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GSM 5135 – Capstone Project
The
Future of the Celtic Tiger:
Key
Success Factors for Ireland’s Continued Economic Growth
BY
Tara Lynne Campbell
B.A., Dominican University of California, 2003
Submitted as partial fulfillment of the requirements
for the degree of Master of Business Administration
in the School of Business Education and Leadership of
Dominican University of California
San Rafael, California
EEC and the Multinationals Arrive:
1973-1986
The Celtic Tiger is Born: 1987-2002
Public Finance and Fiscal Policy
Enterprise-Ireland (Indigenous
Growth)
Electronics: Engineering and
Information & Communications Technology (ICT)
Healthcare: Pharmaceuticals and
Medical Technologies
International and Financial Services
International Financial Services
From Manufacturing to Service:
Markets of the Future
The Sustainability of a
Multinational Driven Economy
The Dangers of Eastern European
Nations Gaining EU Accession
Appendix: Relevant Charts &
Tables
First coined in 1997, the term ‘Celtic Tiger’ come to refer to the phenomenal growth of the Irish economy throughout the 1990s and into this century. “Ireland has traveled far from its struggles against poverty and political and economic dependence” (Norton). Ireland as it exists today is a far cry from the quiet and oft forgotten isle it once was. An interweaving of efforts from within and without the government since 1950 have created a nation with high educational standards, political stability, sound fiscal policies, and an overall clarity of economic purpose. The Celtic Tiger phenomenon is a result of careful planning and years of hard work.
Key demographics including high general education, a young workforce, sound Public Finance and Fiscal Policies, and a strong connection with continental Europe via membership in the EU have, combined with the efforts of the Industrial Development Agency (IDA) Ireland and Enterprise-Ireland, propelled the growth of the Irish economy and pushed the Republic of Ireland into the international spotlight. The economy has grown primarily in key niche markets including, Information and Communications Technology (ICT), engineering, healthcare, and (more recently) International and Financial Services.
Recently, there has been ample speculation about the sustainability of the Irish economy. Concerns primarily center around the economy’s dependency on foreign direct investment, labor competition from Eastern Europe, and the dangers of Irish companies selling out to larger multinationals. Though legitimate, the majority of these concerns have been well addressed by the Irish Government, IDA, and Enterprise-Ireland. The Republic of Ireland has a bright future and should not be counted out just yet.
Since the late 1990s, the term ‘Celtic Tiger’ has come to refer to the phenomenon of the Republic of Ireland’s incredible growth economy. “‘Celtic Tiger’ is a rather overworked description, but it does reflect the tremendous strides that have been made in taking the country from an almost Third World rating to an Ireland with one of the fastest growing export led economies in the world” (Burns, “Beyond”). Where the Republic of Ireland was once the “island beyond the island," forever overshadowed by its British neighbor, it is now a flourishing example of a modern, forward-looking economy; it’s cities are some of the fastest growing in Europe and the capital, Dublin, has become a thriving cosmopolitan center.
How did this amazing turn around happen? What started it and how did it come together? A number of key factors include a:
clear and determined emphasis on education, particularly higher education; a large, vibrant young work force; a series of planned `social partnership' developments involving government, employers, and the trade unions; getting public finances and the governments policy framework right after a series of hit-and-miss earlier attempts; and, last but certainly not least, membership in the European Union since 1973 (Burns, “Beyond”).
Perhaps a more important question is: can the Celtic Tiger continue this way? Some say yes, some say no. The purpose of this thesis is to analyze the causes of the Celtic Tiger phenomenon and realistically consider whether Ireland can maintain its boom or if the Republic’s economic glory days are through.
For centuries, Ireland has been a sleepy remote isle, shrouded in its history and legends, mostly forgotten by the rest of the world. Apart from a short ‘golden age’ early in the last millennium “when Irish monks traveled as educators throughout Europe and further afield” (Burns, “Beyond”), Irish history has been marked by isolationism, interrupted by the occasional Viking or Norman invasion, and followed by eight centuries of troubled British rule. British rule of Ireland ended in December 1921, when the signing of the Anglo-Irish Agreement created the Irish Free State of 26 counties (six in Ulster remained under UK rule), though Ireland did not become a wholly independent republic until 1948. “Revolution, war, strife, famine, a bitter civil war, unemployment, and massive forced emigration were unfortunate byproducts of that checkered history.” (Burns, “Beyond”)
So how did the Irish Republic move from a traditional agricultural economy, with an island population living mostly in rural areas, to a thriving, modern, future-oriented, growth economy that has become the envy of Europe and much of the rest of the world? How was the “Celtic Tiger” created? The story really begins in the 1950s.
The Early Years: 1950-1972
By
1950, Ireland was facing an economic decline and emigration crisis. Far from the growing population of the rest
of the world, the Irish population was decreasing each year as large segments
of the workforce left Ireland in search of jobs. Between 1951 and 1956, an estimated 39,000 people (1.4% of the
population) left each year.
Figure 1: Population 1926-2002
Source: CSO
.
Realizing the danger this presented to the young republic, Irish officials embarked on a new policy of ‘industrialization-by-invitation.’ The Industrial Development Authority (IDA) was created within the Department of Industry and Commerce to lead this new policy by soliciting investment from foreign and domestic firms. The industrialization-by-invitation policy of “offering substantial incentives to multinational companies to locate in Ireland and hoping to generate cash and employment through export-led development” (ORiain) attracted some investors. The enactment of such key legislation as the Undeveloped Areas Act (1952), Industrial Grants Act (1956), Finance Act with Export Profits Tax Relief (EPTR) (1956), and the relaxation of the Control of Manufactures Act (1958) helped to further draw foreign investors. Ireland finally joined the International Monetary Fund and the World Bank in 1957, signaling to the rest of the world that the half-forgotten Irish Republic was ready to join the rest of the world. The application for EEC membership in 1961, and the signing of the Anglo-Irish Free Trade Agreement (AIFTA) in 1965 further boosted Ireland into the European community and irrevocably advanced Irish trade liberalization. The AIFTA was particularly important to increasing Ireland’s Free Trade in a manner that wouldn’t overstress the budding economy. AIFTA gradually reduced trade tariffs between Ireland and Britain, via 10% annual tariff reductions, resulting in full Free Trade by 1975, while also offering grants, loans, and tax incentives to help companies modernize in preparation for the more competitive trading ahead. AIFTA was particularly important, as Britain was Ireland’s prime trading partner, of both imports and exports, at the time. Additionally, AIFTA acted as a sort of middle stepping off point to push Ireland towards EEC accession and also allowed them to obtain membership in GATT (the General Agreement on Tariffs and Trade), which was achieved in 1967.
By the 1960’s,
some major US high-tech companies had come to Ireland, but computing and
high-tech were limited to a “small isolated community that was fragmented into
fraternities of IBM, Honeywell and ICL devotees” (ORiain). These companies helped Ireland to achieve
some limited economic success; they represented an increase of foreign
investment by approximately 4% per year throughout the 1960s. However, the jobs created were chiefly
low-skill. In addition, the new
companies failed to consistently connect to the local economy and often left
once their tax-breaks came to an end.
To further worsen matters, Irish customers (even in the government)
“showed no great desire to buy from Irish companies” (ORiain). Public procurement policies were not used to
assist Irish companies, unlike other countries where government, and especially
military, spending play a great part in advancing local businesses.
