the irish economic miracle. longnn-trb-garret fitzgerald presentation v2-12-04-06-clm 2 the irish...

The Irish Economic Miracle

LONGNN-TRB-Garret Fitzgerald Presentation v2-12-04-06-CLM 2

THE IRISH ECONOMIC MIRACLE:

Dr. Garret FitzGerald,Former Prime Minister of Ireland


Ireland’s Story

English-speaking Strong banking system – low bad debts Sterling retained till 1979 – low interest rates Non-restrictive labour laws: job mobility Lower social costs than on European continent Efficient merit-appointed public service Independent judiciary and rule of law Politicians & civil servants free from corruption Because of under-development – welcoming attitude to foreign

investment

Inherited Inherited AdvantagesAdvantages

Inherited Inherited AdvantagesAdvantages

Industrial protection: new firms high-cost, poor design & marketing, no professional management

So, no manufactured exports Foreign investment restricted (49% max. in manufacturing)

Not Exploited Not Exploited for First 35 for First 35

YearsYears

Not Exploited Not Exploited for First 35 for First 35

YearsYears

Development-oriented Secretary of Finance: age 39. Youngest revolutionary became PM: as initiator of protection

policy he had moral authority to abolish it. Vested interests in protection swept aside.

Policy Policy Reversal of Reversal of 1956-19591956-1959

Policy Policy Reversal of Reversal of 1956-19591956-1959


Ireland – Key Policy Decisions of 1956-1987

1. Low corporate taxation

2. Foreign investment restrictions abandoned and FDI promoted.

3. Trade Freed with Britain, then EU.

4. Education hugely expanded - but high standards maintained

5. Social contract between government, industry, unions, farmers, etc.

6. Productivity increase.


1. Low corporate taxation

No tax holidays, but:

1956 50% tax relief on profits from manufactured exports

1958 100% tax relief on export profits

1973 10% tax on all manufacturing profits

2003 12.5% tax on all corporate profits


2. Industrial Development

Up to 1958 foreign ownership of manufacturing firms limited to 49%

1958 this limit is abolished

1959 Industrial Development Authority established to promote foreign industrial investment

Industrial Development Authority– Research: to identify future key industrial sectors– Promotion: 14 foreign offices to attract high-tech industries– One-stop shop: to help new industries to get established in Ireland– Financial aid: grants for technologies; research development;

employment; training; modernisation; innovation; expansion

Key industries attracted to Ireland by IDA:– Pharmaceuticals (9 of 10 major US companies)– Electronics– Computers (one-third of all sold in Europe)– Software (Ireland world’s largest exporter in 2000)– Medicare– Financial services (Dublin’s IFSC)


3. Freeing of Trade

1959 – new PM saw significance of EU – told Industries Federation “get ready for free trade”

Pilot study of woollen and worsted industry

Proposal of joint industry/government committee to survey 23 industries accepted

1961-1965 Committee on Industrial Organisation (CIO)

1965 - Adaptation Councils set up to help industries prepare for free trade in EU

Follow-up to industry/government co-operation in CIO:

– 1963 – National Industrial Economic Council (later National Economic & Social Council)

To encourage preparation for free trade unilateral 10% cut in tariffs both in 1963 & 1964

1965 government negotiated free trade agreement with UK: protection against UK goods to be eliminated by 1975

1973 EU membership: disappearance of all protection of Irish industry by 1977

Out of 170,000 manufacturing jobs, 50,000 low-paid jobs disappeared – most in years after protection ended

But these jobs were replaced by over 100,000 better-paid jobs in high-tech industries

Half in totally new industries e.g. instrument engineering, computers and software, and half in older industries not previously established in Ireland, e.g. chemicals, pharmaceuticals, rubber


3. Freeing of Trade (Cont.)

Changes in Irish Manufacturing Employment

39

108

38

6

12

0 0 0

55

57

0

38

2527

10

16

23

71

168

222

0

20

40

60

80

100

1963

2006

Changes In Irish Manufacturing Employment 1963-2006

Workers (thousands)

