Industry policy behind Celtic Tiger's successby Patrick J. ByrneNews Weekly
, January 26, 2002
In the space of one decade, Ireland has been transformed from the "In Hock, Out of Work" country described by The Economist magazine, into the star-performer of Europe.
From 1994-1998, the Irish economy grew at 8.3 per cent annually. Whereas emigration had long been an unemployment safety valve, in recent years the country has had net immigration, as the booming economy has seen Ireland with the lowest unemployment rate in Europe and labor shortages.
Ireland’s growth is often attribute to its entry into the EEC, expanding its market from about 3 million to 300 million. However, this didn’t happen automatically. This "potential market" would not have been exploited if it were not for a series of deliberate government decisions from the late 1950s, which involved the Industry Development Authority (IDA). This history is outlined by Ray Mac Sharry and Padraic White, two former heads of the IDA, in The Making of the Celtic Tiger
In the 1960s, the introduction of free secondary education and the expansion of tertiary education allowed Ireland to market itself to foreign firms as the youngest, most educated population in the EU.
The telecommunications system was overhauled to attract the best computer and Information Technology companies to Ireland. The government was prepared to undertake the necessary infrastructure works needed to attract and develop industries.
Starting in the late 1950s, the tax system was progressively overhauled to make Ireland attractive to foreign investment. In 1956, a 50 per cent tax remission was granted on export sales. This was later increased to a 100 per cent remission, and more changes followed.
Pivotal to Ireland’s success was the Industry Development Authority (IDA). It attracted foreign companies to establish their European base in Ireland, developed local Irish industry, and decentralised industry around the country.
The government saw that the most advanced high tech firms, with high productivity and high skills, would be the key developing manufacturing exports, to local industry and the economy.
The IDA became like a statutory authority, not a public service department, with half its staff coming from the private sector and half from the public service. It recruited people with a business "can do" attitude and set up offices around the world to pursue new companies for Ireland.
It operates separately from the Ministry of Foreign Affairs. As the authors point out, attracting foreign investment is a specialised task requiring focused work. A Foreign Affairs department might be cheaper, but it has a political focus, rarely recruits the right staff, is rarely provided with a clear development mandate, and is rarely adequately funded.
As Padric White points out, it seems that development agencies work best when focused on small countries and regions, for example in Singapore, Dubai, Costa Rica, Taiwan, and some regional agencies in the UK.
The IDA had a powerful statutory mandate. It became a "one-stop shop" for new companies setting up in Ireland, helping with many aspect of planning and cutting away red tape impediments.
The primary target from the 1970s onwards was the world’s leading computer, information technology and pharmaceutical companies, most of which established major European branches in Ireland. Some compnaies, like IBM, were repeatedly approached over 30 years with proposals that were continually refined before they agreed to invest.
The IDA successfully made Dublin a major financial and services centre in the 1990s.
1987 was the watershed year for Ireland. A bipartisan economic strategy was accepted by all sides of politics (and embraced centralised bargaining and wage restraint by the unions) resulting in record growth and budget surpluses, despite tax cuts, that slashed government debt. (In the 1980s, Ireland’s public debt per head was three times that of Mexico.)
A key attraction became the company tax rate, which by 2003 will be 12.5 per cent for all companies in Ireland.
Ireland, accounting for just one per cent of the EU population, now attracts 20 per cent of foreign investment.
Ireland’s story has lessons for Australia. We may not be part of a huge free trade region like the EU, but with careful planning and diplomacy we do have the potential to sell into the Asian region that has 3.5 billion people, ten times the size of the EU.
Ireland may have benefited from EU investment grants, but Australia has rapidly growing savings of over $500 billion in superannuation funds, of which the $100 billion invested offshore should be reinvested back into Australia.
Like Ireland, Australia has a well educated workforce.
What Australia lacks is what proved pivotal to Ireland’s development. Ireland had an industry policy and agency with "can do" people who did their homework and figured out the smart way to exploit Ireland’s strengths. If our Federal governments are too blinkered by the free market ideology to see this, then perhaps Australian industry, local and state governments will have to develop regional and industry policy to show the way.