What does Independence Mean for a Small Open Economy?The Exercise of Irish Economic Sovereignty in Long-Term Perspective

Frank BarryTrinity College Dublin

September 5, 2013Draft 2

Introduction

Small economies are highly exposed to international trade because of the difficulties of achieving efficient scale across a broad range of sectors. Openness implies a greater exposure to the external environment, as well of course as reducing the efficacy of Keynesian stabilisation policies. Political independence for many newly established states is associated therefore with an attempt to diversify away from or otherwise reduce economic dependency on the former hegemon or colonial power. For most of the first half of the period since Irish independence in 1922 the attempt to reduce exposure to the UK was implemented through tariff protection and restrictions on the foreign ownership of industry.

Inward orientation eventually ran out of steam, culminating in the long recession of the 1950s. As the visionary (Permanent) Secretary of the Department of Finance, T. K. Whitaker – whose 1958 document Economic Development is widely heralded as a key turning point in the shift towards outward-orientation – has written: “something had to be done or the achievement of national independence would prove to have been a futility” (Whitaker, 2006).

Irish national income per capita was estimated to have hovered at around 55 percent of the UK level between 1870 and independence.1 Henceforth it would diverge, as seen below, reaching the 55 percent mark again only in the late 1960s. The main culprits identified by Ó Gráda and O’Rourke (1996) for this poor performance were the trade-protectionist stance combined with a failure to raise educational throughput until industrialisation began in earnest in the 1960s.

A few short years before the publication of Economic Development, Ireland had stumbled on the policy of export profits tax relief, the origin of the low corporation tax regime that remains in place to this day. Though initially envisaged as an incentive to indigenous exporters, by the time the policy was introduced it was realised that it could prove an effective stimulus to export-oriented foreign industry. As an early report into the consequences of the new policy found, most of these new exports were directed towards continental Europe rather than the UK, which had been the only export destination of consequence up to this point. Most of the largest of these firms, furthermore, were American. Under protectionism, the legal impediments to foreign ownership notwithstanding, the vast bulk of inward foreign direct investment had been of the tariff-jumping variety and was almost exclusively British.

Fiscal autonomy did eventually help therefore in diversifying Irish export markets and FDI sources. Diversification of external links remains an ongoing priority in Irish long-term

1 Maddison provides figures for 1870 and 1913. The continuous series runs from 1921.1

policy, as evidenced by a recent official statement of the broad principles underlying Irish foreign economic policy:

“One of the central thrusts of Irish economic policy… has been to reduce the country’s trade dependence on the UK. Policy initiatives with this aim in mind have included EU entry in 1973, the break with sterling in 1979 and subsequent entry of the Irish pound into the European Monetary System, support for the establishment of the Single European Market in 1992, and adoption of the euro in 1999” (Forfás, 2003).2

While fiscal autonomy in the trade sphere has always been exercised with a degree of radicalism – with tariff protection giving way to export and FDI incentivisation (with a strong regional-policy dimension under both regimes) – monetary/exchange-rate policy was exercised much more guardedly for a very much longer period of time.

The paper is organised as follows. The next section provides a largely chronological account of the exercise of fiscal autonomy as it pertains to trade, industrial and regional policy. The following section provides an account of monetary and exchange-rate policy. Here too, as the Forfás statement makes clear, the overriding concern has been to rebuild Ireland as a region of the EU rather than of the UK economy – to replace the Act of Union of 1800 with Economic and Monetary Union within Europe. The penultimate section discusses Irish migration policy throughout the period since independence. The paper concludes with some comments on the current economic crisis.

2. Fiscal Autonomy and Trade, Industrial and Regional PolicyThe boom of the late 18th century played an important role in Irish nationalist historiography. It occurred under a semi-independent Irish parliament that had exercised its protectionist powers in the form of grants, bounties and tariffs (Cullen, 1987, chapter 4). Irish industry expanded in the 1780s and 1790s under the partly-autonomous Grattan’s Parliament that was abolished by the Act of Union. Thereafter, industry – largely textile production – went into decline, particularly in the wake of the severe depression of the 1820s that coincided with the final removal of tariffs on woollen and cotton goods. As Ó Gráda (1994, 308) notes, the 1821 census had revealed substantial non-agricultural employment even in regions that would later become predominantly agricultural.

