Irish economic development: past, present, future?

From an economic perspective, the most positive outcome of the treaty negotiations (ratified in 1922) was that the Irish Free State acquired full fiscal autonomy from the UK thereafter.

But our new study of Irish economic history since independence has revealed that the economy performed very poorly in the inter war years relative to the British and European economies, despite vigorous attempts to encourage growth, initially through improving agricultural exports in the 1920s and subsequently through import substitution and protectionism.

The small size of the market and the limited supply of raw materials made the economy highly unsuited to protectionism. Furthermore, Ireland’s continued economic dependence on Britain led to labour and capital migrating to the more powerful British economy in the following decades, preventing any meaningful development. The Second World War only made matters worse. The “Emergency” resulted in a far greater economic crisis than our current predicament, as food and fuel supplies contracted and only unprecedented levels of state intervention in supplies, distribution and production averted a major catastrophe.

In the following decades, new developmental policies were introduced, such as Export Profits Tax Relief in 1956, which resulted in the attraction of greater foreign direct investment and the liberalisation of Irish trade, culminating ultimately in EEC entry in 1973, the major economic watershed. This accelerated the significance of trade, while simultaneously reducing dependence on the UK.

Following entry, the economic performance of the Republic improved relative to other European countries, although this improvement was uneven. By the 1990s the combination of beneficial international economic conditions, and the expansion of foreign direct investment, contributed to the first beneficial phase of the “Celtic Tiger”, when Irish competitiveness and trade performance was spectacular, with the Republic of Ireland dramatically catching up with the more developed European economies. However the less sustainable second phase of growth (roughly from 2000) was based on excessive borrowing, property speculation and inappropriate development. Participation in the euro prevented the use of monetary policy to curb this boom while fiscal policy was not utilised sufficiently by the government to dampen the overheating economy. Since 2000, the manufacturing base has become less diverse and is now over concentrated in the pharmaceutical sector.

The experience of the Republic was not unlike a number of other small economies or ‘micro-states’, which could achieve phases of spectacular growth, as it was easier for smaller economies to adapt and attract high-growth sectors.

In an Irish context, this was evident in how the IDA was able to mobilise support for attracting foreign direct investment and its judicious targeting of the pharmaceuticals and electronics/computing sectors from the early 1970s, which made a phenomenal contribution to growth and industrial development subsequently. However, as small states are inevitably dominated by closely connected elites, they are also more subject to regulatory capture and corruption. In an Irish context, banking, construction and local planning conformed to this pattern, and the State failed to break this malign nexus. As a consequence the public is now saddled with the bad debts of the banking sector, and since we pay, we at least deserve full disclosure of the circumstances which led to the ill-fated bank guarantee in 2008, certainly by far the worst decision made by any government in the entire economic history of the state. The role of the ECB in the bailout in 2010 also requires full disclosure so that citizens are protected from this kind of pillage by the banking sector and a highly acquiescent and ill informed government.

Is there any good news? Severe recessions such as those of the mid-1950s and the early 1980s, led to the subsequent implementation of new economic policies which in turn led to much more dynamic phases of growth. Hopefully the lessons of the past decade will be learned by policy makers. The State played an important role in improving Irish economic performance coming out of the recessions in the 1950s and 1980s.

The resolutions to the current major crisis will requires European level economic initiatives which go far beyond debt management and austerity, focusing more on sustainable economic development and the prospect that the majority of the younger generation of adult Europeans can reasonably expect to be in sustainable employment in the coming decades.

Long-term unemployment among large swathes of the European population is potentially a far more corrosive force within European society than inflation. In an Irish and wider European context, growth and employment expansion in the economy (not just austerity alone), is the best route to manage sustainable debt repaymentin the longer term and achieve viable economic recovery.

* Andy Bielenberg and Raymond Ryan are authors of An Economic History of Ireland since Independence, just published by Routledge, London.

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