew by 23 per cent, while unemployment averaged 5.05 per cent. Economists attribute this success to export-led growth based upon trade liberalisation and FDI.
The Institutionalisation of the ICTU/Government Relationship
Congress’s attitude to EEC entry was initially cautious, but by 1962 it was willing to support Lemass’s plans. Congress, recognising free trade as inevitable, decided to embrace it from a position of influence with the government through membership of the CIO and NIEC… the limitations of relying on a web of collaborative bodies to oversee economic adjustment, while collective bargaining remained unregulated, became clear.
The government’s attitude towards collective bargaining was influenced by its increasing economic significance. As more workers became unionised, bargaining exerted a major influence on macroeconomic policies. Industrial development’s pride of place in national policy influenced the government’s stance towards centralised collective bargaining.
Lemass had urged a corporatist strategy towards industrial relations following the Second World War. Corporatism (or as it is sometimes called neo-corporatism) is an inclusive bargaining approach involving the unions, employers and government. However, the employers’ and unions’ preference for the status quo – free collective bargaining – prevented corporatism’s introduction. …
The pay-rounds of the 1960s prompted attempts to again centralise collective bargaining. Growing trade union power, rising industrial conflict and wage pressures impelled governments to adopt a more interventionist stance. The dangers of economic crisis from industrial unrest and an unprecedented pay-round increase in 1969 were the catalysts for the move towards corporatism. This resulted in the unions’ influence over public policy increasing substantially. Throughout the following decade, pay determination became increasingly politicised and public policy was directed towards minimising strikes and restraining pay.
Economic Stagnation at the Beginning of the 1970s
Economic expansion and decentralised collective bargaining were viewed as incompatible in the NIEC’s Report on Incomes and Prices Policy. To compound matters, economic growth slowed. Statistics for output, employment, imports and sales all indicated a stagnating economy. Industrial production and construction activities were affected by strikes, while investment was depressed by a six-month bank strike. Inflation was running at 8.5 per cent, its highest level since 1952. The OECD argued that the high level of inflation was partly due to the labour disputes. The Central Bank warned that the penalty for high and prolonged inflation would be declining sales, followed by a fall in production and employment. The improvements in living standards in the 1960s were in danger of being lost to inflation. At this time, economic openness declined, while the total number of days lost through economic disputes peaked at over one million.
The Government’s Deepening Relations with the Unions
‘The chief lesson emerging from the operation of collective bargaining in the 1960s was that decentralised wage rounds were by their nature unstable and prone to inflation’. The government’s economic policy, traditionally geared to long-term growth and industrialisation targets, from 1969, became increasingly concerned with inflation. Demand and output were depressed by the government’s anti-inflationary policy and the recession in the United Kingdom. The combination of relatively slow growth, inflation and a large external deficit in 1970 presented a dilemma. As prices became a primary concern, budgetary strategy was aimed at moderating government spending so as not to contribute to inflation. In response, the government’s policies towards organised labour changed.
The NIEC viewed economic expansion and decentralised collective bargaining as incompatible. The 1970 budget argued ‘the principle need at present is for a more orderly development of incomes if we are to bring the present inflationary situation under control’. Another lesson from the 1960s was the need for a joint body to administer national pay agreements. It was against this background of industrial strife and economic difficulties that the NIEC prepared its Report on Incomes and Prices Policy. A consequence was the reconstitution of the ELC in May 1970 (which had become defunct during the early 1960s), a significant event in restructuring the adversarial approach to industrial relations. The government became a participant in the ELC with the intention of influencing wages. Then Minister for Finance, George Colley, stated that the economy could not afford wage increases unrelated to productivity increases. Following the collapse of talks at the ELC in the autumn of 1970, the government threatened statutory controls on wages and salaries with a Prices and Incomes Bill.
… it should be noted that the ICTU refused to ratify the agreement until the government withdrew its Prices and Incomes Bill. The 1970 agreement marked the beginning of a decade of engagement in centralised collective bargaining, a significant change in the politics of pay determination. Between 1972 and 1978, six National Wage Agreements (NWA) were reached through bipartite negotiations between the ICTU and employers. A further two agreements reached in 1979 and 1980, referred to as National Understandings (NU), were arrived at through tripartite negotiation with the involvement of the government.
By the mid-1970s, the new collective bargaining was marked by quid pro quo arrangements on taxation between the unions and the state and the integration of government budgetary policy into national pay determination. The linkage between the national pay agreements and government budgetary policy was ‘the most profound change in the nature, functions and prerogatives of democratic government in the history of the state’. With active state involvement in industrial relations came union involvement in policymaking. The relationship between the ICTU, the FUE and the government had changed significantly.
Trade Union Representation and Government Policies
… following the 1970 agreement, the boundary between politics and industrial relations was dismantled by the state and unions. ICTU representation on government committees, in the economic and social fields, expanded. All centralised pay agreements were drafted and concluded by employer and trade union representatives in the reconstituted ELC and thereafter adopted as state policy. …
The 1970s saw union membership expand. Throughout that decade the unions’ and employers’ federations became major actors in policy formulation. … there was a marked change in the level of ICTU policies incorporated into the government’s policies. The Industrial Relations Act of 1971 largely followed the proposals of the ICTU, and the National Prices Commission was established by the then Minister for Industry and Commerce in line with Congress’s proposals. … By the end of the 1970s, formal tripartite agreements were concluded. The government went from using budgetary policy to underwrite national pay deals, to placing a range of policy issues on the negotiation table. The ICTU, through dialogue with the government, gained influence over the most important economic policy instruments in the state.