Traditional Irish nationalism of both the constitutional and militant variety interpreted these events as providing support for protectionist policies.3 Daniel O’Connell (1775-1847), the Westminster-based leader of early constitutional nationalism, reflected in 1842 on the enormous drain represented by “the sums sent annually to England for English manufactures, the Irish manufactures having been destroyed by the want of protection of an Irish parliament’.4 Isaac Butt (1813-1879) – a later Westminster parliamentarian, holder of the Whately Chair of Political Economy at Trinity College Dublin and founder of the Home Rule League (whose leadership would pass next to Charles Stewart Parnell) – published a series of lectures in 1846 that extolled the advantages of protectionism (Butt, 1846).5

2 Forfás is the policy advisory board for enterprise, trade, science, technology and innovation.3 Modern economic historians ascribe the decline of Irish industry instead to the intense external-economy-driven localisation of the textile industry in the UK alongside the dramatic reductions in transport costs of the period (Ó Gráda, 1994; Cullen, 1987; O’Malley, 1981).4 The Nation, 26 November 1842. I am grateful to Charles Read for providing this reference.5 Dublin’s main thoroughfare is bookended by statues of O’Connell and Parnell.

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Even George O’Brien, who would go on to become professor of national economics at University College Dublin – and who described himself as “‘rightist’ in economics and politics, pro-British and a believer in free trade” – concluded his 1918 Economic History of Ireland in the Eighteenth Century with the suggestion that:

‘It is surely impossible to resist the conclusion that there is some connection between the legislative independence and the economic prosperity of Ireland; that Ireland can never be a rich and prosperous country until her independence is restored.’6

This belief was shared by militant nationalists such as Thomas Davis of the radical Young Ireland movement of the mid-19th century (Daly, 1992, 4-5). Davis was a major influence on the journalist Arthur Griffith, whose launch of the protectionist Sinn Féin Policy in 1905 inaugurated the movement of that name that would ultimately spawn three of the four largest political parties represented in the Irish parliament today.

Griffith alluded frequently in his writings to the work of Friedrich List – father of the ‘infant industry argument’ – whose National System of Political Economy (1841) argued that a purely agricultural economy would always be subservient to its trading partners and that development and political independence required a combination of agriculture, manufacturing and commerce (Davis, 1974).

Perhaps the most radical statement of the Irish perspective on the economic interests of ‘perfidious Albion’ comes from the pen of Seán MacBride, a one-time IRA leader and later government minister, founder of Amnesty International and sole recipient of both the Lenin and Nobel peace prizes. Reflecting on the 1948 General Election that saw him enter the Irish parliament for the first time, he wrote that

“Ireland provided most of the British soldiers very cheaply, and by maintaining unemployment here, Britain could recruit numbers of men in Ireland for her army and for her industrial and agricultural requirements. Therefore it suited Britain to keep depressed conditions here, to have this cheap labour pool at its disposal. It was also a labour pool that could be dispensed with and shoved back to Ireland whenever they wanted to. Moreover, British policy had been one of preventing industrial development in Ireland, so as to avoid competition with home development, in order that Ireland would remain a market for British industrial goods… Thirdly, Ireland should be maintained as an agricultural-producing country with low economic levels, so that it would provide food for Britain” (Lawlor, 2005, 140).

This perspective, shared across nationalism, kept fiscal autonomy to the forefront of policy consciousness as the Sinn Féin plenipotentiaries negotiated the terms of the Anglo-Irish Treaty that led to the establishment of the Free State in 1922. The Home Rule Act of 1914 had promised a degree of self-government but had been suspended for the period of the first world war. It did not provide for fiscal autonomy however. Westminster was to retain control of taxation and of trade and monetary policy, and the imposition of protective duties on Irish-

6 O’Brien’s description of himself is recorded in Meenan (1980, 197).3

British trade was explicitly precluded (Jacobson, 1981). Fiscal autonomy was granted by the British at the very end of the Treaty negotiations (Meenan, 1970, 137).7

Article 5 of the Treaty committed the new Irish state to pay Imperial war pensions and a share of the Imperial debt “in such proportion as may be fair and equitable, having regard to any just claims on the part of Ireland by way of set-off or counter-claim, the amount of such sums being determined in default of agreement by the arbitration of one or more independent persons being citizens of the British Empire." This had not been paid by 1925, partly due to the heavy cost of the civil war that followed the Treaty. The treaty also provided for the establishment of a Boundary Commission to decide on the delineation of the border between the Free State and Northern Ireland. Under the terms of an intergovernmental agreement concluded in 1925 the border was to remain unchanged and Britain would write off this debt obligation.

