Ronan Lyons, IBM Global Centre for Economic Development Dansk Industri Conference, Copenhagen,...

© Copyright IBM Corporation 2007

IBM Institute for Business Value

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Ronan Lyons, IBM Global Centre for Economic Development Dansk Industri Conference, Copenhagen, April 2008

From Emigration to Innovation:Ireland’s Long-Term Policy Strategies Since 1800

IBM Global Centre for Economic Development | November 2007 © Copyright IBM Corporation 2007


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IBV Dublin, established in 2007, acts as IBM's Global Centre for Economic Development

In early 2007, IBM established a public sector strategy & change hub of the Institute for Business Value (IBV) in Dublin, Ireland

The main role of the new hub is to act as:- IBM global HQ for economic development initiatives- A worldwide leader in economic development research- A worldwide centre of excellence in economic development consultancy

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Agenda

The Reason People Are Interested in Ireland

Ireland’s Three Different Long-Term Strategies Since 1800

The Factors Driving Ireland’s Recent Success

Ireland’s Challenges and Foundations for the Future



Ireland is of interest because it has closed a long-standing income gap with the rest of Europe in less than fifteen years

UK citizens were the wealthiest in the world throughout the eighteenth and nineteenth centuries Countries such as Denmark steadily closed the gap in the first half of the twentieth century By 1987, though, Ireland lagged the UK – and Denmark – in terms of per capita income Its catch-up since then has been rapid

Source: Maddison

Why are people interested in Ireland?

0100020003000400050006000700080009000

Ireland Denmark UK

1700187019221987

For nearly 200 years, Ireland lagged behind

average income in Europe

Ireland’s progress has been remarkably rapid

since the late 1980s

$-$5,000

$10,000$15,000$20,000$25,000$30,000$35,000$40,000$45,000$50,000

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

Ireland UK USA Denmark Korea



1988

As recently as 1988, it was regarded as the ‘poorest of the rich’




The Celtic Tiger

Europe’sshining lightThe Economist

MAY 1997

In less than a decade, Ireland had become synonymous with rapid globalization-led growth

1988 1997




Ireland has also reversed a trend of falling population and now enjoys the fastest population growth in the OECD

Ireland

UK

Denmark

Korea

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

1700-1820

1820-1870

1870-1913

1913-1922

1922-1939

1939-1960

1960-1987

1987-2003

2003-2006

Ave

rage

ann

ual p

opul

atio

n gr

owth In 1820, Ireland’s (whole island) population was

six times that of Denmark By the 1960s, Denmark’s population equalled

that of the island of Ireland Both the UK and Denmark – and more recently

Korea – exhibit a long-running downward trend for population growth

Ireland, however, has reversed this trend and now has the fastest growing population in the OECD- Births are rising again following a trough in the

early 1990s

Source: Maddison




Agenda







Ireland's first strategy, from 1800 to 1922, was political and economic union with Britain

In 1800 Ireland was a divided country, after a failed revolution in 1798 had worsened, rather than improved, relations between those of different religions

The Protestant Anglo-Irish minority regarded Britain as the natural source for guidance, in contrast with the Catholic majority, who were excluded from politics

Nonetheless, there were two key economic aspects of the union:- The newly created United Kingdom would create a larger free-trade area allowing Irish, English, Scottish and Welsh

markets access to each other- The British Empire was growing steadily, placing Ireland at the heart of a growing global empire and thus be in a strong

position to reap the expected benefits Two exogenous shocks, however, ensured that Ireland never enjoyed those benefits

- Not long after union, the Napoleonic Wars crippled Ireland with disproportionate debts from which it never recovered- Persistent failure of potato crops during the 1840s, a staple for the majority of Ireland's rural poor, led to the deaths of

one million people on the island and the emigration of one million more Ireland’s self-image was as a suppressed country and a failed economy, blighted by mass emigration