Industrial relations difficulties – attributed to the wage round system and free collective bargaining – along with inflation, the loss of competitiveness and industrial conflict, impelled the centralisation of collective bargaining. With the conclusion of the NU in 1979, the government acknowledged a new role for pressure groups in an important sector of economic policy-making and incurred commitments to them; they, in turn, incurred reciprocal obligations involving the conduct of their members. However, by 1978, the ICTU had grown strong due to the state’s willingness to grant it concessions. This became clear in 1980… This left the employers disgruntled and questioning their place in social partnership.
THE COLLAPSE OF CENTRALISED BARGAINING (EARLY 1980s)
By the close of the 1970s, centralised agreements had become policy agreements. However, by the time the second NU expired in 1981, the unions and employers were disillusioned. The sought after economic stability had not materialised. …
The Economy Crisis and Economic Policy
The centralised agreements, implemented as solutions to the economic and industrial relations problems of the 1960s, were increasingly relied upon to address the problems of the 1970s. The late 1970s saw the economy recover from the downturn following the 1973 oil crisis. Inflation and unemployment began to fall, while strong growth returned. Real GDP increased by 5.3 per cent annually from 1976 to 1979. However, the Fianna Fáil government of 1977 employed an expansionist fiscal policy when the economy was already growing unsustainably. Strong pro-cyclical policies led to deterioration in fiscal balances, with the public sector borrowing requirement (PSBR) rising from 13 per cent of GNP in 1976 to 17 per cent by 1979. The structural problems highlighted by the first oil crisis remained unresolved when the second crisis struck in 1979.
Adjustment to the European Monetary System (EMS), entered in 1979 after severing the link with Sterling to reduce inflation, proved problematic and inflation fell more slowly in Ireland than the UK. The average rate of consumer price increase in 1980 was 18.25 per cent. Although high levels of current expenditure produced a budgetary over-run in 1979, the government continued its expansionary policies due to the worsening international economic climate resulting from the second oil crisis, increasing unemployment and emigration.
Following rapid growth in the second half of the 1970s, demand fell in the early 1980s.‘The second oil shock, the protracted international recession and the failure to achieve the fiscal policy of retrenchment led to a worsening of [economic] imbalances’. With a slowdown in growth, unemployment rose to historic levels. The increase in fiscal deficit, intended to be temporary, became impossible to eliminate as the economy declined. By 1981, the national debt reached £10.195bn. The PSBR peaked at 20.1 per cent of GNP, while the current budget deficit stood at 7.3 per cent. Government spending was so high that the total amount budgeted for 1981 had been used by June.
The Unions and the Ending of the National Agreements
Taoiseach Haughey, who came to power after winning a divisive party leadership contest within Fianna Fáil in December 1979, needed to prove his authority to a divided party with an election victory. In this context, the government was reluctant to adopt measures that could prove unpopular. In September 1980, as talks on a second NU entered their final stages, they collapsed, resulting in government intervention. ‘The Taoiseach managed to press the FUE national executive into resuming negotiations by pledging guarantees on the content of the 1981 budget’. The second NU was subsequently ratified, but the FUE resented the pressure brought upon it.
Centralised bargaining was not meeting the FUE’s objectives. For employers, particularly in indigenous companies in exposed sectors, the agreements imposing similar wage norms across the economy undermined competitiveness. For the unions, the agreements were not transforming pay restraint into jobs at a sufficient level to meet the labour supply, nor were they reducing social inequality. The state looked to the agreements to restrain pay increases, preserve competitiveness and deliver economic growth. However, these objectives were compromised by extensive bargaining below national level. The result was a second tier of pay determination developed in the 1970s. Although the agreements had procedures for containing industrial conflict, this was historically high during the 1970s.
Irish governments have tended to appease interest groups through ad hoc policy concessions. This worked against enduring agreements between the state and interest groups found in continental neo-corporatism. Additionally, close ideological affinity between the unions and government, a feature of stable neo-corporatist arrangements, was absent in Ireland. The social partners’ failure to share comparable views on the policies needed for tackling economic problems compounded difficulties. Employers warned that spiralling wages fuelled inflation and contributed to rising unemployment. The unions argued unemployment was a consequence of deficient demand. Their solution was expansionary fiscal policy. Employers resisted the demands for public sector job creation on grounds that it would have a crowding out effect. …
Political and Economic Instability
The general election of 1981 saw a minority Fine Gael and Labour coalition government come to power. At a most inopportune time, Ireland was condemned to a period of unstable government.
Prior to the election, the Central Bank stated the ‘fundamental problem is that the community still does not realise that it must adjust its living standards and expectations downwards in the face of deteriorating terms of trade and the need to commit resources to servicing the increased external debt’. The new coalition government was determined to bring order to the public finances. According to the National Economic and Social Council (NESC), a spiralling current budget deficit, PSBR and national debt precipitated a new approach to economic management. Regaining control of the public finances would entail constraining public service pay. …
Government ministers saw little merit in tripartite agreements. When discussions on a new NU broke down, the government was unwilling to intervene to save the talks. … From late 1981 onwards, with worsening economic conditions, wage rounds became decentralised. By 1982, all political parties were committed to curbing public spending, which was incompatible with the terms of the NUs. Union influence on public policy was drastically reduced during the first half of the 1980s, as the ICTU was pushed out of the policy-making process. The Fine Gael wing of the coalition decided social partners had no right to influence policy.
Political and economic instability peaked in 1981-1982. With the national debt and budget deficit spiralling out of control, a coherent policy approach was essential. However, the governments of 1981/1982 lasted such a short time that no clear policies emerged. When the second Fine Gael-Labour coalition came to power in November 1982, the national debt was almost on par with GNP. By then, all the parties agreed on the need to stabilise the debt/GNP ratio.