If this economic advancement was not all that Ireland could hope for, it was still instrumental in setting up Ireland for future success. The move from protectionism to free trade was a key signal to the rest of the world that Ireland was ready to join the international economic community in a big way. Ireland had also seen continuous economic growth throughout the 1950s and 1960s, contiguous with the worldwide economic boom of the same period. Between 1958 and 1970, the Irish economy had grown by 61%, compared to 42% for Britain (Mac Sharry). The population which, in 1961, was the lowest it had been since the foundation of the state in 1921, jumped to it’s highest point in 1971, with a population just shy of 3 million (Mac Sharry). Although the overall employment did not increase during this period, the sharp decline of previous decades was finally halted and Ireland began the crucial process of converting an agriculture-based economy into an economy based on industry and services. The Irish standard of living increased by 40% throughout the 1960s, though it remained lower than most of Europe. Perhaps most importantly, the lagging Irish educational system was finally brought up to speed in 1967. In that year, all fees for secondary education were abolished and free transportation was made available in rural areas (where the majority of the Irish population lived). Ireland took its first steps toward creating the well-educated workforce that would be so important to the Celtic Tiger. (See Education below) Finally, Ireland’s advances in education and emphasis on improving its economy made it possible for the oft forgotten nation to apply for accession into the newly created European Economic Community. Once accepted, the accession of Ireland into the EEC in 1973 set up the nation for an entirely new era of economic potential.
EEC and the Multinationals Arrive: 1973-1986
In January of 1973, Ireland joined the European Economic Community (EEC), irrevocably altering the future of the Republic of Ireland. Joining the EEC offered numerous benefits to the burgeoning economy. Ireland could hope to benefit from membership in one of the fastest-growing economic regions of the world. The nation now had easy access to a huge market of 250 million people, giving Ireland the opportunity to reduce it’s dependence on Britain as it’s primary market for exports. The reduced tariffs and increased trade freedom with Continental economies were, for Ireland, a benefit that even the Anglo-Irish Free Trade Agreement (AIFTA) couldn’t match. Irish officials hoped to buoy Ireland’s economy by tying themselves to some of the more resilient European economies, such as Germany. Entering the EEC also gave Ireland the opportunity to better compete with the other small but growing market for foreign direct investment: Luxembourg. As a member of the EEC with strong ties to the USA, Australia, and Canada, the Republic of Ireland was now in a much better position to solicit foreign direct investment by offering their island as a sort of stepping stone into the difficult-to-access European market. The nation also benefited from higher guaranteed agricultural prices and large infrastructure grants. Moreover, the young government had the benefit of additional guidance and assistance with regards to social and economic policies.
Now, this is not to say that EEC membership was all ruffles and ribbon to the Irish economy. Far from it. Entry into the EEC resulted in significant job losses as the economy adjusted to major restructuring of the manufacturing sector that severely contracted indigenous industry. From 1973 to 1988, overall employment in industry fell 6.6%. Even the increase in employment by foreign firms (up 25%), did not outweigh the heavy job losses in the indigenous-owned sector (down by more than 20%). Ireland experienced its fair share of troubles as the economy shifted from indigenous industries to modern ones. The formerly protectionist economy accelerated its move from internal to external ownership with EEC membership. “In 1973, foreign firms accounted for less than one-third of total industrial employment (68,511) and by 1988 this had increased to a 42 per cent share (85,851)” (Mac Sharry). Fortunately for Ireland, economists and other government officials took a long-term view. In joining the EEC, they recognized that there would likely be short-term difficulties, but they believed (correctly) that the long-term benefits would likely outweigh the short-term detriments.
Irish officials did not rely on EEC membership alone to boost their economy. The Industrial Development Agency (IDA), now a semi-private industrial advancement group independent of direct government control, really stepped forward to draw in Foreign Direct Investment.
Efforts were made to increase linkages between multinationals and local companies, to grow local firms through marketing support and management development, and to encourage R&D and innovation. However, the policy focus remained to attract foreign investment. (ORiain)
In particular, the IDA focused on the IT sector, using the success of Digital (an early Irish investor) and entry into the EEC to motivate investment. Generous grants and other financial incentives, combined with government-offered 15-year full tax exemptions on export sales followed by a 10% corporate tax rate until 2010 for all manufacturing companies, enticed several notable IT companies to set up operations in Ireland. Among the most notable are Analog Devices (Limerick, 1977), Amdahl (Dublin, 1978), and Apple (Cork, 1981) (ORiain). The Republic of Ireland had attracted a decent population of minicomputer, mainframe, integrated circuit makers, and data processing bureaus by the early 1980s. Again, there were critics both within and without the government concerning these companies and the policies that attracted them. The 1982 Telesis report was particularly critical, saying that these companies did not contribute enough to the national economy because of the “high costs of government incentives, the low level of skills, and lack of R&D within the plants, the weakness of linkages to local suppliers, and the tendency of companies to move out once tax deals ran out” (ORiain). Happily, many managers (again led by Digital’s example) saw themselves as working to favorably develop the Irish national economy, despite the confines of an international corporate strategy. With this in mind, and recognizing that mechanical assembly tends to move to the lowest cost market available, some companies managed to win non-assembly projects for their plants. This move away from assembly turned out to be crucial in the long-run and began the process of attracting many of the companies, such as Dell and Welch-Allyn, that currently rely on Ireland for a large part of their customer service, technical support, and other non-assembly functions. “High-technology investment, particularly from the U.S., has predominated since the 1970s. Electronics currently account for 30% of Irish exports with another 10% from software” (ORiain).
While foreign direct investment grew in Ireland, the Republic had to face other difficulties that made this a trying period indeed. Along with the rest of the world, the Irish economy was rocked by the steep increase in oil prices in 1973-74 and 1979-80. Unfortunately, the government’s response to these shocks created internal public finance woes that crippled the economy with a rising national debt. Throughout Ireland’s short independence the government had made little attempt to use fiscal policy to stimulate the economy or lower unemployment, preferring the stability and strength of a balanced budget philosophy. However, with the blow of a fourfold oil price increase in 1973, the government chose to discard conventional wisdom in favor of maintaining oil demand in Ireland via increased government spending, which resulted in increased borrowing. A modest growth was achieved, but at the cost of increased borrowing, rising unemployment, and higher inflation (21% by 1975.) By 1977, the new Fianna Fáil government faced a fiscal deficit of 3.6% and further increases in inflation and unemployment. (Mac Sharry) Having made election commitments based on lowering unemployment, the new government rushed to implement this goal by way of yet more borrowing. The plan was designed to be self-financing by combination of increased tax buoyancy and higher growth, but the second oil price shock in 1979 reduced growth and left the government in the unpleasant position of having a rising national debt, an even higher current budget deficit (6.8% of GNP), and an expected acute deterioration of the current-account balance of payments. “Despite gaining on the average GNP of countries in the Organizations for Economic Cooperation and Development (OECD) in the 1970s, Ireland fell behind the average growth rate again in the 1980s” (ORiain).
By 1981, the situation had slipped out of control. A succession of governments had attempted to control the national debt, at 94% of GNP and rising, and a nearly 15% balance of payments deficit, with little success (Mac Sharry). A coalition government of the Fine Gael and Labour parties came into power in 1982, but, despite early attempts to rectify the situation, borrowing increased and the problems only got worse. A strict plan of debt reduction and expense control was introduced that might have saved the day, but the plan was difficult and so unpopular that it was dropped before any real benefits could be recognized. By 1986, despite the benefits of EEC membership and increased foreign direct investment, unemployment stood at 18%, national debt was 125% of GNP, and the government was borrowing approximately 12.5% of GDP each year. (Fahy)
The Celtic Tiger is Born: 1987-2002
1987 was a crucial year for Irish Fiscal and Economic policy; it represented a return to economic essentials, balanced budget philosophy, and an increased emphasis on fiscal stability. The NESC document – Strategy for Development 1986-1990 – released in autumn 1986, was a ray of hope to a country so financially troubled that fears of the International Monetary Fund (IMF) taking control were not unrealistic. So bad was the public debt, that 80% of income tax revenues were going to pay the interest on national debt alone, leaving little money for important day-to-day matters like healthcare, education, and welfare. In January 1987, the Fine Gael-Labour government was replaced by the Fianna Fáil with the clear intent of solving the fiscal mismanagement once and for all. Ray Mac Sharry, who began his second non-sequential term as Finance Minister in 1987, believed that:
there was a clear, if implicit, understanding… namely, that I would be able to do what was necessary either in terms of expenditure cuts or tax reforms… I recognised we were at a major turning point in our economic history. I knew that a day of fiscal reckoning had arrived. It was time to call a stop – and mean it. For tough and unpopular decisions could no longer be avoided. (Mac Sharry, 44)
With the support of the Taoiseach, Dáil, and Finance Minister, the Strategy for Development 1986-1990 received an unprecedented level of endorsement across all political parties and major social/business groups “including employers, trade unions, farmers and others” (Mac Sharry, 62). With this support, the Fianna Fáil was in a strong position to implement a plan even more painful than the failed 1982 attempt. Mac Sharry described it as “major financial surgery… without the benefit of anesthetic” (63).