Ireland’s three different long-term strategies



Ireland's second strategy, from 1922 to about 1959, was self-sufficiency

Net emigration raised the wages of those remaining, but this exodus, combined with growing sense of grievance over Catholics’ rights and other issues such as land ownership and language, led to a growing ‘Home Rule’ movement within Ireland- After a successful but violent campaign for independence, which ran from 1916 until 1922, the Irish Free

State was formed Ireland’s new lawmakers launched a new explicit strategy for the country:

- The interests of Ireland – and in particular the Catholic majority – would be best served by an exclusively Irish strategy for the economic and social development of the island

Again, external forces played a role - The worldwide economic recovery from World War I encouraged smaller countries- The damage to the international economic system from the Great Depression

Ireland’s self-image as this time was as a proud, independent, agrarian Celtic society




Between the world wars, Ireland embarked on a policy of economic nationalism, including subsidies and tariffs

Ireland

Denmark

UK

USA

0%

5%

10%

15%

20%

25%

30%

Tarif

f Rev

nues

as

% o

f Tot

al Im

port

s

In the climate after World War I, faith in the international system was shattered, and economic nationalism and deglobalization became the norm

Ireland was no exception to this, providing subsidies to newly-formed champions and charging some of the highest average tariffs in the world- Unlike other countries, though, such as the USA,

tariffs did not fall after the early 1930s- In this, ironically, it mimicked the UK (not least

because of its trade war with the UK)

Source: B.R.Mitchell




Ireland's third strategy, started about 1959 - and renewed in 1987 - has been export-led industrialization and growth

During the late 1950s, most of Western Europe was experiencing a boom triggered by post-war reconstruction- Linked to this, six western European states had formed a European Economic Community, whose main goal

was a Single European Market, signalling a new trend in relations between European countries This – combined with renewed mass emigration of Ireland’s young – led to a growing realization

that Ireland's interests were not served acting in isolation from other economies- In December 1958, the Government published a White Paper on economic policy entitled Programme for

Economic Expansion, whose principal author was T. K. Whitaker, the Secretary General of the Department of Finance

Underpinning the new policy was the belief that international economic forces could be harnessed to drive Ireland’s economic growth- Dismantling protectionism and embracing foreign direct investment were core principles of this new strategy




The first pillar was the expansion of Ireland’s trade, which has grown exponentially since World War II


0

1

2

3

4

5

6

7

1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s

Log

of Ir

elan

d's

Expo

rt Vo

lum

es, 1

980s

=100

Ireland’s Export Volumes, 1930-2005

Source: Central Statistics Office, Ireland



The second pillar was the improvement in Ireland’s education system


0102030405060708090

100

1965 1975 1980 1985 1990 1995 2000 2005

Tertiary Enrolment Secondary Completion

Retention and Enrolment in Secondary and Tertiary education in Ireland (%), 1965-2005

Source: Department of Education & Science, 2006 Annual Report



Trade and education alone were not enough to guarantee success, however


During the early years of Ireland’s new outward-focused strategy, there were some initial successes- Growth in output per capita increased from an average of 1.8% (1955-1960) to an average of 4.2% (1965-

1970)- Industrial development policy was focused on attracting foreign, predominantly US, firms to Ireland (including

IBM, GlaxoSmithKline, Microsoft and Intel) However, commitment to export-led industrialization and investment in education were not

sufficient to guarantee broadly-based economic and social development The oil shocks of the 1970s knocked the confidence out of the economy

- Successive governments, in attempting Keynesian-style demand management solutions to kick-start the economy, succeeded only in driving up Ireland’s national debt



By most of Ireland’s key success metrics, including the fundamental goal of job creation, it was failing

294.3

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50

100

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By 1987, the situation was dire:- GDP per capita was 64% of the EEC average- Unemployment stood at 18.5% and one-quarter

of those unemployed were under 25- Net emigration ran at about 3% of the labor force

and matched any natural increase in population- Ireland’s national debt was more than 150% of its

GNP and debt servicing consumed one-third of tax revenues

- The Government was borrowing more than 10% of GNP to fund current and capital expenditure