The state’s strategy for much of the 1980s was to exclude the unions from the policymaking process. State policy changed from focusing on employment to balancing budgets, export growth and international competitiveness. Persistent turbulence over public service pay, and government disinclination to return to tripartism, meant meetings between the government and the ICTU were formal, tense and unproductive.
The Changed Influence of the Unions
After expanding for two decades, union membership peaked at 545,200 in 1980 and then declined thereafter. During the late 1970s, the unions’ polices had been finding their way into legislation. However, by January 1982, the ICTU was at loggerheads with the Fine Gael-Labour coalition over their budget. Determined to cut government expenditures, the subsequent Fianna Fáil government ignored ICTU proposals. From mid-1982, in the face of an unsustainable national debt, all political parties committed themselves to curbing public expenditure as a precondition for economic recovery. The Fine Gael-Labour coalition budget of February 1983 saw the tax burden on pay-as-you-earn (PAYE) workers increase and social welfare cut. Thereafter, it was clear that on taxes, wages and welfare, the government and ICTU were in disagreement. …
The coalition government of November 1982 to February 1987 experienced considerable difficulties in righting the economy. As McCarthy put it ‘an attempt to achieve fiscal correction and disinflation through increased taxation, rather than expenditure reduction, completed the economic picture’. However, the stabilisation of the debt required sharp cuts in borrowing and, consequently, in current spending. Control over current spending proved difficult to achieve with high unemployment and population growth. Government spending on social services jumped from 28.9 per cent of GNP in 1980 to 35.6 per cent in 1985. … With investment and productivity capacity depressed by high taxes and interest rates, the economy entered a downward spiral.
THE REINSTITUTION OF CENTRALISED BARGAINING (LATE 1980s)
The 1980s saw a stagnating economy, deteriorating public finances and unprecedented unemployment. By the mid-1980s, the level of unemployment was being offset by emigration. Between 1981 and 1986, 75,000 people left the country, and, for the first time in a quarter of a century, 1986 saw the population decrease. By 1987, the economy reached its lowest point ever.
The State of the Economy
By 1986, most economic indicators had reached historic lows, while national economic and political commentators, the media and domestic and international organisations, all regarded the economy as in crisis. The policies introduced to shelter the economy from the oil shocks of the 1970s led to unsustainable macroeconomic imbalances. Between 1982 and 1987, the national debt doubled to over 130 per cent of GNP. The government borrowed to spend on welfare services that could be sustained only by more borrowing. Economic commentators advocated debt repudiation. Although inflation had fallen, the borrowing requirement stood at 13 per cent of GNP in 1986. Unemployment reached 17.7 per cent in 1987, with 254,526 people out of work. The numbers in work had fallen from 1,145,000 in 1979 to 1,095,100 by 1986, shrinking the tax base.
The Central Bank viewed the situation with pessimism, as it would not permit for improvements in welfare benefits to the needy. The business community was extremely concerned and leading businessman and entrepreneur Tony O’Reilly warned of the dangers of International Monetary Fund (IMF) intervention in the economy. If the IMF were to intervene in the operation of the Irish economy, it would signal to the international financial community the diminution of Irish economic sovereignty and be widely perceived as confirmation that the Irish government was incapable of righting the economy on its own.
The NESC Report: A Strategy for Development
In this context, the government became interested in building support among the economic and social interests for a national recovery strategy. Through the involvement of the major economic interests, the NESC acted as a forum for discussing the crisis. In the autumn of 1986, it produced a report A Strategy for Development, 1986-1990, in which it noted that ‘[t]he argument against a continuation of present policies is based on the consideration that discretion over economic and social policy would ultimately be removed from [Irish] control’.
The NESC report emphasised a plan, requiring an integrated medium term strategy that would command acceptance throughout society to tackle the crisis in public expenditure. The report was conceived as a means of supporting the coalition government’s recovery plans. While still in opposition, Fianna Fáil proposed building on the NESC’s report and its 1987 manifesto, The Programme for National Recovery, absorbed much of A Strategy for Development.
The 1987 General Election
By 1986, Fianna Fáil, in opposition, was aware that the unions were disillusioned with the government, especially the Labour Party. In the absence of political links, the union movement faced the prospect of continued marginalisation from policy debates. Spotting an opportunity, Fianna Fáil sought to woo the unions through its willingness to involve them in policy discussions if elected to government. It did not regard the arms length dealings with the unions, employed by the coalition government, as ideal for imposing fiscal discipline upon the troubled economy. Haughey also denounced the Thatcherite policies of the Fine Gael-Labour government, supporting the calls of union leaders for a return to social partnership.
Labour Party ministers struggled in cabinet to maintain social benefits, imposing considerable strains on the coalition. Yet, the Labour ministers’ stance had not made their relationship with the unions easier. The coalition government collapsed in 1987, when Labour resigned in disagreement over budget cuts.
The election of 1987 saw all party leaders proposing fiscal rectitude. Haughey, leader of Fianna Fáil, stressed that the election was about economic recovery. The Fine Gael election manifesto, Breaking out of the Vicious Circle, proposed reduced public spending and borrowing. Fianna Fáil campaigned on a platform of opposition to cuts in social spending and advocated a return to centralised pay agreements.