In order to succeed, the new financial strategy took a completely different approach. Under the old system, each governmental department submitted an over-inflated budget, which was then deflated and approved by the Finance Minister after a series of token concessions, resulting in “savings” that really only slowed the rate of increase in spending, rather than actually budgetary savings. This no longer worked. Now the government needed to not only shed its fat, but cut right down to the bone. The plan to do this became known as the Tallaght Strategy (see Public Finance and Fiscal Policy below). Key points included: not indexing tax bands for inflation, introducing a special 35% withholding tax on professional fees paid by state agencies, abolishing the duty-free allowance for travelers abroad less than 48 hours, maintaining an embargo on government recruitment, and freezing public-service pay from the end of June on. A coordinated team approach was also key to the financial reform; an informal review group consisting of the Taoiseach, Finance Minister, Secretary of Finance, Governor of the Central Bank, Secretary for the Taoiseach’s department, and Chairman of the Revenue Commissioners met regularly to discuss economic performance, taxes, interest rates, etc. Also important was the outright affirmation that the government would steer this fiscal course and not back down, despite difficulties and unpopularity. In a letter the Taoiseach wrote to government ministers about necessary expenditure cuts on May 13, 1987, he made clear the extremities to which the government would go to solve the financial woes:
all options should be considered including the elimination or reduction of particular schemes and programmes, rooting out overlaps and duplications between organisations, the closure of institutions which may have outlived their usefulness, the scaling down of the operations of organisations and institutions and the disposal of physical assets which are no longer productively used. A radical approach should be adopted and no expenditure should be regarded as sacrosanct and immune to elimination or reduction. We do not want a series of justifications of status quo or special pleadings. (Mac Sharry, 69)
Because of the non-governmental support that the plan garnered, politicians were under significant pressure to support the plan and not back down. In addition, an Expenditure Review Committee, known as An Bord Snip, was established. The An Bord Snip was headed by the Secretaries of Finance, Public Expenditure Division, and Personnel Management and Development, and also included consultant, Colm McCarthy, from Dublin-based DKM. Secretaries from any department could bring issues before the community, thus allow the government the chance to ‘sooth ruffled feathers’ before making cuts official. The An Bord Snip represented an extremely successful ‘quasi non-government organisation’ (‘quango’) and, in many ways, demonstrated the value that a quango could have for Ireland, beyond the IDA. The government was able to announce a record 6% nominal reduction in spending in 1987 and could expect minimal objections to further cuts in the coming year. The Republic of Ireland was well on its way to recovery.
The Tallaght Strategy was implemented at the end of 1987, and the first tangible benefits of the policies it included became apparent in 1988. Namely, budget cuts of more than $468 million, a drop in interest rate from 13.25% to 8.50%, a long-term reduction of tax rates, and various other measures resulted in a stabilization of Irish finances and an improvement in general economic conditions (Mac Sharry). Now that a conducive economic climate had been created, Ireland’s growth took off in ways no one could have imagined. From 1987 to 1990, total employment grew by an average of 13,000 jobs a year while unemployment dropped (from 16.9% in 1987 to 7.8% in 1998) along with the number of strikes (lost days were over a million in 1979 and down to only 37,374 in 1998). By 1990, the current budget deficit had fallen from 8.3% of GNP in 1986 to 0.7%. “From 1990 to 1994, GDP growth averaged 5.3%, surpassed only by the fastest growing Asian economies; the inflation rate was among the lowest in Europe and employment increased for the first time in years” (ORiain). The pace of these changes was so fast that it challenged textbook understanding of economy and amazed more than a few people. In truth, the figures speak for themselves:
· Government debt as a proportion of GDP stood at 116 per cent in 1987 and had fallen to 55 per cent by 2001.
· The current budget surplus reached some £2 billion in 1998, compared with a deficit of £1.4 billion in 1986.
· The 1990s have seen a decade of rapid economic growth, with GDP averaging 7 per cent annually, and some 9 per cent since 1993 [to 2000].
· Tax rates have fallen sharply: in 1987, the standard rate of income tax was 35 per cent and the higher rate was 58 per cent. By 1999 these rates had fallen to 24 per cent and 46 per cent respectively.
· An average rate of inflation of some 3 per cent has been achieved since 1987 [to 2000], and Ireland’s rate of inflation has been well below the EU rate over the period.
· The tide of emigration has been reversed: between 1996 and 1998, net inward immigration reached 38,000. (Mac Sharry, 119-120)
· See also Appendix: Relevant Charts and Tables
While amazing, the phenomenal growth of the Celtic Tiger did not come without its challenges. The IT sector is a perfect example: The Irish economy was already well invested in the IT industry by 1987, so when the Tech Recession of 1990 hit, Ireland suffered. Several thousand jobs were lost in the mainframe & minicomputer sectors alone. However, the Tech Industry and Ireland both recovered from this fall, rebounding with Irish IT’s most remarkable era.
The IDA claims that Ireland
attracted 40% of U.S. electronics investment in Europe since 1988. Dell,
Gateway and AST Research joined Apple in the PC sector; HP, Keytronic, and
Seagate were among those making peripherals while 3Com and Motorola
strengthened the networking sector. Forty percent of Europe's packaged software
is now supplied from Ireland (Microsoft and Lotus since the mid-1980s; more
recently Claris, Symantec, Oracle, and Novell, manufacturing and localizing
their products in Ireland). ICL, Ericsson, IBM, and Digital carry out software
development. (ORiain)
Today, Ireland is the world’s
second-largest exporter of software (after the US) and supplies more than a
third of PCs sold in Europe. (Martin).
This sort of self-reinforcing
success has helped to build the Irish economy with a sort of avalanche effect:
multinationals locate in Ireland and push the economy towards an impressive
economic performance that, in turn, attracts additional large multinational
corporations to earmark Ireland as a location for expansion or for moves into
the European market, thus beginning the cycle anew.
In addition to
soliciting foreign investment, Ireland has made substantial efforts to increase
the number of relationships between multinational corporations and local firms,
allowing the Irish to learn valuable skills from the multinationals in order to
grow Irish business. In fact, even
though the heavy investment in telecommunications and education was originally
intended to attract multinational investors, is has also had the benefit of providing
the infrastructure for the growth of Irish-owned businesses. Recognizing the danger of an economy that
was dependent on foreign investment, the government and Enterprise-Ireland (an
quango created to push indigenous growth – see Enterprise-Ireland below)
both began pushing the growth of local Irish business. Fortunately, the increasing use of
subcontracting among multinationals benefited local firms, allowing them to
expand. Some Irish firms have even used
the “outsourcing of
manufacturing and logistics as a springboard toward a more independent and
technically sophisticated business” (ORiain).
