posted 5 Apr 2007 in Volume 9 Issue 10

Country report: Ireland’s economic turnaround

By Dáithi O’Ceallaigh, Irish Ambassador in London

Over time, all countries change, but when one is living through the change, it can seem imperceptible. Often, it is only by looking back, that one realises how, truly, the past is a foreign country. The change I wish to write about in Ireland relates to the much talked about economic turnaround, which started just under 20 years ago, although the seeds were, I believe, sown much earlier than this.

Following independence in 1922, Ireland followed a policy of protectionism in trade, which allowed native industry to build itself, protected by a wall of high tariffs. Indeed, a number of foreign companies set up subsidiaries in Ireland, often the only way to gain access to the market. This approach did provide employment, but it enabled less efficient producers to survive, and in an era of high tariffs, it made exports more difficult.

In the 1950s, there was something of a change in direction, with the setting up of the Industrial Development Authority, which was given a mandate to develop industry and to attract foreign direct investment (FDI), and the establishment of a tax-free zone at Shannon Airport – one of the first in the world. This more open approach ultimately led to entry to the European Economic Community in 1973.

Entry to what is now the European Union brought many benefits, although progress was slow at first. Many indigenous companies, for example in the textiles and clothing sectors, were forced to close. By the mid-1980s unemployment was hovering at 17 per cent. There was double-digit inflation, and Ireland’s debt to GDP ratio was 130 per cent. Between 20,000 and 40,000 people emigrated each year – a choice that was largely forced because of a lack of job opportunities.

Today, the picture is very different. GDP grew at an annual rate of more than eight per cent between 1994 and 2003, while forecasts for 2007 suggest growth of five per cent, continuing for the short to medium term. Ireland has now reached virtually full employment, with inward migration flows averaging 100,000 a year. Now, when people leave, it will more often than not be to gain experience. In 2005, our GDP reached €161bn, or €39,000 per person – the second highest in the EU after Luxembourg.

There were a number of factors that gave rise to this. The late 1980s saw both government and opposition parties adopting the necessary approach to curbing public expenditure, creating a model of social partnership between employers, trade unions and farmers. Social Partnership acted as a catalyst for a virtuous circle of moderating public expenditure, including low to moderate pay increases; cuts in taxation; low unemployment; and political and economic stability.

The psychological dividend of industrial peace and less adversarial labour relations manifested itself in a number of ways – a less negative attitude towards business and a growing entrepreneurial spirit. This was the key, but not the only important contributory factor in our turnaround.

We have one of the most favourable corporate tax environments in the world, of which a key element is the corporation tax rate of 12.5 per cent. There is also tax exemption for certain income derived from patents, and tax credits for incremental expenditure on R&D, together with an extensive network of double-taxation agreements.

At an early stage, there was also recognition of the need to change our focus in industrial-development policy. Ireland recognised the importance of leveraging the knowledge element in both manufacturing and services and the importance sectors such as IT, both hardware and software, and pharma could play.

We have been very successful in attracting FDI, with over 1,000 overseas companies having chosen Ireland as their European base, and are now involved in a wide range of activities in sectors as diverse as ICT, biotechnology and globally-traded services.

Currently, 13 of the world’s top 15 pharmaceutical companies have established a presence in Ireland. Exports in the pharma sector now account for around €40bn per annum. A key feature of the companies located in Ireland has been their constant re-investment in their businesses. Six of the top ten ICT companies in the world have substantial operations in Ireland. This sector of 220 companies employs over 40,000 people, accounts for €50bn in exports and generates €500m in corporate tax annually.

Other factors that contributed to the turnaround, and bode well for the future, include our young and educated workforce, with a reputation for a positive attitude, hard work and flexibility, and our excellent R&D base, where last year we launched a new Strategy for Science, Technology and Innovation, involving an overall investment of €8.2bn to 2013. Along with Britain and Sweden, we were the only EU member states to open our borders to workers from the ten accession states in 2004. In earlier years, many of these workers, with work permits, played their part in the turnaround of our economy, and we were very pleased that it fell to us, during our presidency in the first half of 2004, to welcome them as full members of the enlarged Union.

Is Ireland a model to be followed by other countries? This is a question often put to me, and while any package of measures must be suited to a particular country’s culture, certainly I think that a pro-business, pro-employment environment, is critical. There is much talk about rates of taxation. Here I believe that our approach of moderate corporation tax is one which could bring benefits elsewhere, although again, this is for each national government to determine.

If we are to continue our growth patterns, a key will be to ensure that we remain competitive – and that means not just improving, but improving relative to our competitors. I believe that this supplement brings together an interesting mix of technical legal issues, with some broader reports on areas such as FDI and the operation of the Commercial Court.

One of our main functions in the Embassy is to enhance Ireland’s foreign earnings and associated economic benefits from trade, investment and tourism. In this, we work closely with the four promotional agencies based in London, Bord Bia (the Irish Food Board), Enterprise Ireland, IDA and Tourism Ireland. If you think we can be of any help to you, I do hope that you will give us a call.