The election saw a shift of urban working-class support towards Fianna Fáil, in protest at the harshness of the measures proposed by the coalition. The new Fianna Fáil minority administration was considered likely to want to avoid the risks of implementing severe spending cuts. However, after Haughey visited the Department of Finance for a briefing on the national finances, Fianna Fáil recanted on its manifesto promises, making clear it proposed little modification to the outgoing government’s plans. The budget introduced in March 1987 sought greater fiscal adjustment than was achieved in preceding years. This was a marked shift in policy emphasis and a determination to reduce the deficit. Expenditure was reduced by £250m, while tax revenue increased by £117m.
The Unions and the Programme for National Recovery
The new government’s actions appeared unpromising from the ICTU’s perspective. However, Fianna Fáil wanted to avoid confrontation with the unions, especially in the public service. Within a few months of assuming office the government promoted talks on a national pay agreement – The Programme for National Recovery (PNR) – in accordance with the principles in the NESC report. The administration was interested in securing a three year tripartite agreement throughout the economy. ‘The Taoiseach invited the unions, along with the other social partners, to take part in an effort to spur recovery by means of consensus’. To facilitate agreement, the government was willing to modify its stance on public service pay and discuss tax concessions, job creation and welfare.
By supporting a centralised pay agreement for industrial peace and union commitment to spending cuts, Fianna Fáil revealed a preference for defusing, rather than inflaming, industrial conflict and for seeking union support, rather than excluding them from policy deliberations. By 1987, the unions favoured a return to centralised pay determination. The prospects of agreement on a moderate pay rise, combined with tight control over second-tier bargaining, also drew in the employers.
The union movement entered negotiations in a weaker position than in the 1970s. Although the unions had not been consulted on policy by the coalition government, they still possessed leverage in the Dáil with the Labour Party and Fianna Fáil. However, with Fine Gael now in opposition and operating under its Tallaght Strategy of not opposing the government’s measures to revive the economy, many of which had ironically been proposed by Fine Gael in the run up to the election, the unions had few options besides doing a deal.
Talks built on the NESC report. The ICTU executive argued that the PNR would prevent Ireland going down the Thatcherite road, where the UK Trades Union Congress (TUC) had been utterly marginalised. Thus, the PNR restored social partnership, as well as brining considerable benefits for capitalism. The PNR resembled the NUs in scope, but not content. The central issue was an agreement on wages in the public and private sectors for three years. However, the PNR, and its successor agreements, also encompassed a wide range of economic/social policy commitments on job creation and welfare benefits. Unlike the 1970s, these agreements were based on shared understanding of the problems facing the economy and the policies required to address them.
The Unions and Policy Developments
Following the recommendations of the NESC, the government’s objective was to reduce the debt/GNP ratio to a sustainable level. The change in government economic policy, first encapsulated in its March 1987 budget, as a determination to reduce the deficit, was elaborated in the PNR. In contrast with earlier attempts, the targets for 1987 were achieved. Subsequent budgets were designed in harmony with the PNR and the agreements thereafter and they provided for implementation of policies over which the unions had direct input.
Three joint government-ICTU working parties on Employment and Development Measures, Taxation and Social Policy were established and chaired by the Secretary of the Department of the Taoiseach. More committees were formed following subsequent national agreements. A Ministerial-ICTU group also met monthly to review progress. The unions had secured input into policy-making through their position as an essential constituency with rights of representation on state boards, committees and policy fora
From 1987 onwards, Congress policies on pay, tax and social welfare found their way into government policy. Ireland had embarked on a tripartite approach to income policy, marking ‘a fundamental change in [the] approach to social partnership between that practised up to the early 1980s and that practiced from 1987 onwards’. The agreements of the 1980s and 1990s were not confined to wages, but encompassed a range of socioeconomic policies. The focus of these agreements was economic stability, greater equity in the tax system and enhanced social justice, with the result that, ‘in the decade after 1987, interest group activity in Ireland attained centre stage, with the tripartite agreements of the 1990s cementing social partnership’. Ireland’s political economy shifted from a British, towards a European, mode of consensus between social partners. ‘These arrangements re-established a reciprocal relationship between Congress, the government, and employers on a much stronger institutional footing than heretofore’.
Social partnership arrangement continued to function up until the collapse of talks on a new national agreement in 2008, as a new economic crisis took hold. It remains to be seen whether Ireland will witness a return to the decentralised collective bargaining of the early 1980s, or if the social partnership arrangements can be revived. In this respect, the current situation in some ways mirrors conditions in 1981. The decision on this issue will have huge implications for the role of trade unions in Irish society, and for the performance of the economy, over the coming decade.
This chapter examined the four periods in which the trade union movement’s influence over Irish public policy changed dramatically during the latter half of the 20th century. In each of these cases, extant economic circumstances had a significant role to play. Thus, the unions’ changing influence was examined in the context of the broader Irish political economy.
The 1950s was a depressing decade. However, after Lemass came to power in 1959, the Fianna Fáil administration sought to open the economy to competition and FDI. Lemass regarded trade union involvement as critical in this attempt to revive the economy. As a result, ICTU access to the Taoiseach, representation on government committees, government economic policies and policies towards organised labour, changed in the unions’ favour.
Fear that industrial unrest might frighten off FDI led to centralised collective bargaining between the state, unions and employers throughout the 1970s. The NWAs and later NUs, provided the ICTU with unprecedented access to government, its policies, and their formulation. These centralised collective bargaining arrangements were linked to government budgets. Thus, the state came to play a role in industrial relations, in return for which the unions gained influence over economic policy. By the end of the 1970s, wage agreements were being concluded in a tripartite context.
