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Unity on the Essentials

Presentation by

John Bruton T.D.,

Former Prime Minister of

Ireland

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Ireland

“When Ireland achieved independence from the UK in 1922, per capita income was amongst the highest in Europe. Thereafter, however,

followed a half century of relative decline as Ireland pursued a policy of industrialisation behind high tariff walls”

Economist Intelligence Unit (2004)

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An Economic Miracle

or just

a late developer catching up?

Ireland

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What Ireland achieved in the 1990’s

6.6% GDP growth per year 1991 – 2004 Budget deficit of 1980’s becomes a surplus Unemployment of 16% in 1980’s falls to 4% Inflation remains low Emigration turns to immigration Second Highest level of Foreign Direct Investment per Capita in the world

(after Hong Kong)

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Independent non-partisan Civil service (1922) Police and Military independent of politics (1924) Non-partisan body set up to attract foreign investment – IDA (1949) Independent courts system (since 19th century) English as a language (since 19th century) Cultural connection with North America – half of all foreign firms in Ireland

are U.S. owned

Long-term sources of success

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Prolonged protectionism (1932 – 1960) Restriction on Foreign Investment (1932 – 1960) Excess Government Borrowing (1977 – 1987)

Initial Mistakes

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Removal of controls on foreign investment (1958) Free Trade with Britain (1966) Free post-primary education (1966) Joining European Union (1973) Abolition of Exchange Controls (1980)

Modernisation Begins

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Political Ingredients

A Bipartisan tax policy to favour foreign direct investment 0% from 1956, (on all exports) 10% from 1978, (on manufacturing and trade) 12.5% from 1997 (on all companies)

Social Partnership with Trade Unions from 1987 – this kept wage growth below productivity growth by promising tax reductions

The Dublin International Financial Services Centre (1987) – Total assets of licensed credit institutions in Ireland now 400% of GDP

Free Third Level education (1996)

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Demographics and Human Capital (I)

Labour force available to work grew from 1.1 million in 1980 to 2.01 million in 2005

A lot of children in 1980’s – a cost then which became a benefit later when they grow up to be. Young adults in 1990’s – well educated and IT literate

35% of Ireland’s 25 to 35 year old population have third level education, as against E.U. average of 23%

Women joining paid workforce added 2% p.a. to growth rate in 1990’s – participation of women rose by 53% from 1994 to 2005.

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Demographics and Human Capital (II)

The dependency ratio in 1986 was 224 dependents per hundred person employed. By 2004 it was down to 124

Ireland still has a lower life expectancy for men and women than the rest of the E.U. (A residue of poverty in earlier years)

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E.U. membership gave guaranteed access to largest market in the world, as part of a relationship of equals on the basis of rules which apply equally to all countries large and small

Money from Europe used to expand technological education from 1973 – especially useful from 1988 onwards

E.U. Competition Rules acted as a restraint on some monopolistic and rent seeking tendencies, and euro currency rules disciplined public finances

A better relationship with Britain arose from E.U. membership and this helped pacify Northern Ireland

E.U.membership and temporary emigration widened people’s horizons and promoted innovative attitudes rather than mere imitation of Britain

Ireland in the European Union (I)

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Ireland in the European Union (II)The benefits came slowly. After fifteen years in membership in 1988, Ireland was still lagging, but everything had changed by 1988

Economic Turnaround 1988 2004

GNP per person at work as a % of EU Average 70% 110%

National Debt % of GDP 122.7% 29.8%

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Being a small country brings trust, ease of communication of strategic goals, and accessibility of key decision-makers

Investment in modern telecommunications (1973 – 1990) enabled Ireland to become an exporter of Services

Shift in world economic development in 1980’s towards high value / low weight products which suited an island economy like Ireland

The authorities read the market well- the IDA targeted IT, financial services and pharmaceuticals – spillovers achieved in these sectors

Other Factors that helped

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The Surge in Foreign Direct Investment (FDI) in Ireland

1994 2000 2004

Number of FDI companies 908 1,250 1,022

New FDI jobs filled 9,961 22,994 10,825

Full-time FDI Employment 85,597 141,125 128,946

Note: The US Stock Market peaked in 2000 and the fall-off since then partially

reflects that.

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The Foreign Investment Sectors

Total Employment

(net change in 2004 on previous year

New Jobs 2004

Information & Communication Tech.

41,887 (+ 1.3%) 2,946

Pharmaceuticals & Healthcare

19,985, (+3.4%) 1,433

Engineering 13,989 (-9.0%) 478

International & Financial services

44,842 (+3.3%) 5,763

Miscellaneous 8,243 (-11.2%) 205

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Foreign Direct Investment

While FDI has been the driver, the bulk of the increase in total employment was in the service sector. FDI was mainly in the form of greenfield investment in viable new projects, not mere asset sales.

More importantly, the psychological effect of FDI promoted innovative attitudes.

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Irish 21st Century Prospects

Still much better than rest of E.U. because:

A younger and more flexible population

Openness to immigration (average of 56,000 per year for the past 5 years. 40% returning Irish Nationals).

Relatively low pension and other demographic costs

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Irish 21st Century Vulnerabilities

Fall in the value of the $ Competitiveness peaked in 2000 – rent seeking remains in markets for housing,

land, and professional services. House prices rose 253% between 1995 and 2004

Insufficient home grown R & D, only 57% of OECD average Exchange rate risks because Sterling remaining outside Euro High exposure to the United States economy 17% of Students still do not complete second level Education Most foreign firms in Ireland have little contact with their ultimate customers

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The formula that worked for Ireland

1. Recognition that business needs certainty and simplicity

(a) Ireland offered certainty on the rate of corporate taxation (12.5% for the next 15 years)

(b) It offered certainty of access to the world’s largest market (the E.U.)

(c) It offered comparative certainty about the industrial relations by Social Partnership with trade Unions

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The formula that worked for Ireland (contd.)

2. Investment in Technological education with aid of E.U. funds to offer a well trained labour supply

3. A recognition that Irish people abroad can be attracted home, bringing skills and open-mindedness with them

4. An understanding that reforms often take a long time to deliver results and that patience is necessary

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The Celtic Tiger

Unity on the Essentials