The Cumann na nGaedheal government that ruled the new state for the first 10 years of its existence was an alliance of free traders and protectionists born solely of acceptance of the Treaty (Meehan, 2010, 129-30). The former accorded priority to agriculture, a sector that accounted for more than half of total employment at the time (Daly, 1992, 15). As Meenan (1967) put it, “farmers could be prosperous only if they were able to export. But precisely because the British market was open to the world, the Irish farmer could compete only if his products were of good quality and capable of being sold at a competitive price. Tariffs, rates and taxes had to be kept as low as possible.”

The new government nevertheless introduced a policy of selective protection, which expanded in scale – as elsewhere across the world – as the Great Depression took hold. From its beginnings in 1926, Fianna Fáil, which came to power in 1932 and has been the dominant party of government since then, was ideologically committed not just to protection but to as high a degree of self-sufficiency as possible.8 It was clearly influenced by factors other than those that had motivated Arthur Griffith (who remained within the Cumann na nGaedheal camp). In the case of agriculture, the influence came through a separate stand of 19th century thought that had blamed the depopulation of the country on the expansion of cattle at the expense of tillage (Daly, 1992, 8).9

Under Fianna Fáil, policy shifted from selective to full-blown protection. The new policy undoubtedly generated some increase in manufacturing employment, though the full extent of this is difficult to gauge as the coverage of national industrial statistics improved over time. Subsidies were introduced to encourage the growing of wheat and sugar beet, though this merely led to the displacement of other crops. Total acreage under tillage did not expand until the second world war (Lee, 184-5).

7 Trade with Britain would be carried on within the framework of the system of Imperial Preferences, which offered Commonwealth countries preferential access to the UK market in return for preferences to British imports (Maher, 1986, 3).8 Fianna Fáil was founded in 1926 following a split within the defeated civil-war camp.9 O’Rourke (1991) and most subsequent analyses find that the pull of emigration was crucial to the decline in population and that agricultural self-sufficiency would not have been capable of generating incomes high enough to cause people to stay on the land.

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In a famous lecture delivered in Dublin in 1933 Keynes remarked, much to the surprise of the recently defeated government, that “were I an Irishman, I should find much to attract me in the economic outlook of your present Government towards greater self-sufficiency”. By this stage, he had come to the conclusion that tariffs could be stimulatory in the face of unemployment, downward wage rigidity and a fixed exchange rate. He had ceased to advocate protectionism in the UK however once sterling left the Gold Standard in 1931 (Kindleberger, 1973, pps. 134, 171; Irwin, 1996, pps. 189-206).

Keynes went on to qualify his comments however, asking rhetorically whether the Free State was large enough, ‘with sufficiently diversified natural resources, for more than a very modest measure of national self-sufficiency to be feasible without a disastrous reduction in a standard of life which is already none too high’. He suggested that it would be ‘an act of high wisdom’ if the Irish government were to agree some economic arrangement’ to preserve Ireland’s traditional trading relationship in a manner that did not constrain Irish development, expressing particular concerns at the consequences if Ireland ploughed ‘her rich pastures’.

Skidelsky (2004, 497) reports that Keynes assumed the role of peacemaker during his visit. Fearing that his apology for contemporary movements to greater self-sufficiency might be taken as giving de Valera undue encouragement, he “interpolated a passage of warning relating to Irish conditions” (as he wrote to a friend). In a letter to his mother he wrote that he “was very glad to find that (de Valera’s) mind was moving from his insane wheat schemes to peat proposals which are at any rate harmless and might quite conceivably turn out well.”

Superimposed on the effects of protection and the Great Depression was the tariff war with Britain that the new government’s stance on the controversial “land annuities” triggered. Agrarian unrest in the late 19th Century had induced the British government to provide loanable funds to Irish tenants in a massive land redistribution programme. The incoming Irish administration refused to forward the annuities to London, retaining them instead for the Irish Exchequer. In an attempt to recoup the value of the annuities, Britain retaliated with substantial tariffs on Irish agricultural exports. The dispute, though it declined in intensity after a number of years, was comprehensively settled only in 1938 on terms that were very favourable to Ireland as Britain tied up loose ends with the slide towards war in Europe.

Another plank in Fianna Fáil’s protectionist platform was the control of foreign ownership of industry, as legislated for by the Control of Manufactures Acts of 1932 and 1934. The acts were never strictly policed however. The onus was on the government to prove non-compliance, and no prosecutions were ever pursued under the legislation. Many foreign firms managed to set up in Ireland by adopting a shareholding structure which complied with legislative requirements but with merely nominal capital size (Daly, 1984). The official tolerance of evasion was indicative of a recognition of the value to the Irish economy of the employment generated and of the access to foreign capital and skills that it allowed (Neary and Ó Gráda, 1991). By the late protectionist period it appears that as much as 30-40 percent of the manufacturing workforce were employed in foreign – largely British – tariff-jumping firms (Barry et al., forthcoming).10

10 The only non-British plant of significance was the Ford Motor Company. Its Cork plant was established in 1917 to supply tractors for export. It switched to car assembly for the domestic market with the onset of protection.