Government sponsored programs were also used throughout the 1990s to
quietly support Irish Firms via “guidance and funding with R&D, marketing
consultancy, management development, and business networking” (ORiain). Today, some Irish start-ups, such as Iona
Technologies, have become world leaders in their markets. Since 1998, the IDA and Enterprise-Ireland
have also emphasized Research & Development and innovation, both to attract
multinationals to the isle and to develop local industry. Today, many multinationals have major
R&D centers in Ireland; there has also been a trend towards multinationals
establishing their European regional operations in Ireland and “managing their manufacturing,
logistics, and distribution through these centers” (ORiain). Even multinationals that locate in Ireland
who choose not to purchase from or work with local companies have benefited the
Republic. Intel, for example, set up a
major wafer manufacturing plant and brought with it almost all of its
established providers (mostly US and Japanese companies). Though Intel chose not to connect with the
local businesses, it was responsible for bringing more companies to Ireland, companies
that may, in turn, support the local industry.
Domestic industry has also been driven by the tax and interest rate cuts
inherent in the Tallaght Strategy, the huge inflow of capital (almost $100
million a month in 1999), especially venture capital, and the favorable
demographics (see Demographics of Success below). “The traditional exodus of young persons
seeking better opportunities abroad is reversing” (Martin).
The Celtic Tiger term was first applied in the early 1990s and, with the highest annual growth rate in the European Union and one of the fastest in the industrialized world, it has been accurate thus far. In 1998 alone, the Irish economy grew by 11% with a 22% growth in exports (Martin). Perhaps most amazing for an economy with such growth: inflation stayed at or below 2% during the height of the Celtic Tiger’s performance. Ireland’s economic performance has been unprecedented within Europe and the Organisation for Economic Co-operation and Development (OECD).
A look at the history of the Celtic Tiger really helps to bring to light some key elements of Ireland’s economic progress. There are several important areas that have made Ireland so successful. First, the emphasis that the Irish government has placed on education allowed for the creation of the well-educated workforce that spurred Ireland’s success. The young age of the Irish workforce, with 40% of the population under the age of 25, was also key (CSO). Combine these with political and social stability, a “series of planned `social partnership' developments involving government, employers, and the trade unions” (Burns, “Beyond”), a carefully planned public finance and fiscal policy framework, membership in the European Union, and the work of the Industrial Development Agency, and the reasons for Ireland’s success become readily apparent. In fact, the 2001 World Competitiveness Yearbook “rates Ireland as one of the most competitive economies in the world” (Norton).
Education
Reforming Ireland’s education system in the 1960’s is arguably the most important key to the success of the Celtic Tiger. Education was one area where Ireland was substantially behind the rest of Europe:
The 1916 Proclamation promised to cherish all the children of the nation equally. But by the early sixties, and after nearly half a century of self-government, the failure to live up to that ideal in the field of education was striking… The OECD-sponsored Investment in Education report of 1965… showed that in 1961 half of the children (aged 15-19) of professionals and skilled workers were in full-time education, compared with just 10 per cent among those in semi-skilled and unskilled categories. (Mac Sharry)
Clearly, change was needed and, in 1967, it began. Free, universal, secondary schooling was made available to all children, including free transportation to and from school in rural areas. Enrollment increased by 18,000 in the first year alone. In 1964, only 25% of seventeen year-olds was still in school, compared to 83% by 1994 (Mac Sharry).
The advancement of secondary education in turn triggered a revolution in third-level (college) education. The Regional Technical College (RTC) system, also set up in the late 1960s, was an important step toward creating the technically sophisticated workforce that fueled the Celtic Tiger. Two additional technically oriented National Institutes of Higher Education were formed in 1972 and 1980, the Dublin Colleges of Technology and the Institute of Higher education in Limerick, both of which received full university status in 1989. Today, some 80% of secondary school graduates apply for higher education and “spending on education, as a proportion of national income, has doubled” (Norton) since the 1960s.
This strong investment in higher education was actually quite controversial in the beginning. At first Ireland was “producing a surplus of doctors, dentists, lawyers and other professionals to her needs” (Mac Sharry). The addition of the technical universities resulted in a surplus of engineers who, like the other professionals, often emigrated to Europe, Canada, Australia, and the United States to find employment. The overall result was that other countries benefited from the education paid for partly by the Irish taxpayers. This phenomenon reached its peak during the “brain drain” of the 1980s. Despite these doubts, the government continued to invest in education and, “in the long run, it proved perhaps the most successful government policy of the last 30 years” (Burns, “Beyond”). Ireland gradually built a strong, technically advanced, low-cost, English speaking workforce that became the human capital so necessary to attracting foreign direct investments and building Ireland’s own businesses.
The primary industries that propelled the Celtic Tiger phenomenon (IT, semiconductors, and pharmaceuticals) all require an educated workforce to successful create their products. Although educated workers are available around the world, very few places could offer the unique combination of education, age, and low-cost labor that was available in Ireland. The Republic capitalized on this fact by emphasizing education and shift the focus from a classical education “for the elite to a more practical, vocationally oriented, education suited to the demands of a knowledge-based, internationally competitive economy” (Norton). From 1973 to 1989, the key years for attracting the aforementioned industries, the skill profile of workers in Ireland’s IT industry was somewhere between that of the US and South East Asian industries (ORiain). With the labor costs as they were (Ireland’s were only a little higher than South East Asia’s), this was ideal for attracting companies to Ireland. Moreover, as the economy grew and bloomed, the Irish people were able to take advantage of the skills they had learned and their quality educations to create and grow Irish companies. At the turn of the millennium, “more than 50% of postsecondary (“third level”) students studied business, engineering, or computer science” (Norton).
Working Age
According to the 2002 Census data from Ireland’s Central Statistics Office, the Republic of Ireland has the youngest population in Europe, with 37.5% (1,468,950) of the nation’s 3,917,203 inhabitants under the age of 25 and an average age of 32. With 22% of the population under the age of 15, Ireland can expect to maintain this young (and predominately skilled) workforce for several years to come (FitzPatrick).
Public Finance and Fiscal Policy
Much is made of the value of Ireland’s economic policies, and with good reason. Although the other areas discussed in this section (age, education, etc.) are very important to the Celtic Tiger phenomenon, none of these would have mattered without sound fiscal policies that make growth possible. Economic growth in the Tiger has run as high as 10% per annum, with minimal inflation, a huge trade surplus, and the government running a financial surplus: a long cry from the early days of the republic, or even Ireland of the late 1980s. “In many ways, Ireland was forced into applying sensible economic policies. By the late 1980s, Ireland's accumulated national debt had reached some 125% of GNP, and the government was borrowing some 12.5% of GDP each year at its worst” (Fahy). The single most important move in fiscal policy made by the Irish government was the adoption of the Tallaght Strategy. Not a single policy, the Strategy was instead a long-term plan to repair the republic’s struggling finances and propel the nation to a level of growth that turned out to be completely unexpected.
Named for the speech given by Alan Dukes to the Tallaght Chamber Commerce on September 2, 1987, the Tallaght Strategy was probably the most important fiscal decision for the success of the Celtic Tiger. A broad reaching fiscal plan covering spending cuts, interest rates, and taxes, the Strategy was necessary to control Ireland’s financial woes, which were spiraling wildly out of control by 1987. Though unpopular at first, the Fianna Fáil government had the unprecedented benefit of strong support from the main opposition part, the Fine Gael. Fine Gael understood the extremity of the Republic’s finances and recognized that an extreme hard-line plan was Ireland’s only chance. Moreover, the plan was seen by the Irish people as an important step in the right direction; support for the government actually improved with the adoption of the Tallaght Strategy, increase from 44% at the time of election in 1987, to 46% by the beginning of 1988 (Mac Sharry). In many ways, this unprecedented support was the catalyst for a number of “national tri-partite agreements between the government, trade unions, and employers. Originating at a time of crisis, the agreements generally contained moderate wage increases, significant personal tax cuts, and programmes of measures to help the most disadvantaged in society” (Fahy). The first part of the Tallaght Strategy, cutting spending, called for massive across-the-board spending cuts throughout the government. £485 million in budget cuts, the first decrease in real cash terms in 30 years, was achieved in 1988. In addition, an embargo on government recruitment was initiated and public service pay was temporarily frozen.