The early 1980s were a time of economic turmoil and political instability. The national agreements of the 1970s, a solution to the industrial relations problems of the late 1960s, were no longer addressing the needs of the economy. The employers’ had become disillusioned with the agreements’ failure to control wage inflation, while the unions felt pay restraint was not resulting in job creation. In 1981, the government abandoned centralised bargaining, as it sought to bring public spending under control. As a consequence, the ICTU was excluded from directly influencing policy.
By 1987, with the country on the verge of bankruptcy and unemployment at almost 20 per cent, the political establishment recognised the need for a new consensual approach to the economy. A new Fianna Fáil administration, building on an NESC report and determined to impose fiscal discipline, sought to involve the unions in policy consultation to avoid the dangers of open confrontation. For the weakened ICTU, fearful of permanent marginalisation, the prospect of reinstituted centralised bargaining was a welcome lifeline. The unions saw this as an opportunity to regain influence over taxation, unemployment and social welfare policy. From 1987 onwards, a tripartite approach to managing the economy developed, wherein the social partnership agreements encompassed a range of economic and social issues. The ICTU, through involvement on numerous committees and working parties, secured an input into state policies that endured up to 2008.
However, with the collapse of social partnership in 2008, a large question mark hangs over the whole process. If the impact of current recession was sufficient to collapse the social partnership process, this raises questions as to the underlying strength of the agreements. Did Irish social partnership hold together from 1987 onwards because of an underlying societal commitment to what the agreements represented? Or, did partnership exist primarily due to a very favourable set of economic circumstance that, once ended, made it an unsustainable proposition? The answer to these questions will determine the future of Irish social partnership, and that of the wider economy and society, over the next decade.
Here is also a paper, FDI and Irish Economic Development over Four Stages of European Integration (PDF, January 2006) | Frank Barry, University College Dublin. Underlines, italicization, excerpts, et al. are on our own.
Ireland is the most FDI-intensive economy in Europe. Foreign-owned firms account for almost 50 percent of Irish manufacturing employment. This compares to an average figure of 23 for the Western European EU member states and a figure of 33 for the three largest Central and Eastern European economies. Of the 17 EU countries plus the US and Norway for which OECD (2005, E7) provides data, Ireland also records the highest share of services-sector employment in foreign-owned firms. These figures are reflected in the value of the stock of foreign direct investment (FDI). Per head of population, the Irish inward FDI stock is a multiple of the EU average.
The distinguishing feature of the country’s development strategy over the last four decades of outward orientation has been the emphasis placed on attracting FDI. The country had been remarkably successful in this regard even before the “Celtic Tiger era” of the 1990s and beyond. Having stumbled upon the strategy, it turned out with hindsight to accord well with Ireland’s advantages: its Atlantic location and English-speaking environment, relatively low labour costs by Western European standards, cultural connections with the US and Western European standards of governance.
The present paper analyses the co-evolution of institutional features of the Irish economic environment and the types of FDI available to European economies. We divide the period of Irish outward orientation into four distinct phases.
The first phase of Irish trade integration with Continental Europe began in the late 1950s when the country moved away from protectionism, dropped its restrictions on foreign ownership of industry and adopted a zero rate of corporation tax on manufactured exports. These moves drew in substantial numbers of US firms who exported into mainland Europe (as opposed to the UK, which remains to this day the dominant export destination of most Irish domestic firms) even though substantial tariff barriers remained against Irish-produced goods. Increased openness saw the country adopt the main proposals of an influential OECD report on primary and secondary education in 1965, which sparked a dramatic educational expansion at all levels.
The second phase began when Ireland joined the EU in 1973. This brought a substantial increase in FDI inflows which – in response to the upgrading of the Irish tertiary educational system – began to locate in higher-technology sectors. Macroeconomic instability over the period of the oil shocks however prevented Irish convergence on average Western European living standards over this period.
The third integration phase was driven by the Single European Market, the global high-tech boom and domestic policy adjustments in Ireland. The outlawing of restrictive public procurement practices on the part of EU governments allowed Ireland’s locational advantages come more strongly to the fore; the low-corporation tax environment proved especially beneficial to high-tech MNCs who are better able to exploit its benefits; Ireland’s continued educational upgrading remained an important magnet for such firms, while fiscal consolidation, EU regional aid and the institutions of social partnership brought further competitiveness gains. Furthermore, the EU-enforced inter-sectoral harmonisation of corporation tax rates in Ireland brought the Irish rate on services down dramatically just as global services-sector offshoring began in earnest.
The fourth phase arose as a consequence of Ireland’s convergence on average Western European living standards over the Celtic Tiger era and the accession of other low corporation-tax states to the EU. This required Ireland to focus more on developing its national system of innovation in order to target the increasingly technology-sourcing foreign direct investment flowing into and across Europe.
- Phase 1: from Protectionism to EU Accession (1958-1973)
Ireland remained protectionist for about a decade after most of the rest of Western Europe had moved towards freer trade. The post-war boom of the 1950s saw Western Europe achieving growth rates of almost 6 percent per annum while protectionist Ireland stagnated with a growth rate of less than 2 percent, and an employment growth rate of less than 1 percent. The need to import the more sophisticated capital and consumer goods that the country could not produce for itself led to balance of payments crises and macroeconomic instability, exactly as happened in protectionist Spain at around this time. The depressed economy of the 1950s saw more than 400,000 Irish people emigrate, out of a total population of less than 3 million.