Source: Central Statistics Office


Unemployment in Ireland, 1978-1993



Agenda




Ireland’s Foundations for Future Success



The third key pillar of success was social partnership – dialogue between government, workers and business

The Factors Driving Ireland Success

In 1987 the newly elected minority Government (Fianna Fáil), with the support of the largest opposition party (Fine Gael), began the social partnership process by launching the Programme for National Recovery- Under this process, the government chaired discussions involving itself and key social partners, including employers, labor

unions and the farming and non-profit sectors The primary output of the process was a document outlining Ireland’s strategy over the period in relation to

wage increases, industrial peace and taxation policy Early agreements ran for a term of three years each and, as time progressed, they covered an increasing

number of policy areas related to Ireland’s economic and social development This process meant that Ireland made explicit the ‘social contract’ between different pillars of society that

would address the challenges Ireland faced and shortly afterwards Ireland's ‘Celtic Tiger’ period started- It guaranteed to Ireland’s enterprise base an end to industrial unrest, wage restraint and some degree of certainty over the

medium term- It gave Ireland’s workers a clear indication of future incomes, particularly when agreed wage increases were combined with

the government’s taxation policy



The fourth pillar of success was the European Union, which provided markets to access, financial stability and capital

By the late 1980s, Ireland had educational endowments which were steadily improving, an outward-focused strategy for developing its enterprise base and, in its social partnership process, an explicit mechanism for setting out medium term goals for development

The fourth key pillar was membership of the European Union- At a basic level, Ireland was a recipient of structural funds until the early 2000s, providing Ireland both with the funds to

pursue long-needed projects, particularly in transport infrastructure, and with the required incentives to fiscal discipline and clarity in relation to objective-setting

During the 1990s, the EU’s member states embarked on a process of economic and monetary union while also undertaking to finally implement the Single European Market- These twin developments provided a stable macroeconomic environment for Ireland, with none of the exchange rate and

interest rate volatility that had dogged Ireland in the past This enabled Ireland to market itself – particularly to American and Japanese firms – as the English-speaking

gateway to Europe




With these extra pillars in place, Ireland’s success was rapid

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A simple indicator of Ireland’s success is the change in the names of the social partnership agreements- Whereas the Government launched the Programme for

National Recovery in 1987, the agreement for 2003-2005 was called Programme for Sustaining Progress

Such a change in emphasis is well backed up by the statistics- Numbers at work increased from 1.1m in 1991 to 2m by

2006, while unemployment fell from 18.5% to 4.4% by 2005

- The top rate of corporation tax fell from 40% to 12.5%, while the top rate of personal income tax fell from 48% to 41%

- In 1995, Ireland’s GNP per capita was 80% of the EU-15 average; by 2005 it was 9% higher

Source: Central Statistics Office


Unemployment in Ireland, 1978-2006



Ireland’s experience offers lessons for countries that seek to emulate its rapid development

Naturally, the growth path of Ireland was largely determined by the confluence of many country-specific and time-specific factors

Nonetheless, three key lessons emerge- Ignore global developments at your peril: Ireland’s history shows that the best intentions of policymakers

may come to naught, if powerful global forces are not considered in the analysis; during all of Ireland’s different long-term strategies, external forces proved every bit as powerful at determining success as domestic factors

- Previous lack of development may be a current opportunity: the years of economic stagnation in the nineteenth century may have actually allowed Ireland to bypass the heavy industries that drove neighbours’ growth at this time and specialize instead, during the 1980s and 1990s, in global growth industries such as computers and pharmaceuticals

- You need society’s buy-in for any grand visions: tackling Ireland’s problems of unemployment, emigration and debt required government, employers and workers to agree on the scale and nature of the problem and the broad strategy needed for growth




Agenda







With the nature of growth changing, Ireland now faces some significant challenges

