BUSINESSWEEK ONLINE : JULY 10, 2000 ISSUE
ECONOMIC VIEWPOINT Ireland's Miracle: The Market Didn't Do It Alone
ROBERT KUTTNER
The Celtic Tiger, as Ireland now likes to call itself, is currently the economic champion of the European Union. Three decades ago, it was a sleepy, impoverished, protectionist country with little prospect for growth.
Today, thanks to a six-year growth rate averaging 7% per annum, Irish unemployment has dropped from 16% to 4% in a decade. Ireland, whose longtime prime export was its sons, is experiencing net inward immigration. Its per-capita income now surpasses Britain's and by 2002 will exceed the EU average. Almost overnight, Ireland has become a First World nation--albeit with Third World roads and a retro cuisine which, despite improvements, is still too reliant on potatoes and cabbage.
The Irish economic metamorphosis was recently debated at a conference in Galway sponsored by the John Templeton Foundation. The foundation's Freedom Project explores the connections among laissez-faire economics, political liberty, economic growth, and other social goods such as civility, culture, and equality.
Ireland offers a wonderful Rorschach test. A libertarian can assert that government just got out of the way over the past three decades and let the free market rip; the miracle followed. A mixed-economy type can credit farsighted public-development policies. Here are the facts; you be the judge.
Prior to the 1960s, the Irish Republic, which wrested its independence from Britain only in 1922, was turned inward. Nationalists emphasized the reclamation of Irish heritage and sheltered the economy. Not unlike the early American patriots, Prime Minister Eamon De Valera believed that limiting British economic influence would allow both national culture and domestic industry to flourish.
A TURN OUTWARD. But these policies produced economic stagnation rather than growth. In the 1960s, a new government shifted the emphasis to a massive investment in Ireland's young workforce and a turning outward. Three major policy initiatives ensued. First, beginning in 1968, the government sponsored a commitment to a world-class education system, beginning with universal secondary schooling, then community colleges and improved technical training. Today, Ireland ranks second among advanced countries in the share of national income devoted to public education.
Second, Ireland began welcoming foreign capital investment. It cut tariffs, offered corporations the most generous tax concessions in Europe, and joined the European Union and monetary system. Third, it pursued policies of social partnership with its trade unions, rewarding wage restraint.
It took a quarter-century for these strategies to bear fruit. As recently as the late 1980s, Ireland was still stuck in an economic rut. But with the 1990s came a stunning virtuous circle. Ireland's well-educated workforce today offers multinational businesses perhaps Europe's best ratio of skills to wages. Coupled with its tax concessions and its English language, these attractions drew such U.S. technology companies as Intel, Dell Computer, Microsoft, Digital Equipment, and a slew of biotech and chemical outfits.
SOFTWARE ACE. Ireland has become a leading base for exports to Europe. According to Edward Walsh, former chancellor of the University of Limerick, 60% of packaged software sold on the Continent is made in Ireland.
Membership in the EU and its monetary system cut Ireland loose from Britain's pound and restrictive monetary policies. Membership also brought EU regional economic-development funds, which peaked at a remarkable 6% of Irish gross domestic product. All over Ireland, you see infrastructure improvements financed under the banner of the EU's royal blue, star-studded flag. With European Monetary Union and macroeconomic convergence, Irish interest rates dropped to near-German levels, providing yet another shot in the arm.
So what did the trick, laissez-faire economics or creative statecraft? Clearly, economic opening, foreign capital, and tax breaks helped. Score one for laissez-faire. But so did massive investment in education and public infrastructure. Score one for social outlay. The multiple benefits of EU membership also support both sides of the argument. On the one hand, the EU is a free-trade area. On the other, it tends to a more interventionist style of governance than anything commended by American libertarians. To be sure, Ireland's very low corporate taxes gave it an artificial competitive advantage in attracting foreign capital--but by definition, not every nation can win this game.
My conclusion: Free markets surely invite economic dynamism--but markets also rest on a foundation of social investment and inventive governance. Long-suffering Ireland's new problems are happy ones: labor shortages, immigrants, crowded ancient roads, and a housing shortage. Creative governance must solve these, too. Markets alone won't.