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Industrial protection made little difference during the second world war of course, by which time the policy had run out of steam. The decade of the 1950s was characterised by low growth, recurring balance of payments crises, high unemployment and massive emigration. The political dilemma was how to escape this quagmire. Conventional wisdom ascribes the resolution of the dilemma to two key figures: Seán Lemass, who had been the protectionist Minister for Industry and Commerce in most Fianna Fáil governments since 1932, but who as Taoiseach from 1959 to 1966 implemented the new policy recommendations of T. K. Whitaker, (Permanent) Secretary of the Department of Finance from 1956 to 1969 (see e.g. Walsh and Whelan, 2010). The conventional wisdom however downplays the importance of the intensified electoral competition of the time, and undervalues the achievements of the two non-Fianna Fáil coalition (or “Inter Party”) governments of 1948-51 and 1954-57.

Recent research has shown that the move to outward-orientation was instead a two-stage process – a ‘tale of two liberalisations’ (Barry, 2011; Barry and Ó Fathartaigh, 2012). The first stage was implemented by the Inter-Party governments. The first Inter-Party government established the Industrial Development Authority (IDA) in 1949. The IDA would later be deemed to be

“probably the most powerful governmental agency in Ireland. It acts as both coordinator and lobbyist for all matters relating to manufacturing and service industries as well as the industrial infrastructure…If the I.D.A. supports a particular investment, other officials rarely withhold their approval or consent” (Fanning, 1984).

The second Inter-Party government introduced a nationwide system of industrial grants alongside export-profits tax relief, the forerunner of Ireland’s low corporation tax regime that Padraic White, long-serving Managing Director of the IDA, refers to as “the unique and essential foundation stone of Ireland’s foreign investment boom” (MacSharry and White, 2000, p. 250).

The second liberalisation – the trade liberalisation heralded by the signing of the Anglo-Irish Free Trade Area Agreement of 1965 and Ireland’s subsequent entry to the then EEC in 1973 – is correctly associated with the names of Whitaker and Lemass. The two initiatives were temporally and logically quite distinct.

The Inter Party government that came to power in 1948 was, as the Cumann na nGaedheal governments of the 1920s had been, a coalition of protectionists and free traders. It was clear however that, with conditions exacerbated by the dollar shortage, some new initiative was needed to stimulate exports. This was one of the functions of the new Industrial Development Authority which was established in 1949 under a non-civil service board. As Alexis FitzGerald, economic advisor to the new Taoiseach, would later report, the IDA was located outside the civil service because the Department of Industry and Commerce, which might have been seen as its natural home, remained strongly wedded to protectionism. Already by 1950 however the Department itself recognised that the proposed export profits tax relief, which had been under discussion for a number of years (though initially thought of as a stimulus to indigenous exports, and strongly opposed by the Department of Finance and the Revenue Commissioners), might serve to attract export-oriented foreign industry.

This perception was strengthened when a Marshall Aid-funded study by a team of New York consultants drew attention to the success achieved by Puerto Rico with a similar initiative.

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Puerto Rico’s status bore some similarities to Ireland’s. As a US protectorate it had tariff-free access to the US market while retaining control of its tax regime.11

Even before the measure was finally introduced in 1956 the IDA had run several missions to continental Europe to advertise Ireland’s attractions as an export platform, and had achieved some success in attracting German firms, lured by Irish access to the UK market.

By 1956, the IDA had a special representative in the US and the government had prepared a note for American industrialists outlining the attractions of Ireland as an export platform. The following year it published an advertisement in the Wall Street Journal announcing that ‘Ireland welcomes your industry’.