Textiles & Clothing

Drink & Tobacco

Leather & Footwear

Food Pharma-ceuticals & Chemicals

Metals Rubber& Plastic

Computers Instrument Engineering

Other TOTAL

32% growth


4. Education

Primary education universal in Ireland from 1830’s

But up to late 1960’s Ireland under-educated by comparison with European neighbours:

– Barely 20% completing secondary education, only 7% entering higher education

In 1968 Ireland embarked on ambitious expansion of educational system

Secondary schools up to 1968:

– 25% public vocational

– 75% private religious academic, with state support but also fees

1968 free secondary education

1995 free university education


4. Education (Cont.)

Level of Education of Irish Population

21%

7%

0%

7%

87%

60%

15%

75%

0%

20%

40%

60%

80%

100%

Completing Secondary Entering HigherEducation

Other ContinuingEducation

Total Post-Secondary

1964

2005

Percent of Irish Population in Various Stages of Education


4. Education (Cont.)

Broad-based Secondary Education Irish students have to take 6 subjects in school-leaving examination This contrasts with narrow A-level system in England where general education

has been shortened by unduly early specialisation (school-leaving examination in only 3 subjects)

Higher Education Foreign investors prefer broader Irish system to narrower English system –

they feel it produces better-educated and more rounded and adaptable workers at end of secondary school.

Higher education: much higher Irish entry rate than in England (60%). University standards also better maintained. Over half of the 60% of school-leavers going into higher education enter the 7

universities, which have very low drop-out rates. Most of remainder enter 14 regional technical institutes – greatly valued by

industry because they provide courses related to needs of (especially foreign-owned) firms.


5. Social Contract

Like Britain, bad industrial relations until end of 1980s

But in 1987 government, unions and management decided to work together to agree at intervals broad lines of economic and social policy, including pay increases and personal taxation

Later this social partnership joined by farmer representatives and by representatives of the socially deprived

Social contract negotiations take place every 2-3 years

Seventh of these negotiated in 2006 and adopted.

Social contract has helped limit industrial unrest.

During 1990’s governments traded cuts in high level of personal taxation for pay moderation

In that decade half of workers’ real pay increases from tax cuts, half from pay increases.


6. Productivity Performance

During Celtic Tiger period productivity (i.e. output per worker) rose 4% per year

External factor:

Foreign manufacturing investment involving:

– much higher productivity of new high-tech firms

– demonstration effect of this on indigenous manufacturing

Domestic factor: Privatisation of inefficient state enterprises (although Ireland was

never socialist, because of under-development many activities, including manufacturing and transport, had been undertaken by the state in its early decades)


FOOTNOTE: What Increases Output Per Head and Living Standards?

Competitiveness increases productivity

But another factor, which in Europe has been significant only in Ireland:

– reduction in ratio of dependants to workers

This occurs when participation in labour market increases

Ireland in 1986: in many ways still a developing country, e.g.under-employment in farming

more children many fewer women at work high unemployment

Putting these dependants to work increased living standards, supplementing simultaneous increases in output per worker


1091

2450

3541

19292202

41312.25

1.14

0

1000

2000

3000

4000

5000

At Work Dependents Total Population Dependency Ratio

0

0.5

1

1.5

2

2.5

3

1986 2005

Dependency Ratio

In 1986 every 100 workers had to support (either in family or through taxes for

social welfare for others), 225 dependants as well as themselves, i.e. 325

people.

Now a worker has to support only 107 dependants, i.e. 207 people

So, quite apart from the benefits of increased productivity, this has made the

average worker 57% better off.

Tho

usan

ds o

f peo

ple

Ireland Dependency Ratio

Dependency R

atio


KEY IRISH POLICIES:

1. MAINTENANCE AFTER INDEPENDENCE OF :

High-calibre independent Judiciary.

Civil Service of integrity, independent of politics.

Foreign investment process free of political corruption.


2. POLICY STABILITY

Key economic policies unaffected by changes of Government.

Welcoming public attitudes to foreign investment.


3. LOW CORPORATE TAXATION

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