Listener 21 July, 2001.
Keywords Globalisation & Trade; Growth & Innovation
In 1987 the Irish decided that their economy needed a new direction. Rather than policy being seized by a small group of extremists, there was a national consensus for change, including from the parliamentary opposition.
The Irish fiscal position has been conservative, correcting a huge imbalance in the government deficit. Within the totality of public spending the government concentrated on education and industry assistance, some would say to the detriment of the provision of health services and physical infrastructure (roading and energy).
Irish personal income tax rates seem higher than New Zealand’s. It is always hard to make comparisons, but their top rate is 42 percent, compared to our 39 percent. However their corporate tax rates can be as low as 10 percent on some businesses. (Because corporation tax is largely a form of holding tax I favour low rates. But I am told a low rate strategy is impracticable because it offer opportunities for tax avoidance. I did not find out how the Irish prevented this.)
Low corporate taxes are a major reason why foreign businesses were attracted to Ireland. The Irish GDP (which is a measure of production) may be overvalued because of transfer pricing where international corporations price their exports low in high tax countries. Although the Irish have one of the world’s highest GDP per capita, much of the income goes offshore in corporate profits. Their standard of living (what they spend) still seems lower than Britain.
But it is rising, and Irish unemployment rate has fallen from around 17 percent to below 5 percent. Instead of continuing the last two centuries of massive out-migration, Ireland is experiencing an inflow.
The Irish are not antagonist to ‘foreign direct investment’ (FDI). This may be because when the 26 counties gained independence in 1922, the country was riddled with British investment, and they were keen to get it from other sources, especially the United States. The Irish diaspora has been important with its descendants reinvesting in their ancestral hoome. (It is thought that there are about 70m people of Irish descent overseas, say twenty times more than the New Zealand diaspora. Moreover, the Irish roots are far deeper than ours – Maori excepting.)
FDI is when a corporation builds and runs a production unit in a foreign country. The ‘D’ distinguishing from indirect investment which is financial flows which do not generate directly extra productive investment. (Until recently New Zealand seems to have concentrated on financial flows rather than physical investment.) Most of the FDI businesses I saw were supplying products and services to Europe which East Asian businesses supply to the Pacific Rim. I wondered why we did not have some of those businesses.
In may be part a mind set. The Irish roading system is congested: much like ours – even inferior – but with far more traffic (because of inadequate infrastructural investment). But the industrial complex at Shannon in the west hardly needs the 1.2m people in Dublin and 1.5m in Northern Ireland if it is concentrating on supplying 300m in Europe. Our strategy has been much more inward looking.
I got the impression that the Irish may be running an undervalued real exchange rate and that, in particular, their real wages were slightly lower than justified by their international productivity. So they take their higher productivity in extra jobs rather than higher incomes (a view I am sympathetic with, given how damaging unemployment and out-migration are).
The FDI businesses are not, however, low wage businesses. They are attracting Irish back from overseas. They require high skills. An FDI telecommunications equipment factory I visited had 70 percent of its staff who were university or polytechnic graduates.
The Irish have made it cheaper to get an education (rather than the New Zealand strategy of making it dearer). They acknowledged that their young tended to leave the country, but thought they had a right to a decent education even if they left. This ‘entitlement’ approach to education sort of backfired, when the educated young had their OE and returned home, to work in the foreign businesses attracted by the well educated labour force.
Irish industrial policy is moving to giving a greater emphasis on technology and moving up the valuer chain. The Irish think they found a niche in international economic development in the 1990s, but the world has moved on and so must they.
One cannot simply explain the Irish success in terms of their joining the European Union. So did Greece but its economy has not prospered to the same extent. The EU helped, but the policy was crucial.
For 15 years we pursued almost the exact opposite of the Irish industrial strategy. Today the Labour-Alliance government is adopting many of the policies with which the Irish have succeeded, although not on as large a fiscal scale. Moreover, we do not yet have the advisers with the commitment and experience of the Irish I met. Time and again they made (orthodox) economic remarks which would be considered eccentric here. By our standards their analysis and strategy is. But it succeeded while ours failed.