Regional policy had been conducted over most of the protectionist era by exerting political pressure on new firms over where to locate, and occasionally by offering them monopoly positions if they agreed to establish in particular areas (Barry and Ó Fathartaigh, 2012). Under the new dispensation, differential grant payments were used for this purpose (Meyler and Strobl, 2000). The Buchanan Report of 1968 proposed a policy of promoting a small number of growth centres on the basis that growth would be self-sustaining only in centres above a critical size, but these proposals were ultimately rejected by government. The IDA had always favoured more dispersed development (MacSharry and White, 2000).12

The growth in foreign industry from 1956 contributed to a substantial diversification of Irish exports away from the UK. Most of the new foreign companies exported primarily into Continental Europe and the then six-country EU share of manufacturing exports rose by 10 percentage points between the late 1950s and the early 1970s.13 The new strategy also diversified the sources of inward FDI. The vast bulk of foreign investment in Ireland under protectionism was by UK firms. Today the US is by far the most important source of export-oriented inward FDI, while the UK is relatively insignificant.14

Of course, the other major factor driving diversification was EU entry itself. Irish agricultural interests strongly favoured EU accession from an early stage as a way of escaping out from under Britain’s traditional ‘cheap food’ policy. The National Farmers Association argued for EU entry even without the UK before the first applications for membership were submitted in 1961.15 Ireland would have had no choice but to submit an application when the UK applied for membership. As the Taoiseach, Seán Lemass, stated to the EEC Council of Ministers at the time:

“Because of the close inter-relationship of the economy of Ireland and that of the United Kingdom, and the vital interest of Ireland in agricultural trade, the Irish

11 Ireland by this stage had negotiated tariff-free access to the UK for its (miniscule) manufacturing exports.12 The rejection of the Buchanan Report undoubtedly helped to maintain a greater dispersion of population, given the relatively poor transportation infrastructure of the time. When an area falls below a critical population size (typically associated in Ireland with the ability to sustain a local Gaelic Athletic Association sports team) the area becomes denuded of younger people and inevitably goes into decline. 13 In 1960 90 percent of Irish exports went to the UK. Today the figure is well below 30 percent.14 Following the opening of a New York office in the 1950s the IDA opened further overseas offices in London, Paris, Cologne, San Francisco and Chicago in the 1960s. Its first offices in the Asia-Pacific region opened in the mid-1970s, in Tokyo and Sydney. It had an office in Silicon Valley by the end of the 1970s. By 2010 it had 6 offices in the US, 4 in Europe, 9 in the Asia-Pacific and 1 in Brazil (Barry, 2012).15 The Department of Agriculture disagreed because of the loss of preferential access to the UK that this would entail.

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government would wish to have the discussions for the admission of Ireland to the Community completed at the same time as those for the United Kingdom.”

The Fianna Fáil government was facilitated in implementing such a dramatic U-turn on overall economic strategy by the publication in 1958 of Whitaker’s report on Economic Development. Uniquely, the report was published as a civil service document under Whitaker’s name. “It may be surmised”, Lee (1989, p. 352) writes, “that Lemass had little ambition to inflict on his backbenchers, or on de Valera, the enlightenment that would be willingly proffered from the opposition benches about the manner in which Fianna Fáil had at last seen the light, and was now reneging on its earlier self.. The de-politicisation of ‘planning’ was too useful an asset to be wantonly surrendered to the capricious vagaries of Dáil debates.”

From the first application onwards, EU entry became a strategic foreign policy objective for Ireland. Some Commission officials had suggested at the time that associate membership might be more appropriate for Ireland “as an underdeveloped economy”. Associate membership, however, would not have guaranteed full participation in EEC agricultural arrangements or eligibility for the various sources of financial assistance available. A free trade agreement with the UK was hence sought as a way of allowing Ireland to demonstrate its willingness to compete on a level playing field. The Anglo-Irish Free Trade Area Agreement (AIFTA) was duly signed in 1965. As FitzGerald (2000, 176) puts it, Ireland had to go one step backwards in terms of economic dependence in order to go two steps forward towards economic diversification.

Since 1973, of course, EU aid had been the focus of considerable Irish attention. Assistance through the Social Fund was high on the list of early Irish priorities and, as White (2001, 161-65) notes, Irish negotiators were pioneers in extending its boundaries. The entire EU Structural Funds programme was massively expanded in 1989 in the lead-up to the Single Market. Moravcsik (1991) argues that such convergence policy was not a vital element of the Single Market programme, “but was instead a side-payment to Ireland and the Southern nations in exchange for their political support.” McAleese (2000) however lists Ireland’s contribution to the development of EU regional policy as one of its few original contributions to strategic policy formulation in Europe, while its productive use of Structural Funds “impressed many European economists by showing how financial assistance can spur economic performance”.