Equally important to the strategy was a long-term tax modification plan. The Republic took several steps to boost tax revenue initially, when it was most needed, while also beginning plans to eventually lower the overall tax rates. The first step was to not index tax bands for inflation. What this meant was that the tax brackets remained at the same cash level, while inflation rose, thus lowering the tax brackets in actual terms and increasing income tax revenues. A new 35% withholding tax on professional fees paid by state agencies was also introduced. The tax reduction plan was designed to incrementally lower taxes from the standard rate of 35% (top rate of 58%) in 1987 to a standard rate of 24% (top rate of 46%) by 1997, while also raising the tax bands. The reduction of taxes was crucial to the creation of the Celtic Tiger. Although this reduced tax revenue from 44.3% of GNP in 1987 to 40.2% in 1998, actual GNP increased dramatically. The reduction in taxes left the public with more disposable income, thus increasing spending, thereby fueling economic growth.
In a related move, the Republic also instituted what became known as the ’48-hour rule.’ This rule was a restriction on duty-free shopping. Normally, people traveling from one nation to another may purchase certain goods and transport them across the border without paying taxes on the products. Because of the weakness of the Irish currency, the Punt, and the relative strength of the Pound Sterling, many Irish in border areas were crossing into England/Northern Ireland to shop. As a result, the Republic of Ireland was losing the revenue from taxes on these products, much less money was being spent in border towns (reducing the income of locals and related taxes), and money was moving in a one-way flow out of Ireland: it was estimated that Ireland lost £300 million in 1986 alone. Without the internal spending, border areas were becoming economically weak and inherently non-self-supporting. For a country determined to reduce it’s dependence on the British economy, this cross-border shopping was a significant detriment. In a surprising move, Ireland placed a restriction on the duty rule, declaring that one must be abroad for at least 48 hours in order to bring items back Duty Free. The result was an estimated 30% increase in trade in border towns by December 1987 alone. Interestingly, this rule was much more controversial in the EEC than in Ireland. At the time of its implementation many Irish officials believed that the new rule was actually illegal by EEC policies. However, by June 1990, when the EEC finally made an official ruling, Denmark had already followed suit and the legislation was deemed legal.
Another extremely controversial part of the Tallaght Strategy was the offer of a 9-month period of tax amnesty. During this period, anyone owing back taxes could pay and have all of their fees and penalties forgiven. Many people believed this was an unintelligent idea as it would both make loyal taxpayers angry and encourage them to default on their payments, with only minimal benefits in return. As it turned out, this was one of the most valuable policies the government could have implemented. The limit was strictly kept to one 9-month period (January 1st - September 30th, 1988), thus discouraging default, and most of the public did not object to this temporary amnesty offer. Moreover, the revenue returned far exceeded anyone’s hopes. The Minister of Finance, Ray Mac Sharry, initially forecast just £30 million in revenue. The final figure was far higher: £500 million. When repeated in 1993, another £260 million was raised. Most importantly, many individuals, and especially the self-employed, were brought into tax compliance, boosting tax revenue not only in the first year, but also for years to come, and reducing government expenditures for the tax enforcement department.
Of course, government officials weren’t concerned merely with income taxes; corporate tax rates were just as important, if not more so, to the success of the Tallaght Strategy. Because of the amount of breaks and concessions given to business, the income from corporate taxes in 1987 was small compared to that of other nation: about 1.5% of GNP. Although these concessions had initially attracted some investment in Ireland, Finance Minister Mac Sharry believed that the concessions were in fact too generous. The nature of the breaks was encouraging companies to invest in fixed assets rather than jobs. Changes to corporate taxes were also designed to be gradual. Initially, the corporate tax rate was reduced from 50% to 43%, while accelerated capital allowances on new investment were reduced from 100% to 50% (Mac Sharry). The plan further reduced the corporate tax rate in gradual steps to 12.5% by 2003, encouraging foreign investment and the growth of Irish-based business: “the old adage again applies, that '100% of nothing isn't as useful as 10% of a lot!’” (Fahy).
The final important element of the Tallaght Strategy was interest rates. The Short-term Facility Rate (the approximate equivalent of US Federal Rates) was at 13.25% in March of 1987. By March of 1988 the rate had dropped to 8.5%, falling faster than similar rates internationally and causing increased public spending due to the increased disposable income available to loanees. In addition, the fall in interest rates acted as evidence to the public that the Tallaght Strategy was working. Working in careful monitored combination, all the elements of the Tallaght strategy together helped to not only turn around the flagging Irish finances, but to also create the Celtic Tiger (Mac Sharry).
The European Connection
One major strength for the Irish Republic is its position as ‘bridge’ between Europe and the Americas. Approximately 40% of Americans can claim an Irish heritage, and morally and socially the Irish and American mentalities share many similarities: more so than when comparing Americans to Continental Europeans. Ireland shared similar ties with Australia and Canada as well. This encourages many Americans, Australians, and Canadians to consider doing business in Ireland, particularly where they are interested in tapping the continental European market. And with membership in first the European Economic Community (EEC) and then the European Union (EU), Ireland has ideal ties for trading with continental Europe. But membership in the EEC and EU means more to the Irish Republic than merely bridging this divide; European membership offered (and continues to offer) substantial benefits for the growing Irish economy.
Until 1973, Ireland relied heavily on Britain for trade. The bond was so strong that any rise or fall in the British economy or currency was inevitably followed by a similar Irish rise or fall. The independent Irish people were very uncomfortable with this situation, so when the opportunity came to cement Ireland’s position as part of Europe, officials jumped at the chance to reduce their dependency on Britain and take advantage of benefits that even the Anglo-Irish Free Trade Agreement (AIFTA) couldn’t hope to match. The Republic of Ireland joined the EEC in January of 1973, officially gaining membership in one of the fastest-growing economic regions in the world and accessing a market of 250 million people. In 1973, no one had any dreams that Ireland would become a Celtic Tiger; in fact, the government hoped to prop up the Irish economy by tying it to the more resilient European economies (i.e. Germany). EEC membership also placed Ireland in an agreeable position for competing with the other small but growing European market for foreign direct investment: Luxembourg. The advantages of EEC membership were numerous: higher guaranteed prices for agricultural products, EEC sponsored infrastructure grants (strongly needed by Ireland), and additional assistance and guidance with regard to economic and social policies. The transportation infrastructure grants alone total more than £23 billion between 1973 and 2000, enabling Ireland to build a modern freeway system capable of supporting the commerce to come. The Structural Fund support from the EEC also “imposed the discipline of a 5-year planning cycle, thus reinforcing the medium- and long-term fiscal recovery measure[s]” (Norton) described previously.
EEC membership was an early boost to the Irish economy, but membership had its downside; a major restructuring of the manufacturing sector resulted in an overall drop in employment of 6.6% between 1973 and 1988, and more than a 20% drop in employment in the indigenous-owned sector, both contributing to the woes besetting the nation by 1988. Despite the troubles, EEC membership did help to boost foreign direct investment, and by 1988 foreign firms accounted for 42% of industrial employment (as compared to 33% in 1973). (Mac Sharry) The combination of foreign investment and infrastructure grants, and even the restructuring of the manufacturing industry, were crucial steps to creating the Celtic Tiger; these benefits merely took longer to materialize.