By the end of the 1950s it was clear that economic policy would need to be completely overhauled. The First Programme for Economic Expansion, which removed protectionism, encouraged foreign direct investment and promoted exports, was introduced in 1958. The Anglo-Irish Free Trade Agreement, which aimed to liberalise trade with the country’s major trading partner of the time, the United Kingdom, came into force in 1966, and both countries acceded to the then European Economic Community (EEC) in 1973. The move towards openness was accompanied by the introduction of a zero tax rate on profits derived from manufactured exports and a liberalisation of the law on foreign ownership of companies. As the bulk of the country’s exports at that time were agricultural in nature, there was little diminution of the tax base when the concessionary tax rate was adopted.
O’Hearn (1987) has estimated employment levels in the new foreign firms that entered Ireland to avail of the zero tax rate on manufactured exports. By the time of EU entry these firms accounted for slightly more than half of all foreign-firm employment in manufacturing, with the remainder accounted for by the mainly UK firms that had entered Ireland to cater to the home market, whether under protectionism or in the outward-oriented era. …
…most of the growth prior to EU entry was in traditional or low-tech sectors such as Textiles and Clothing, Metals Industries (such as aluminium extrusions, shipbuilding, cranes, metal nuts), Pulp and Paper, and Rubber and Plastics.
The FDI inflows of this period led to Ireland developing a revealed comparative advantage (at the SITC-1 level) in Chemicals (whose share of exports grew from less than one half of 1 percent at the end of the 1950s to 6 percent at the time of EU entry) and in “manufactured goods classified by material” and “miscellaneous manufactured articles”.
The growth in foreign industry also contributed to a substantial diversification of Irish exports away from the UK market, with the then 6-country EU share of manufacturing exports rising by 10 percentage points between the late 1950s and the early 1970s.
It is of interest to note that though the numbers of new foreign firms establishing operations in Ireland accelerated as EU accession drew closer, the impact of EU membership on inbound FDI would have been unclear a priori, since accession entailed the loss of Ireland’s preferential position in the UK market.
The increased intellectual openness of the period saw Ireland (and later Austria) volunteer to allow the OECD conduct a survey of the entire national education system. An important feature of the subsequent report, issued in 1965, was that – almost for the first time – technocratic expertise was now to be heard alongside the party political and denominational interests which had previously dominated ministerial councils (Logan, 1999). The report was scathing in its assessment of the Irish system, noting that over half of Irish children left school at or before the age of thirteen. This finding generated newspaper headlines and presaged the introduction of ‘free’ second-level education and free access to special transport networks for all second-level school pupils in 1967. These measures sparked a dramatic educational expansion over the course of the 1970s and subsequently.
Notwithstanding Ireland’s early successes in attracting FDI, there was no convergence on average Western European living standards over this period, nor indeed until the late 1980s. This is arguably ascribable to Ireland’s “regional economy” character, where, because of the historic ease of emigration to the UK, Ireland can be thought to have little control over its net-of-tax labour costs (though there were substantial insider-outsider problems in the labour market also). This would have prevented Ireland from industrialising through the development of low-wage consumer goods exports as each of the other traditionally less developed Western European economies – Portugal, Spain and Greece – did in the 1960s…
- Phase 2: From EU Accession to the Single Market Era (1973-87)
Although Ireland was already relatively FDI-intensive at the time of EU entry, the number of jobs in foreign-owned manufacturing industry grew by 23 percent between 1973 and 1980, before declining subsequently as a consequence of macroeconomic mismanagement.
Although Ireland’s low corporation-tax environment is particularly attractive to high technology firms, the increasing technological intensity… would not have been possible without the educational advance touched upon in the last section.
The structure of the Irish education system that emerged in the wake of the OECD report is unusual in that while Ireland just matches the OECD mean in terms of those with university qualifications, it has far higher proportions than the average OECD country with specific post-secondary and sub-degree tertiary educational qualifications…
The post-secondary education system that emerged in Ireland was based on a realisation that, unlike in the UK – whose early industrialisation had ensured the evolution of a well-developed system to provide an intermediate layer of technicians – the education system in Ireland would need to provide this intermediate layer from scratch if human resources were to be available to sustain the industrial expansion… that followed on from Ireland’s relatively late trade-liberalisation-driven industrialisation.
The main components of the technical-education system developed in Ireland over the course of the 1970s were the Regional Technical Colleges (later rebranded as Institutes of Technology), for which there was no UK model. These offered subdegree programmes of shorter duration than those at universities and concentrated in the fields of engineering and business studies, and their curricula had a practical orientation designed to be responsive to the needs of local industry and business.
From having had a tiny short-cycle third-level sector before 1970, by 1981 Ireland had internationally, after the Netherlands, the highest proportion of third-level students taking sub-degree courses. Since the late 1970s, furthermore, the universities themselves – at the behest of the national development agency, the IDA – had begun to accept increased responsibility for ensuring that manpower needs were met. The Manpower Consultative Committee was established in 1978 to provide a forum for dialogue between the IDA and the education system. The state agency, concerned by the looming disparity between electronics graduate outflows and its own demand projections, convinced the government to fund a massive expansion in educational capacity in these areas. The output of engineering graduates, as a result, increased by 40 percent between 1978 and 1983, while the output from computer science increased tenfold over the same short period. The IDA in turn was able to use the rapidity of this response – exemplified by the immediate introduction of a range of one-year conversion courses to furnish science graduates with electronics qualifications – as a further selling point to foreign investors; MacSharry and White (2000).
…the major expansions were in computing equipment and electronic components, pharmaceuticals and medical and optical devices, and these expansions continued into the following “Celtic Tiger” era.
