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Transcript of 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
LONGNN-TRB-Garret Fitzgerald Presentation v2-12-04-06-CLM 3
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
LONGNN-TRB-Garret Fitzgerald Presentation v2-12-04-06-CLM 4
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.
LONGNN-TRB-Garret Fitzgerald Presentation v2-12-04-06-CLM 5
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
LONGNN-TRB-Garret Fitzgerald Presentation v2-12-04-06-CLM 6
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)
LONGNN-TRB-Garret Fitzgerald Presentation v2-12-04-06-CLM 7
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
LONGNN-TRB-Garret Fitzgerald Presentation v2-12-04-06-CLM 8
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
LONGNN-TRB-Garret Fitzgerald Presentation v2-12-04-06-CLM 9
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
LONGNN-TRB-Garret Fitzgerald Presentation v2-12-04-06-CLM 10
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
LONGNN-TRB-Garret Fitzgerald Presentation v2-12-04-06-CLM 11
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.
LONGNN-TRB-Garret Fitzgerald Presentation v2-12-04-06-CLM 12
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.
LONGNN-TRB-Garret Fitzgerald Presentation v2-12-04-06-CLM 13
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)
LONGNN-TRB-Garret Fitzgerald Presentation v2-12-04-06-CLM 14
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
LONGNN-TRB-Garret Fitzgerald Presentation v2-12-04-06-CLM 15
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
LONGNN-TRB-Garret Fitzgerald Presentation v2-12-04-06-CLM 16
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.
LONGNN-TRB-Garret Fitzgerald Presentation v2-12-04-06-CLM 17
2. POLICY STABILITY
Key economic policies unaffected by changes of Government.
Welcoming public attitudes to foreign investment.
LONGNN-TRB-Garret Fitzgerald Presentation v2-12-04-06-CLM 18
3. LOW CORPORATE TAXATION