The
EEC was an important turning point in the growth of the Irish Republic, but,
with the overall drop in employment and the slow realization of benefits, much
of the public did not truly recognize the importance of the move. For many, the tech recession of the early
1990s, and subsequent Irish fallout, was proof that the EEC just wasn’t good
enough. To the Irish public, and to the
world at large, the Celtic Tiger did not and could not exist until Ireland went
beyond EEC membership. In fact, “it was European Union membership
that gave Ireland its greatest impetus, not just in terms of the huge financial
aid it received, but also in a psychological sense, in giving its young people
new horizons and a brimming new confidence” (Burns, “Beyond”). Full European Union (EU) membership offered
more immediate benefits to the growing republic and, because of the change
begun during the EEC period, these benefits where more readily apparent to the
public. In short, the public was ready
and willing to become part of the EU and to adapt and grow with the changes it
offered; the psychological readiness and hope that the Irish people had was, in
many ways, just as important as the economic and political benefits that the EU
offered.
With a population of more than 320 million, the establishment of the European Union in 1992 created the “largest single internal marketplace in the world” (Norton). With one of the weakest national economies within the EU at the time, the Republic of Ireland had nowhere to go but up. Ireland was positioned as low-cost labor market, benefiting more prosperous EU members whose labor rates where mushrooming, such as Germany and France, and boosting the Irish economy.
Many of these EU countries initially set-up plants in Ireland as a cost reduction tactic; however, they were not the only ones to see Ireland as an ideal plant location. With the greater unanimity and collateral strength created by the Union (as opposed to the EEC), outside nations, such as the United States and Japan, saw Ireland has a strategic opportunity to outmaneuver the potential creation of EU tariff walls. Ireland itself, with only slightly more than 1% of the EU market, was not the target. Rather, the creation of foreign subsidiaries within Ireland served to better unite the European and international markets (OECD, 2000).
The IDA
The Industrial Development Agency Ireland (IDA) is often cited as the major force behind Ireland’s growth, and not without reason. Initially established as a government department responsible for attracting foreign direct investment, the IDA is today a quasi-non-governmental organization (quango) that works independently to attract multinationals to Ireland. The IDA currently has 23 offices, with five in the USA, three in Asia, three in Europe (outside Ireland), and one in Australia.
The IDA works on a direct basis to encourage investment in the Irish economy. It does not rely merely on offering grants and other incentives to attract companies, but solicits the companies directly. The case of Intel offers an ideal example: When word went out in March of 1989 that Intel was searching Europe for locations for two different projects, one with 1500 jobs and the other with 1000 jobs, the IDA went into what former IDA Director Padraic White calls “red alert status.” The IDA assembled a team of 15 people from different areas of the agency whose sole job was to bring Intel into Ireland. This kind of direct personal attention (and a little bit of the famous Irish charm) is precisely what has made it possible for the IDA to bring so many multinationals into Ireland. Equally important has been the Agency’s persistence, even when investments seemed lost, as the cases of Hewlett-Packard and Compaq both illustrate. In both cases, Ireland lost manufacturing projects to Scotland, but the IDA refused to give up completely. As a result, Compaq chose Ireland to for its new European customer service center and HP built established its new plant there. HP was so impressed by its Irish experience, that they decided to further expand their Irish base before they had even finished building the first plant!
Key to the IDA’s efforts to successfully attract companies is the Agency’s ability to key markets and then select companies whose needs complemented Ireland’s own.
Successful industrial development began with an appraisal of the mutual needs of those involved – the state and the potential industrial investor. Each needed to secure a perfect industrial-development fit… The IDA’s role is to act as the middleman and facilitator in helping secure them. It target’s prospective companies, identifies their investment needs and matches their requirements with the native skills and resources available here [in Ireland]. (Mac Sharry, 234)
Fortunately, although the people at the IDA have not always been correct, they quickly got quite good at identifying these markets and investors. As of 2003, there were 1054 IDA supported companies in Ireland, creating 128,993 jobs (“Information,” 8). In selecting industries (rather than specific companies) for Foreign Direct Investment, the IDA works on two main principles:
1. Pick those [industries] that offer the best chances of commercial stability and therefore economic stability, by reference to commercial criteria such as high profitability; strong growth both in output and international trade
2. Pick those [industries] with high dependence on scarce human resources, such as skilled people, because it implies a greater commitment and tie. (Mac Sharry, 235)
Two of the most important industries for the Celtic Tiger are Healthcare and Electronics (see Niche Markets below), both industries initially selected and targeted by the IDA.
A final to the IDA’s ability to bring in foreign direct investment has been the agency’s determination to do whatever was necessary to bring in and maintain investment that benefits both the foreign company and the Irish state. As the people in closest contact with current and potential foreign investors, the IDA has often been in the best position to determine what incentives were most attractive to these investors. For instance, when, by talking to multinationals and working with PriceWaterhouseCoopers, the IDA determined that Ireland’s low corporate tax rate was key to investors, the Agency spearhead an initiative to create the current 12.5% flat corporate tax. This astounding change took several years of direct action on the part of the IDA who worked continuously with the government and refused to give up until it was implemented.
Enterprise-Ireland (Indigenous Growth)
Originally a division of the IDA, Enterprise-Ireland is now a separate quango committed to accelerating “Ireland’s national and regional development by working with Irish companies to develop and compete so that they can grow in world markets” (“2003”). By building indigenous business, Enterprise-Ireland’s activities complement the IDA’s in building the Irish Economy. To achieve continued indigenous growth, Enterprise-Ireland focuses on 4 main areas:
- Achieving export sales:
- In 2003 alone, Enterprise-Ireland helped 168 Irish companies enter new markets and 159 companies open overseas offices. In addition, 110 companies exported their products for the first time.
- Promoting innovation and productivity:
- In 2003, more than €40 million was invested in 186 Research & Development projects. A €10 million Competitiveness fund was established to assist small to medium businesses improve their productivity.
- Creating start-up companies:
- 61 new “high potential” start-up companies were supported in 2003, primarily in key areas of biotechnology, medical devices, digital media, and eLearning.
- Driving regional enterprise:
- Enterprise-Ireland maintains 14 venture capital funds for the sole purpose of driving regional enterprise. 2003 particularly focused on funding 14 Technology Centers around Ireland that are intended to both commercialize research and encourage entrepreneurship in key locations.
Though less publicly visible than the IDA, Enterprise-Ireland has shown itself to be just as committed to Ireland’s future. Enterprise-Ireland’s work helps to reduce Ireland’s dependency on foreign multinationals and is, in some ways, more directly beneficial to the people of Ireland who learn to depend on themselves and compete directly in the world market.
One of the keys to the creation of the Celtic Tiger has been the government, IDA, and Enterprise Ireland’s ability to identify key growth markets and then attract the right investors. The insight and care that the Irish have shown in this selection has shifted Ireland from a traditional agrarian economy to a pharmaceutical and IT giant. “John Travers, chief executive of Forfas, the state policy and advisory board for promoting industry, science, and technology, says Ireland was lucky in identifying some twenty years ago that information technology and pharmaceuticals would be major growth areas” (Burns, “Beyond”). Much of the Republic’s economic development can be attributed to the efforts of the Industrial Development Agency (IDA) Ireland. Says IDA media manager, Brendan Halpin, ““For the first time [in the 1970s], we said, ‘What did Ireland have to offer?’” What they came up with was a good infrastructure and the availability of young, educated people in the area of electronics” (Wall). The Irish weren’t shy about scouting for the right markets to meet their capabilities: they asked anyone and everyone around the world that they could. Advice from venture capitalists to economists and government boards were all taken into account. The IDA initially focused on attracting computer parts manufacturers and pharmaceuticals, but Ireland has been quick to adapt to changing market conditions and has generally stayed ahead of the curve in key industries. Today, “Ireland has built an impressive dynasty in pharmaceuticals, semiconductor technology, and the software industry” (Wall) as well as the medical device industry and a growing presence in International and Financial Services.
