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Ireland: The Celtic Tiger Still Has a Bite - 2003-02-07

For much of the Twentieth Century Ireland’s main export was its people, but a booming economy driven by favorable tax rates, government deregulation, and a highly educated and computer literate work force has changed that.

For the second year running, Foreign Policy Magazine and A.T. Kearney ranked Ireland as the world’s most globalized country in their annual Globalization Index. The Index shows that despite the global economic cool down, Ireland’s economy continues to outperform the rest of Europe and the world.

From 1995 to 2001 Ireland’s economic growth rate averaged 9.5 percent. Breifne O’Reilly, economic counselor at the Irish Embassy in Washington, says the thriving economy has brought many Irish emigrants back home.

The economic boom has also attracted immigrants from other parts of the world. Walking down the street in Dublin now you see a very different kind of population than you would have seen 10 or 15 years ago.

Mr. O’Reilly says, “the great thing is and the huge transformation is that people now have the choice whether to emigrate or not. The pattern of forced emigration has been ended in the last few years, and that wasn’t the case before. But I think the opportunities in Ireland are such that a lot of families are returning. Net immigration has been a feature of the country now for several years.”

Although official figures for 2002 aren’t in yet, Mr. O’Reilly says that Ireland’s economy continued to grow despite the global economic turmoil, albeit at a slower pace.

Ireland wasn’t always able to weather economic storms so well. In fact, as recently as the 1980’s, public debt was out of control and interest rates were sky-high, making Ireland very unattractive to foreign investors. The government took measures to correct this, and now Ireland’s debt to G-D-P ratio is the second lowest in Europe at around 34 percent.

Mr. O’Reilly attributes Ireland’s success to a series of measures implemented by successive governments.

“The public finances weren’t the only reason why accelerated growth took place,” economic counselor O’Reilly says. “I think there were a number of other factors involved, including a flexible work force and fairly high productivity in the economy. There was also sustained investment by not only the U-S but also European Union companies. There was a policy of low corporate tax rates, initially in the manufacturing sector, but now extended right across the economy.”

Mr. O’Reilly also credits Ireland’s membership in the European Union for his country’s success at attracting foreign investment. Ireland joined the E-U in 1973.

“We also have one of the most open economies in the world,” he says. “We export 95 percent of our G-D-P, so that we act as a fairly efficient gateway to the European Union market, which is another, I suppose, very important aspect of our success. We will have access now, once the succession countries join, to a market of 450 million plus people.”

Paul Laudicina, managing director of A.T. Kearney’s Global Business Policy Council, says portfolio capital inflows to Ireland actually grew in 2001 despite the world wide slowdown, rising to 91 billion dollars in 2001 from 80 billion dollars in 2000. Investment kept flowing into Ireland, even as other nations saw foreign investment tumble by as much as 75 percent.

“And I think part of the reason for that was that Ireland completed this overhaul of its financial services regulatory framework, introducing this single regulatory authority,” Mr. Laudicina says. “And at the same time barriers to entry in financial services have been falling in Ireland. So these inflows drove Ireland’s good standing and also Ireland increased trade levels in 2001. It was one of only a handful of countries to buck the overall global trade slowdown.”

Ireland’s economy is very export dependent. While the country has managed to do well in spite of the weak global outlook, Timothy Guinnane, professor of economics at Yale University, says Ireland is not immune to outside shocks.

“Ireland is very much dependent on exports,” Professor Guinnane says. “So any slowdown in partner economies, such as the United States or Britain, will almost automatically produce a cooling in the Irish economy. So the preliminary data for 2002 suggests a much slower rate of growth, but still respectable, over three percent. But it’s definitely going to hurt them. There’s no question about that.”

And while foreign direct investment has been a cornerstone of Ireland’s success, Professor Guinnane says it also means that a lot of the profits earned in Ireland go back to overseas stockholders.

He says, “It’s true that because much of the investment is foreign direct investment, some of the increase in Irish output, or in Irish production, actually has to be repatriated overseas to the owners of those investments, the United States and elsewhere. And that’s something people point to. It’s a concern. There’s also some concern in Ireland about an increase in economic inequality or at least a potential increase in economic inequality.”

Mr. O’Reilly says the Irish government has taken steps to ensure that Ireland’s economic success translates to all Irish citizens.

“I think the benefits are there to be seen by any visitor to Ireland across the board,” Mr. O’Reilly says. “And successive governments have been very keen to ensure regional development across the board. But the government - not just this government but successive governments - has always been at pains to promote social inclusiveness. That’s to say, increases in child benefits and state pensions for older people and in social housing.”

While Ireland’s unequivocal success is often held up as a textbook example of what to do right, Professor Guinnane says it has ruffled a few feathers over on mainland Europe.

“There is some sort of discussion, some resentfulness,” the professor says. “The Irish have really followed a dramatic, opening free market attitude and that has really paid off for them. And sometimes in a country like Germany, where there is a great deal of resistance to that, there is some sort of effort to diminish Irish accomplishments or say it’s just all due to E-U generosity, and really downplay that.”

And indeed Mr. Guinnane says Ireland has profited from E-U development money.

“The other thing to point out is that the Irish have benefited tremendously from various grants and transfers from the rest of the European Union,” he says. “The European Union has these various funds, which are designed to improve infrastructure and to help poor regions of Europe. And when Ireland joined the E-U, it was one of the poorest countries in Europe and had very bad infrastructure. Over the years, the EU has paid for dramatic improvements, especially in Irish infrastructure.”

The Irish Embassy’s O’Reilly says the whole point of European Union policy in the 1980’s was to bring weaker member states like Ireland, Spain, Portugal and Greece up to as high a standard as possible. While acknowledging the E-U’s help in developing Ireland’s work force and infrastructure, Mr. O’Reilly says his country will continue to compete aggressively for new investment.

With the E-U set to add 10 new members in 2004, Ireland will have plenty of countries to compete with, but A.T. Kearney’s Paul Laudicina expects Ireland to do just fine.

“The official figures are not in, in terms of actual foreign direct investment flows and certainly the other indices are not in, but Ireland has continued to reinvent itself, positively positioning itself to take advantage of strategic shifts in the global economy,” Mr. Laudicina says.

Ireland’s image has dramatically changed. No longer is Ireland a sleepy little backwater whose economic blues forced its people from their homes. At the dawn of the 21st century, the Celtic Tiger’s roaring economy is drawing immigrants from Europe and beyond - changing the face and fortune of the Emerald Isle.