Figure 1 below plots real Irish national income per head (excluding foreign MNC profits) relative to the UK and the Western European EU.16 Ireland diverged from the UK until the outward orientation of the 1960s and began to converge rapidly on the UK and Western Europe only from the late 1980s. By around 2000 it had largely converged, and later overtook both entities.17

16 As Irish GDP is today around 80 percent of GDP due to the foreign-MNC profits, GNP is used from 1960 onwards. (The measures began to diverge from the mid-1970s). For the UK and most other EU countries the gap between the two is insignificant. EU14 refers to the Western EU minus Luxembourg, which is not included in the Maddison dataset. 17 In a broader context, Ó Gráda (2002) shows that while Ireland lay below the OECD convergence line from 1950-1987, the rapid subsequent growth saw it rise above the line when the entire period 1950-1998 is considered. The UK was placed exactly on the line over both periods.

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Figure 1: National Income per capita: Ireland, UK and EU14 (PPS)

19211927

19331939

19451951

19571963

19691975

19811987

19931999

20050

5,000

10,000

15,000

20,000

25,000

30,000

UKIrelandEU14

Source: Maddison dataset for GDP in 1990 International Geary-Khamis dollars; Central Bank of Ireland and Department of Finance data are used to adjust to Irish GNP from 1960.

The diversification of exports and inward FDI sources away from the UK is shown in table 1. The UK accounted for over 70 percent of Irish exports in 1960. Today it accounts for only 10-15 percent. The vast bulk of Irish exports however are accounted for by foreign MNCs. Irish indigenous manufacturing firms remain much more highly concentrated on the UK market. (This breakdown is not available for services exports but the pattern is likely to be similar). In terms of FDI sources, while the UK accounted for almost all of Irish inward FDI in 1950, today it accounts for only around one-quarter.

Table 1: Export Market and FDI Source-Country DiversificationUK (%)

Rest of Europe (%)

North America

(%)

Rest of World

(%)Share of exports, 1960 73Share of Manufactured Exports, 2010

11 38 32 (USA) 19

……..Foreign-owned Firms 8 38 34 (USA) 20……..Irish-owned Firms 40 38 10 (USA) 12Share of Services Exports, 2011 18 45 9 28FDI Liabilities, 1950 ≈ 100FDI Liabilities, 2001-03 24 14 59 3Source: CSO; Lane and Ruane (2006) for FDI by ultimate ownership.

3. Monetary and Exchange Rate PolicyThe government in 1927 established an ad hoc commission under the chairmanship of H. Parker Willis of Columbia University in New York to advise on future currency arrangements. This recommended the establishment of a new unit of account (the Irish

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pound) at par with sterling and the creation of a standing Currency Commission to administer the introduction of Irish legal tender currency notes against receipt of sterling.

Following the report of another ad hoc Government Commission of Inquiry in the 1930s, it was decided to replace the Currency Commission by a Central Bank with expanded powers. The Central Bank duly began operations in 1943. Its activities were tightly circumscribed by the continued existence of a backing requirement for the currency however, and by the fact that the banking system, with its large net holdings of external assets, had no need of the new Central Bank as a lender of last resort.

Practice remained conservative therefore. Total gold and foreign exchange reserves of the Central Bank always comfortably exceeded the note issue. On this evidence, Honohan (1997) concludes that the Central Bank retained many of the essential characteristics of a currency board right up to the end of the sterling link in 1979.

The system’s ability to withstand shocks was helped by the additional reserves held by the commercial banks, by the substantial degree of trade and financial integration between Ireland and the UK, and by the fact that the link imposed no severe discipline because of general sterling weakness.

When sterling fell sharply against both the US dollar and the German Deutsche Mark in the mid-1970s however it became clear that the sterling link no longer provided financial stability. Allied with this was the perception that Britain’s relative economic decline would continue and would augur poorly for an economy too closely entwined with it.

A new type of exchange rate regime that would tie Ireland into the apparently more vigorous and less volatile continental economies appeared to be on offer when France and Germany proposed a “zone of monetary stability in Europe” in April 1978. A diplomatic faux pas that seemed to reveal perceptions of Ireland as a UK client state strengthened the government’s determination to join the European Monetary System (Honohan and Murphy, 2010).

Ireland successfully negotiated for cash transfers from the EU to help absorb the competitiveness losses that the country would suffer if sterling were to depreciate – as was expected – in the short term. To turn down the offer to join the EMS might have adversely affected future negotiations on other matters.

Honohan and Murphy (2010) concur with Baker et al. (1996) that the final decision to break the sterling link “represented a political choice for staying in the vanguard of European integration rather than a view on the technical merits of the EMS as an exchange rate regime for Ireland”. There was no clean break with sterling as yet however. The Irish pound was devalued three times within the EMS, in 1983, 1986 and 1993, each time in response to sterling weakness.