Once again over this period however, notwithstanding the continued success in upgrading the country’s sectoral FDI allocation, no convergence was recorded on average Western European living standards. Unlike in the previous era (1960-73) however, this lack of convergence was replicated across all the poorer Western European economies… Barry (2003) identifies deficient macroeconomic policymaking across all these four countries in the wake of the oil shocks as a common factor behind their weak performance, suggesting that poorer countries may be structurally less capable of adhering to appropriate monetary and fiscal policies in the event of a downturn in the world economy. Convergence is also known to be more difficult to achieve when the encompassing world economy is performing poorly.
- Phase 3: The Single Market, Services Offshoring and the Celtic Tiger
In this phase, running from 1987 to the present, all four cohesion economies converged substantially on average Western European living standards, with Ireland’s performance being particularly dramatic. The various factors behind the Irish performance are discussed in detail elsewhere, e.g. in Barry (2004). Here we focus solely on the contribution of FDI.
Manufacturing FDI into and within Europe expanded in the late 1980s. …with respect to US investments in Europe, with the US Department of Commerce Survey of Current Business (March 1991) attributing much of this to the lead up to the introduction of the Single European Market in 1992. The figure also shows that Ireland captured a growing share of US investments in Europe. MacSharry and White (2000) explain this latter effect by describing how several larger EU countries, in the pre-Single Market era, “had suggested to potential investors that publicly funded purchases of their products might be blacklisted if the new investment was located in Ireland” (rather than in the countries from which the threatening noises issued). With the outlawing of restrictive public procurement practices under the Single Market initiative, the attractiveness of Ireland as a destination for FDI increased. This effect would undoubtedly have been dampened without the concurrent restoration of macroeconomic stability.
The increasing share of high-tech sectors in European manufacturing over the 1990s also helped, as did the high profitability of the era, since both increase the attractiveness of a low corporation-tax environment. Altshuler, Grubert and Newlon (2001) argue, furthermore, that US foreign investment has become more sensitive to differences in host country taxes in recent years, and Ireland has had – until the recent enlargement – the lowest rate of corporation tax in the EU. The Single Market programme may also have allowed Ireland achieve a critical mass of US firms in certain sectors, allowing agglomeration and demonstration effects to come into play (Barry, Görg and Strobl, 2003).
Thus the number of jobs in foreign-owned manufacturing in Ireland expanded by almost 50 percent between 1987 and 2000.
Combined with this increase in manufacturing FDI, Ireland also began to attract increasing services-sector FDI inflows (Grimes and White, 2005). Starting from a base close to zero in the late 1980s, by the new millennium, foreign-firm employment in each of Ireland’s strong FDI-intensive manufacturing sectors is now matched by foreign-firm employment in several offshore services sectors located in Ireland. Thus computer software now matches hardware, international financial services matches pharmaceuticals and other business-process offshored (BPO) activities match employment levels in instrument engineering. Furthermore, as Barry and Van Egeraat (2005) show, as computer hardware firms have shifted their manufacturing facilities to Asia and Central and Eastern Europe, they have upgraded their operations in Ireland into services activities.
An indicator of Ireland recent successes in offshore services… Though Ireland has only around 1 percent of the EU15 population, it attracted 50 percent of new shared services projects in the EU15 and 8 percent of regional headquarters projects in the period to which the data refer.
It is well known that the share of services in international FDI flows has been increasing over recent decades (UNCTAD 2004). Ireland’s ability to attract an increased share of services was facilitated by substantial reductions in the rate of corporation tax on services over the course of the 1980s and 1990s… These changes were generally made of the behest of the European Commission. Export Profits Tax Relief, for example, began to be phased out in 1978, to be replaced by a special 10 percent rate for manufacturing industry. From 1987 this special rate was extended to qualifying activities carried out at the newly opened International Financial Services Centre in Dublin. Most other market services meanwhile continued to be subject to the standard 32 percent rate that prevailed at that time. The European Commission had been pushing for some time for tax harmonisation across sectors, implicitly hoping that Ireland’s rate would be pushed much closer to the EU average. The Irish government instead decided in 1998 on a harmonised rate of 12.5 percent –to be instituted from 2003 – which yielded substantial benefits to most services sectors in order to cushion the impact on manufacturing.
Table 7: Ireland’s corporation tax regime
- 1956: Finance Act introduces Export Profits Tax Relief (EPTR), primarily for manufacturing industry, with 50 percent tax remission on profits (increased to 100 percent two years later). The measure provided full relief for fifteen years and tapering relief for a further five years.
- 1969: EPTR extended to 1989-90.
- 1978: Government abolishes EPTR and replaces it with a special 10 percent rate of corporation profits tax for all manufacturing industry from 1981-2000. Those qualifying for export-tax relief before 1981 continue to benefit until 1990.
- 1987: Financial Services Act establishes International Financial Services Centre in Dublin. Profits of qualifying activities carried out from the Centre are taxed at 10 percent until 2005.
- 1990: Government extends the 10 percent corporation profits tax rate to 2010.
- 1998: Agreement with European Commission on universal 12.5 percent corporation tax for all trading companies from 2003. All existing commitments to the 10 percent tax rates for manufacturing industry to the year 2010 to be honoured. The current 28 percent standard rate applying to most Services to be reduced by 4 percent annually in 2000, 2001 and 2002, and by 3.5 percent in 2003, giving a 12.5 percent rate at that date.
The Finance Act 2004, furthermore, established a new headquarters regime aimed at attracting international corporations to establish their regional HQ in Dublin. This has further served to attract other activities such as shared services and treasury management (Finance Dublin Yearbook, 2004).