Electronics: Engineering and Information & Communications Technology (ICT)
Forfas and ID both invested a great deal in investigating the ICT industry and targeting its future areas of growth. Having determined that there existed an opportunity for Ireland, they set about attracting ICT investors. This proved difficult early on as most US and Japanese companies didn’t want to invest in locations without an immediate market. So, the IDA changed its strategy, focusing instead on smaller companies that lacked immediate access to the European market. Ireland initially entered the ICT industry via manufacturing. “Using tax incentives and grants, IDA attracted assembly and test facilities of electronics-industry startups. These investments came in waves centering around U.S. technological advancements, such as Digital Equipment Corp.'s (DEC's) minicomputer, Wang Technology's personal computer, Amdahl's IBM-compatible mainframe, and Apple Computer's PC” (Wall). As these companies prospered, larger companies began to consider the possibility of Irish investment. Also the Venture Capital community of Silicon Valley gave Ireland some wise advice: focus in software technology. They aptly predicted that computer business would shift from hardware to software, with software expected to become 90 percent of the ICT business. The IDA and Irish government heeded the advice, so much so that they changed legislation so that software companies would receive the same tax benefits that were so attractive to manufacturing companies (Wall). Between this change and the success of early Irish ICT investments, larger companies began to take notice of Ireland. When Microsoft set up a testing facility in Dublin in 1985, the real rush began. In fact, “most major software providers-including Oracle, Novell, and SAP-operate manufacturing or test facilities in Ireland. As a result, Ireland is the largest software exporter in the world and handles the majority of Microsoft's business in Europe, the Middle East, and Africa, as well as all of its Internet sales” (Wall).
With Software booming, gathering
investment in related sectors proved less difficult. “In 1989, Dell Computer set up a Pan-European multilingual
tech-support center, and key hardware providers followed. IBM, Intel, Motorola,
and others took advantage of the native English language, foreign-language
capabilities, and skilled workforce to establish manufacturing plants and
customer-support and R&D facilities” (Wall). Other
companies currently running major centers in Ireland include Nortel, Compaq,
Microsoft, and Hewlett Packard. Today,
Ireland is one of the world leaders in semiconductors and software, with 40% of Europe’s packaged software
coming from Ireland.
According to the IDA, of all Foreign Direct Investment into Europe,
Ireland attracts 12% of information and communications technologies and 41% of
all software. In addition, Ireland has attracted
40% of US electronics investment since 1988.
Ireland currently has hundreds of
ICT and Software companies. Among the
1100 supported by the IDA are Dell, Ericsson, Analog Devices, EMC2,
Hewlett-Packard, IBM, Intel, Lucent Technologies, Nortel Networks, Microsoft,
Oracle, Apple, Adobe, Computer Associates, Novell, SAP, Siebel, Symantec, Trend
Micro, Lotus, Accenture, Motorola, Sun, EDS, Net IQ, and Xerox. Software alone generates 10% of the
Republic’s exports at €12 billion a year.
Ireland has also remained strong in the engineering industry: among the
170 companies supported by the IDA are ABB, Cardo, Eaaton, Honeywell, Ingersoll
Rand, Magna Donnelly, Moffett-Kooi Kostal, Kone, Liebherr, Pratt & Whitney,
and Siemens. (“Information,” 10-11)
Healthcare: Pharmaceuticals and Medical Technologies
Healthcare was the
other main industry identified early on by the IDA as being of key importance
and includes two distinct sectors: Pharmaceuticals and Medical
Technologies. The Pharmaceutical sector
includes drugs, medicines, and the ingredients for these. Medical Technologies includes physical
devices such as catheters, syringes, and dosage-measurement devices. According to the IDA Ireland currently takes
about 31% of the healthcare
oriented Foreign Direct Investment going into Europe.
As one of the earliest to achieve substantial investments, Pharmaceuticals was the first successful sector for Ireland. The first pharmaceutical company to choose Ireland was Leo Laboratories in 1960. With the visible benefits of locating in Ireland that Leo Laboratories received, other companies followed, including Squibb Linson (now Bristol Myers Squibb) in 1964 and Pfizer Corporation in 1969. Despite some troubles with environmental allegations in the 1980s, Pharmaceuticals have been one of the longest and strongest sectors in Ireland. Today, the more than 80 foreign pharmaceutical companies in Ireland include 12 of the world’s top 15 companies and are responsible for around €30 billion of Ireland’s manufactured exports (“Information,” 12). The pharmaceutical sector also holds a remarkable record in Ireland: it has never had a plant closure, exports more than three times the value of its imports, and contributes an estimated €30 million a year in corporate tax (Mac Sharry, 279). Major companies include Genzyme, GlaxoSmithKline, Johnson & Johnson, Lilly, Merck Sharpe & Dohme, Novartis, Roche, Schering-Plough Company, Takeda, Yamanouchi, and Wyeth. Because of the strength and proven record of this sector, the Irish government is currently investing over €700 million in building a world-class biotechnology skills among the Irish people and awarding substantial funds to research projects that well help to make Ireland a world center for biotechnology.
Medical technology companies came to Ireland shortly after the pharmaceuticals, arriving in the 1970s. Overtime, it has become a “showpiece industry providing stable jobs in beautifully designed premises conveying a new image of industry” (Mac Sharry, 280). This sector faced dangers in the 1980s as well, this time from competition in Puerto Rico and Mexico, but Ireland again pulled ahead in the 1990s, averaging for new companies a year. Today, there are more than 110 companies in this sector, including 80 foreign companies and 30 Irish, producing a wide range of devices. Moreover, more than half of the medical technology companies have dedicated research and development centers, many with close ties to Irish universities. The sector currently exports more than €4 billion annually and includes such firms as Braun, Bayer, Bausch & Lomb, Baxter, Beckman Coulter, DePuy, Guidant, Medtronic, Stryker, Tyco, and Welch-Allyn (“Information,” 13).
International and Financial Services
International and Financial Services represent a fairly new sector for Ireland, having existed a little over 15 years. The growth in and government support for this industry reflects Ireland’s decision to move into services (as opposed to manufacturing) in hopes of creating another strong and sustainable Irish industry. It includes two main areas: International Financial Services and International Services.
International Financial Services
Predominately located in Dublin’s renowned International Financial Services Center (IFSC), the International Financial Services industry consists of:
1. Banking
2. Corporate Treasury Management
3. Fund Management, Custody, and Administration
4. Insurance, Reinsurance, Life Assurance, and Captives
There are currently more than 400 leading international financial institutions with operations in Ireland. Firms likes ABN-AMRO, AIG, Deutsche Bank, JPMorgan, State Street, GE Capital, MBNA, UBS, and Hypo have chosen the IFSC. The more than 160 banks, with over €200 billion in assets that are growing at approximately 50% a year, are concentrated on international lending, asset financing, and securities. The IFSC is an ideal location for corporate treasury operations as well; blue chip companies can obtain banking licenses there, among other services. Companies that concentrate their stand-alone treasury activities in the IFSC include IBM, Pfizer, Ericsson, Volvo, and Hewlett-Packard. Dublin has also become a leading international center for mutual funds; approximately 5000 funds valued at $559 billion are administrated in the IFSC. Finally, the IFSC is home to half of the world’s top 20 insurance companies including: AIG, HSBC, UBS, Allianz, Citigroup, Generali, and Scottish Equitable. The insurance sector’s assets alone are currently valued at €34.3 billion (“Information,” 15-16).
The growth of an International Services industry in Ireland reflects perhaps the most future-oriented movement of the last several years. Services are being recognized as having high value to the economy, particularly with the recent decline in trade barriers and creation of new business models. These new business models include Shared Services Centers, Call/Contact Centers, digital media and e-business services, separate headquarters functions, sales and marketing, intellectual property management, and supply chain management hubs. This industry is a very new and dynamic area. Nevertheless, with companies like Accenture, Hertz, Marriott, McGraw-Hill, Microsoft, Overture, Google, eBay, RCI, and Starwood locating in Ireland, this sector has some of the highest potential for growth. According to the IDA, of all Foreign Direct Investment into Europe, the Republic of Ireland obtains 25% of pan-European contact centers and 34% of pan-European shared services centers (“Information,” 17-20).