In the mid-1990s the Economic and Social Research Institute was commissioned to evaluate the costs and benefits for Ireland of participating in the single currency project. The report (Baker at al., 1996) concluded that "Ireland can expect to benefit modestly in terms of income and employment through membership of Economic and Monetary Union". Publication of this report triggered a massive debate among Irish economists. Critics argued that the consequences of potential sterling weakness were underestimated, that the projected lower

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interest rates would not necessarily be beneficial for Ireland, that the Irish business cycle was out of sync with that of the euro zone core and hence that European Central Bank monetary policy would be inappropriate for Irish conditions, and that the European project lacked the key element of fiscal federalism that acted as an automatic stabiliser for region-specific shocks in the US.

This latter point had been raised in the broader European debate, with Costa and De Grauwe (1999) warning that failure to create a European government with similar responsibilities to current national ones “creates the risk of the break-up of the monetary union”. De Grauwe (1998) warned furthermore of the increased risks of banking crises and contagion unless regulatory and prudential control of banking were centralised at supra-national level.

The fact that these broader issues did not appear in the terms of reference for the ESRI study supports Laffan’s (2000, 135) contention that the Irish policy-making system with respect to Europe “is largely reactive and agenda-driven”. As Laffan and O’Mahony (2007) note, “the desire to be seen as broadly communautaire led successive Irish governments to go with the emerging EU consensus, unless an issue was thought to be a particularly sensitive one”. That monetary union does not appear to have been seen as such recalls Lee’s (1984, 5) early observation that “while the ‘political’ skills of Irish representatives in negotiating positions are widely acknowledged...there seems to be no comparable criterion for assessing the calibre of conceptualisation of the Irish case.”

As in the earlier EMS case, Ireland had already received financial transfers – in this case from the EU Cohesion Fund – to help it to participate in EMU. Laffan and O’Mahony (2007) indeed entertain the possibility that “Irish governments agreed to projects such as economic and monetary union and foreign and security policy reforms in return for increased structural funds, a strategy termed ‘conditionally integrationist’.” It would have been politically difficult to opt out under these circumstances. The ESRI report concurs:

“Whatever other derogations Ireland may have received over the years, they are as nothing compared with failure to join the EMU. Such a result would entail risks which are hard to evaluate, but may be considerable. The history of international co-operation in monetary affairs suggests that the political advantages of membership in a co-operative monetary and economic area are less evident when economic conditions are good; it is in the downturn when outsiders may be penalised or at least when assistance to a non-member may be more needed and less forthcoming.”

4. International Migration PolicyAs Mac Éinrí (2001) notes, Ireland – as a relatively poor peripheral European country with sustained emigration, limited employment opportunities and no traditional colonial ties to developing countries – had given little consideration to a formal immigration policy for most of the period since independence. The vast majority of those who immigrated over the boom of the 1990s were returnees or citizens of other EU member States, so immigration policy has continued to develop slowly and in piecemeal fashion. Ireland was one of the few Western EU countries to open its labour market immediately to the new Central and Eastern EU entrants in 2004 however.18 This may not have been unrelated to the introduction of a 18 A report commissioned by the National Competitiveness Council dealt with the implications of enlargement for Irish trade, foreign investment, migration, and macroeconomic and budgetary issues (Barry et al., 2003; Barry, 2004). The overall implications were positive, though the report pointed to flaws in the methodology

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minimum wage in Ireland – set at a very high fraction of median earnings by European standards – several years earlier.

A Common Travel Area Agreement allowing mutual freedom of travel, residence and employment has been in place between Ireland and the UK throughout the period since 1922, other than for a brief period during the second world war. 19 The primary reason has been that the two states share a land border on the island of Ireland. The existence of the common travel area has led to each state’s nationals being accorded special status in the law of the other state, and has entailed the enforcement by each state of the other’s immigration policy (Ryan, 2001). The common travel area and the fact that – for islands – frontier controls are the least intrusive way to prevent illegal immigration meant that neither Ireland nor the UK signed up to the Schengen agreement which abolished border controls across much of the rest of Europe.

The position vis-à-vis the US is more complicated. Until the 1930s, the US was the primary destination for Irish emigrants. When the US moved to restrict immigration with the passage of legislation in 1924, the Irish Free State, as part of its battle for international recognition, lobbied for an immigration quota separate from that of Britain. With the help of influential Irish Americans, and in the face of counter-lobbying by the British, a separate quota was achieved. Though it was reduced in 1929, it was sufficiently large to accommodate all those who applied (Whelan, 2006, 462-499).