-2%-1%0%1%2%3%

1990-1995

1995-2000

2001 2002 2003 2004 2005

0%1%2%3%4%5%6%

Ireland (GDP) Ireland (GNP) OECD US

1990-1995 1995-2000 2000-2005

Since the early years of the 2000s, the nature of Ireland’s growth has changed- Growth is now predominantly domestic driven, not export-

led- With billions emerging into the world economy, Ireland’s

share of world trade falling- Ireland’s productivity growth has slowed considerably

since 2000 Much of the impetus of Ireland’s recent high

economic growth rates has come from a property boom, which is now slowing with knock-on effects for confidence both on the part of businesses and consumers

At the same time, there is intensified international competition for investment projects and for trade


Contribution of Net Exports to GDP Growth

Average Annual Productivity Growth

Source: Forfas/National Competitiveness Council



Ireland is now laying the foundations of what it hopes will build future success

In 2006, Ireland’s latest social partnership agreement, Towards 2016, was agreed, which will last for ten years

It establishes a vision for Ireland as:- “A dynamic, internationalised and a participatory society and economy with a strong commitment to social

justice, where economic development is environmentally sustainable and internationally competitive” It identifies some specific ‘hot topics’ and priorities for economic policy


Specific hot topics Energy: cost competitiveness, supply security, long-

run sustainability Affordable housing: 270% inflation in house prices

since mid-1990s Transport networks: road, underground, rail Fate of manufacturing

Economic Policy Priorities Return to Export-led Growth Competitiveness through Productivity & Innovation Four priority policy areas for Forfás

- Knowledge, Science, Technology- People, Education, Productivity- Environment, Infrastructure, Regulation- Enterprise Development Policy

Forfás 2004 | Apr 22, 2023 26 © Copyright IBM Corporation 2007


Within Ireland’s overall governance and social partnership structures, Ireland’s economic and social policymaking has two main pillars

The first pillar is social partnership itself, which is coordinated by the National Economic & Social Development Office (NESDO), in cooperation with the Department of An Taoiseach (the Prime Minister)

Its three constituent organisations are:- The National Economic & Social Council- The National Economic & Social Forum- The National Centre for Partnership & Performance

Ireland has two pillars for its economic and social policymaking, the first of which is social partnership, coordinated by NESDO


Forfás 2004 | Apr 22, 2023 27 © Copyright IBM Corporation 2007


The second is economic policy and enterprise development, where Forfás sits in the middle of a comprehensive system of agencies and councils

Forfás is the national policy and advisory board for enterprise, trade, science, technology and innovation

Forfás has four main functions:- To analyse matters relating to the

development of industry and enterprise- To advise the Minister for Enterprise,

Trade and Employment on these issues- To advise and coordinate Enterprise

Ireland, IDA Ireland and Science Foundation Ireland in relation to their functions

It also provides research and secretariat to the Advisory Councils




1 342

Forfás’s four strategic priorities are: knowledge for business, people for business, environment for business and policy for business

Knowledge for business Policies to maximise the impact of investment in technology

and innovation through:- Strategy for Science, Technology & Innovation, 2006-2013

– approx €9bn over 7 years- Aligning investment in higher education with enterprise

needs- Fostering greater enterprise-higher education collaboration- Advising on Irish participation in international science and

technology programmes

Environment for business Pro-innovation and pro-enterprise Government policies

in relation to:- Developing an advanced economic infrastructure- A conducive tax and financing environment- A pro-competitive regulatory regime- Public Sector reform- Non-technological business innovation- Balanced regional development

People for business How education can prepare people with the

skills for the economy of the future by:- National Skills Strategy, 2006-2020- Identifying skills needs for the economy- Supporting, on an ongoing basis, the

development of a skilled immigration policy

Policy for business Coherence and responsiveness in Ireland’s enterprise

strategy- Identifying new challenges and opportunities for Ireland’s enterprise

sector, e.g. ‘Economy 2.0’: niche areas and technologies- Improving the quality of information being received by Government

on enterprise performance- Leading greater understanding of Ireland’s productivity

performance




Thank you for your attention

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