- Phase 4: Science, Technology and Innovation Policy and the Offshoring of R&D Functions
Offshoring of R&D facilities is a growing phenomenon. Kuemmerle (1999a) tracked 32 MNCs in the pharmaceutical and electronics industries and found that their overseas R&D staff increased from 6 percent in 1965 to more than 25 percent today, while the number of overseas R&D labs increased from 14 to 84. His study distinguishes between “home-base-exploiting” R&D sites (which are associated with traditional FDI, where firms set up overseas to exploit on a larger stage the advantages, such as brand names, that they had already accumulated) and “home-base-augmenting” or technology-sourcing cites. The former are found to be more likely to be located close to existing factories and important markets, while the latter are more likely to be located close to universities. The proportion of R&D labs that Kuemmerle categorises as home-base-augmenting rose from 7 percent to 40 percent over the period he studied.
The 2005 UNCTAD World Investment Report provides broader and more detailed evidence on the recent growth in global offshoring of R&D functions. This provides the context for recent developments in science, technology and innovation (STI) policy in Ireland.
Given the growth in offshoring of R&D, along with Ireland’s convergence on average Western European living standards by the early years of the new millennium – and perhaps also in response to the threat of increased corporation-tax competition from Central and Eastern Europe – science, technology and innovation policy has recently moved to the heart of the Irish policy agenda.
This was heralded by the release in 1996 of the first-ever Irish Government White Paper on Science, Technology and Innovation. It is underlined by the five-fold increase in investment in these areas under the current National Development Plan (2000-06), by the launch in 1998 of the Programme for Research in Third-Level Institutions (which established 24 major research centres as well as major programmes in human genomics and computational physics), by the establishment of Science Foundation Ireland (SFI) in 2000, and by the introduction of a 20 percent tax credit for incremental R&D in the Finance Act of 2004.
The origins of Science Foundation Ireland lay in a Technology Foresight Exercise organised by the state body Forfás, which asked client company executives where they saw their companies headed over the next 10–15 years, and what the Irish government could do to respond to those changes. The response was that as Ireland was no longer a low-cost manufacturing location it would have to develop more highly trained engineers, research scientists etc. to become a center for innovation, research, design and development.
The exercise proposed the establishment of a Technology Foresight Fund to promote and finance new basic and applied scientific and technological research in Ireland, and SFI was set up to administer this fund. Besides providing awards to support scientists and engineers working in designated fields (along the lines of the US NSF), SFI has established a host of joint partnerships between third level research institutions and industry.
Within ICT alone, the last few years have registered a number of significant developments under this new strategy. Bell Labs has announced its intention to set up a major R&D centre at Lucent Technologies’ Dublin facility, linked with the establishment of a collaborative academic centre at one of the city’s universities. Similarly, Hewlett-Packard announced the establishment of a world-class Technology Development Centre at its manufacturing facility outside Dublin, while its European Software Centre entered into collaboration with NUI-Galway in establishing the Digital Enterprise Research Institute. Intel has established an innovation centre at its main site outside Dublin and increased its investment in its research centre near Limerick. It has also partnered three Irish universities in an academic Centre for Research on Adaptive Nanostructures and Nanodevices. IBM over the same period announced significant investments in its R&D software facility in Dublin – a decision influenced, according to one of the company’s directors, by the availability of the necessary skills, the strong support of the IDA and the increasing role of SFI. A number of similar investments have also appeared recently in the biotech and pharmachem areas.
Ireland’s success in attracting FDI can be ascribed to the following factors:
- EU membership, macroeconomic stability, Western European governance standards and an English-speaking environment
- a low corporation tax rate
- the skills and experience of the country’s Industrial Development Agency (IDA)
- the quality of the telecommunications infrastructure, and
- an educational system that is integrated to a large extent with the country’s FDI-oriented development strategy.
As one of the first countries in the world to adopt an FDI-focused development strategy (in the late 1950s), the country has had an extensive period of time to fine tune its policies and institutions in line with the requirements of international FDI. This has allowed it to continue to succeed as FDI flows into Europe have shifted progressively from traditional to higher-tech manufacturing sectors through services offshoring and more recently into the offshoring of R&D functions.
Though a late starter – by Western European standards – in increasing educational throughput, Ireland by 1981 had, after the Netherlands, the highest proportion of third-level students taking sub-degree courses. This was a relatively inexpensive option for the country for follow, a strategy arguably justified in the case of a relatively poor European country. By international standards tertiary enrolments were heavily biased towards science and engineering, which accorded with the requirements of the MNCs that the country was trying to attract. As convergence on Western European living standards was progressively achieved and as offshoring of R&D has grown, the emphasis has increasingly switched towards university and postgraduate education.
As shown in the appendix, the country’s IDA has also functioned effectively as a learning organisation through its transnational strategic networks. The strong focus on the importance of FDI in Ireland and the position of the IDA in the policymaking hierarchy ensure that the system is configured to respond rapidly to emerging market opportunities as well as changing factor-market conditions in Ireland.
One example, discussed earlier, concerns the pace of response to the looming disparity, once recognised, between electronics graduate outflows and the IDA’s demand projections for such graduates. Another example is provided by the response to an EU Directive in the 1980s which allowed financial services companies, once established and registered with the regulatory authorities of one EU member state, to operate in any other member state. The directive freed firms to locate in countries where they found the regulations to be most favourable. Ireland was the second country after Luxembourg to implement the directive, in 1989. In addition the authorities decided to forego VAT and inheritance taxes on certain investment fund activities and two further items of legislation were enacted in 1990 to facilitate the development of investment funds. The industry’s activities in Ireland expanded dramatically in response and by 2005 the country had become one of the world’s leading locations for the domicile and administration of investment funds (Barry, Thebault and Wojcik, 2006).