The Irish authorities took a sanguine view of forthcoming changes to US immigration laws in the 1960s that brought an end to national quotas. By the close of the decade however it was clear that Irish applicants were ranking poorly in the immigration process because of relatively poor job skills and low educational levels. The Irish Embassy in Washington acknowledged that immigration from Ireland would have been more than twice the actual figure if the new laws were not in force (Daly, 2002).

The return to heavy emigration in the 1980s raised demands for increased US visa allocations, which were only partly met by US visa programmes sponsored by Irish-American politicians. The problem of the undocumented Irish in America remains the subject of lobbying by the Irish government.

Former US congressman Bruce Morrison, author of the Morrison visa legislation, was laudatory of Irish government strategy in a recent newspaper article (Morrisson, 2007). “Political influence is like a muscle”, he writes; “the more it is used, the stronger it gets. Those who can garner political victories are the ones who get listened to the next time they come calling.” The greatest asset that Ireland has in its relationship with the US “is the strength and influence of the huge Irish-American diaspora. When the Irish Government and Irish America work in tandem, it is a potent team.” He describes the Irish government approach of offering a reciprocal commitment of easier entry for a like number of Americans as ‘music to the ears of US politicians’ struggling with immigration reform. Even if the Irish

employed in the study on immigration effects that the EU had commissioned, suggesting that forecasted immigration to Ireland from the new member states was massively underestimated. The report nevertheless pointed out the many possible benefits of immigration for the indigenous population.19 Thus at least one of Sean MacBride’s fears – that Irish workers might be treated as Gastarbeiter in the UK – appears to have been unwarranted. The German experience shows of course how difficult it is to adhere to the technical details of such programmes.

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authorities may have been banking on the unlikelihood of large numbers of Americans taking up such an offer, it nevertheless represents a creative input into the search for a solution.

Concluding CommentsUnsurprisingly, given its geography, Ireland remains an Atlantic economy, though the pattern of trade, capital and migration flows has changed substantially since independence. At the beginning of the period, the UK accounted for the vast bulk of Irish exports and imports while the US was the primary destination for Irish emigrants, other than for a few short years in the early 1920s when many who were ill-disposed to independence migrated to the UK. Most inward FDI, until the shift towards outward-orientation in the 1950s, came from the UK.

Today, most export-oriented FDI comes from the US. US and other export-platform firms sell mainly into continental Europe, though indigenous industry remains highly-focused on the UK market and is particularly vulnerable to fluctuations in sterling since domestic industry competes on the Irish market mainly with UK imports.

Overall, however, economic sovereignty has helped to achieve a strong diversification of external links. Ireland is much less a region of the UK economy than it would have been if Home Rule had been achieved rather than independence.

In adopting a long-term perspective the paper has had little to say on the current global crisis. This has been particularly damaging to Ireland, as seen in Figure 2 which plots Irish GNI relative to UK GDP per capita over the period 1960-2013.

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Figure 2: Irish GNI per capita relative to UK GDP per capita (PPS)

19601964

19681972

19761980

19841988

19921996

20002004

20082012

0

20

40

60

80

100

120

Source: Ameco database.20

Ireland’s FDI-intensity has not been problematic. The export sector has performed strongly over the global downturn. Indeed the country’s prospects for the foreseeable future depend on whether this engine will be sufficiently powerful to outweigh the drag of the anchor of national public and private debt and weak domestic demand (Barry and Bergin, 2012).

Why then, though, has Ireland been so adversely affected by the global crisis? This fault lies with policy-making processes. Irish fiscal policy had been unusually pro-cyclical by European standards over the long Celtic Tiger boom and even beforehand. The Irish political system seems poorly configured to deal with the populist pressures to spend that arise everywhere when tax revenues are buoyant. It would have been advantageous had Irish politicians used the political cover provided by EU criticism to counteract such pressures (Barry and FitzGerald, 2001).

Mention was made above of the political cover provided by the civil service advice of T. K. Whitaker and the Department of Finance in implementing the U-turn on protectionism in the late 1950s and early 1960s. The usual articulation of the separation of powers – between executive, legislature and judiciary – relates more to the US system than to those of these islands, whose legislatures play a much weaker role in holding government to account. This makes the separation of powers between government and bureaucracy more important. The encroaching politicisation of the Irish civil service over recent decades has reduced its ability to serve as a defence against populist pressures (Barry, 2013).

20 These data are not entirely consistent with those employed in Figure 1, though the overall picture is similar.14

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