From Manufacturing to Service: Markets of the Future
The earliest successful niche markets for the Republic of Ireland were predominately manufacturing based, such as pharmaceuticals and Medical Technologies. While still successful and valuable to the Irish economy, recent years have seen a shift towards services (as described above) and research and development. As Ireland has become more important to the world as a channel into the European market, it has been able to turn to towards these higher value activities. “In 1989, Dell Computer set up a Pan-European multilingual tech-support center, and key hardware providers followed. IBM, Intel, Motorola, and others took advantage of the native English language, foreign-language capabilities, and skilled workforce to establish customer-support and R&D facilities” (Wall). This was a major first step in transitioning towards research and service oriented projects that emphasize the importance of knowledgeable skilled workers and generate additional inwards investment. Today, 8% of Foreign Direct Investment for Research & Development Centers in Europe comes into Ireland (“Information,” 20). These sectors offer significant growth potential for the Celtic Tiger.
Recent news media has been full of all sorts of dire predictions for the future of Ireland’s economy. “Can Ireland go on?” “Has the bubble burst on the Celtic Tiger?” These and other speculations have been a hot topic in the last 2 years, but are they appropriate? To answer these questions, one must closely consider the basis for them.
The Sustainability of a Multinational Driven Economy
Many people have come to question the sustainability of an economy driven predominately by foreign direct investment. The debate about this has been hot, and is not a new concern. The majority of employment growth in Ireland from 1988 to the present has been from foreign investments. Coupled with the fact that national governments find it much more difficult to bargain with globally organized corporations (who have significant capabilities outside of Ireland) versus a local national operation, a multinational oriented economy would seem cause for worry. The Irish government recognized this early on and has quietly, but strongly, pushed Irish entrepreneurialship and indigenous business. The strength of Enterprise-Ireland’s programs is a tribute to the effectiveness of these efforts. The IDA has also worked tirelessly to incorporate foreign owned companies into the Irish economy by encouraging partnerships and local outsourcing. The recent growth in International Services is tangible proof of the effectiveness of these endeavors. Yes, Ireland’s economy is still highly dependent on multinationals, but many of these firms have become so closely tied to the Irish economy that pulling out of Ireland would be so difficult and expensive that it is unlikely to occur.
Additionally, the Irish government itself has repeatedly
questioned the high costs of the incentives being offered to attract
multinationals and the level of income foregone by such a low corporate tax
rate. Over and over again the Forfas
and IDA have had to study anew the benefits and disadvantages of this plan, and
over and over they have determined that the benefits realized by this plan, the
jobs, taxes, and economic growth created by the attracted multinationals, far
outweigh the costs. However, the low
tax rate itself has provoked tension between Ireland and other EU nations. Because numerous European companies have
chosen to locate in Ireland and pay lower taxes, the tax revenue lost to EU
nations as a whole is substantial, particularly as “competition between
countries to offer multinationals the best financial incentives [further]
weakens the European tax base” (ORiain).
Many Europeans worry that as the tax revenue losses result in a net
income transfer from EU governments to the European corporate sector, the
ability of EU governments to fund themselves and maintain healthy fiscal
positions will be impaired. While a
legitimate concern, I do not believe that it is accurate. In addition to European firms, Ireland has attracted
numerous American, Australian, and Asian companies. Without the incentives that Ireland offered, many of the American
and Australian companies would likely have moved their business to Asia,
bypassing Europe completely. The Asian
companies might still have entered Europe, but would more likely have invested
in the United States or Central America.
In short, I believe the net benefits of the business attracted to
Ireland make worries of EU fiscal impairment unrealistic.
The Dangers of Success
As the Irish economy grows, it faces the danger of suffocating in its own success. As discussed above, one of the crucial elements in the creation of the Celtic Tiger was the low labor rates available in Ireland. However, as the Irish economy grows, and the cost of living increases, and unemployment drops, making available labor scarcer, it is natural for wages to rise. Once again, the Irish government, IDA, and Enterprise Ireland are ahead of the curve. By shifting focus from manufacturing industries to services, Ireland is gradually moving into areas where the need for educated skilled employees outweighs the need for inexpensive labor. Wage pressures could potentially become a significant danger, but at present it appears that Ireland’s transition to knowledge-based industries is minimizing this consideration.
Selling out?
The majority of concerns about Ireland's future surround the multinationals in the Irish economy. However, there is one issue concerning indigenous Irish firms that should be considered. The success of Irish firms themselves can represent a problem because they may ‘sell out.’ That is, it is a common practice in the business world for larger international corporations (with less ties to the local markets) to acquire their smaller successful competitors. Ireland has already seen some of its most successful supplier and software companies go this way. Some, likely many, of these acquisitions were strategic moves by the larger corporations designed to help them enter the European market by acquiring a local, established, and successful business: another common move in the business world and one that brings further investment into the Irish economy. The remaining acquisitions could indeed represent a danger for the Irish economy and represent an area where Ireland will have to act with care and caution.
The Dangers of Eastern European Nations Gaining EU Accession
With the recent accession of 10 new European Union states labor costs are once again an issue. The new member states, primarily Eastern Europe, tend to have lower labor costs than the older 15 European states, so many people have again raised the issue of Ireland possibly losing multinationals to these nations. In addition, these new nations have the benefit of education to compete with Ireland. What one has to consider here is this: although these nations may appear attractive in terms of labor costs and education, they do not have the ‘entire package’ that Ireland has. These nations do not have the benefit of extremely low corporate tax rates. They do not have strong development agencies like the IDA to attract and continuously support multinationals. Many of these nations do not have a proven record of astute economic policies like the Republic of Ireland’s. They do not have the benefit of close ties between these multinationals and their local economies. Most importantly, they do not have the history of successful and mutually beneficial relationships between their governments and multinationals. The vast majority of multinational corporations in Ireland today would be hard pressed indeed to consider trading the secure and foreseeable benefits of Ireland for the questionable benefits of these Eastern nations.
Failing Growth Rates
Another major concern has been the recent fall off of the growth rate of the Irish economy. The Irish economy was growing at rates of over 10% per annum in the late 1990s, a decline from this is hardly surprising. No economy can realistically hope to maintain that pace, and attempting to do so would likely cause the economy to overheat, boosting inflation beyond controllable levels and reeking economic havoc. Moreover, Ireland’s highest growth rates were achieved during a period when the majority of the world was experiencing a boom. With the recent recessions in assorted international arenas, particularly in the United States where there are strong corporate ties to Ireland, a decline in growth rate is nothing to be alarmed about. Ireland’s growth rate remains significantly higher than the European average. GDP per capita has increased by nearly €4,000 since 2000 alone, and it continues to rise (CSO). By any standards these are encouraging figures. The danger here lies not in Ireland failing to grow, but in overestimating the amount of growth that any nation can realistically expect, particularly when compared against Ireland’s earlier groundbreaking performance.
Having thoroughly analyzed the causes of the Celtic
Tiger’s phenomenal success and considered the dangers currently facing the
Republic, I find that I have to conclude that Ireland is not, as so many
critics have implied, doomed, finished, or dried up. As described above, Ireland has some significant challenges to
face, but they are not insurmountable and the nation has, in most cases,
prepared well and put itself in a very good position to meet these
challenges. Provided that Ireland
continues to favor the cohesive national strategic approach that has brought it
thus far, the nation should be well able to face the challenges of its
future. The Republic of Ireland remains
a “land of beauty with social and political stability… close proximity and easy
access to the large and expanding European Union … [with a] young and educated
workforce and diverse industry mix” (Norton) and of course, the indomitable
Irish spirit, all of which bode well for the nation’s continued growth.
Appendix:
Relevant
Charts & Tables
Sources: CSO & OECD
Sources: CSO and OECD
140 120 100 80 60 40 20
Source: CSO
900,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000
Source: CSO
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