Chapter 7Europe and the Irish Economic Miracle
As we saw in the previous chapter, membership of the European Union had a profound transformative effect on Irish politics. Not only did it help in providing a background against which a decades-long territorial dispute could be resolved and a bloody conflict ended; for Ireland it was a way of getting out from under Britain’s shadow and becoming more fully independent. Far from being seen as limiting Irish sovereignty, EU membership was understood as being an important contributor to both sovereignty and national self-respect. Such political considerations help to explain why Irish attitudes towards the European Union are so different from attitudes in Britain, but they are not the entire explanation. For membership of the EU also helped transform Ireland’s economic fortunes, and crucially it did so largely by making Ireland less dependent on Britain. This economic history continues to shape the way in which both politicians and ordinary people in Ireland view the EU, and it helps to explain why almost no one in the country is tempted to follow Britain out of the door.
Irish economic performance under British rule was disappointing and occasionally tragic.1 Ireland’s population in 1845, on the eve of the Famine, stood at around 8.5 million. Over the course of the subsequent five years about one million people died, and a further million emigrated. The Famine ushered in a wave of mass emigration which persisted into the twentieth century, and which led to a continuously declining population throughout the late nineteenth century at a time when Europe as a whole was experiencing a population explosion. Indeed, the population of the 26 counties that became the Irish Free State in 1922 continued to fall: it stood at 6.5 million in 1841, 3.0 million in 1926, and just 2.8 million in 1961.2
Ireland’s history meant that the British and Irish economies were closely intertwined. The newly independent Irish Free State was overwhelmingly specialized in agricultural activities, and its agricultural exports went overwhelmingly to the United Kingdom. The Irish and British labour markets were very tightly integrated with each other. The Irish Free State, and later the Irish Republic, would share a common legal system with Britain, as well as a common currency (until 1979) and many other institutions. For much of the twentieth century it makes sense to regard Ireland as one small regional component of a broader British and Irish economy. And the problem was that this broader British and Irish economy, within which the British component was obviously overwhelmingly dominant, was a poor performer within the wider European context. Only when Ireland emancipated itself from excessive reliance on its nearest neighbour was it able to finally grow as rapidly as other poor countries around the European periphery.
Assessing Irish Performance
In order to assess Ireland’s economic performance, we need a benchmark.3 Because of Ireland’s history a natural tendency is to use the UK, but that is a mistake. The UK performed poorly relative to most European economies: by using it as a benchmark we are setting the bar too low.
A second alternative is to compare Ireland with similar regions inside the UK – Northern Ireland most obviously, but perhaps also Scotland and Wales. As we will see, doing so provides us with useful insights, but again, by comparing Ireland with regions located within the slowly growing UK economy we are again setting the bar too low.
A third alternative, which makes more sense, is to compare Ireland with other relatively poor economies around the European periphery. Greece, Portugal and Spain were all as poor as Ireland at the start of the twentieth century, if not poorer. They therefore faced many of the same obstacles, but also shared the same potential for rapid growth based on catching up on the industrial core. How did Ireland do compared with these economies? Indeed, how did Ireland do compared with European economies more generally?
It is a matter of statistical fact that within Western Europe, countries that were initially poorer have grown more rapidly than countries that were initially richer during the twentieth century. In other words, poorer economies have tended to converge on richer ones, mostly as a result of importing best practice technologies already adopted elsewhere. We don’t have reliable national income evidence for Ireland before 1926, so Figure 7.1 plots initial income levels, per capita, in 1926 against average growth per annum over the course of the subsequent 75 years. I have done this for the broadest available sample of European countries that managed to avoid becoming Communist later in the century, as well as the United States. As can be seen, there is a very clear negative relationship between these two variables. Initially poor countries such as Portugal grew much more rapidly than initially rich countries such as Switzerland. The average statistical relationship between these two variables (what economists call ‘the regression line’) is given by the straight line in the figure. As can be seen, the ‘statistical fit’ of this convergence relationship is remarkably tight, in that most countries are very closely clustered around this line.
Initial income and subsequent growth, 1926-2001
Source: Broadberry and Klein (2012). GNP rather than GDP is used for Ireland, using adjustment ratios kindly provided by Rebecca Stuart. Her data go back to 1944 so I have simply assumed that GNP was the same proportion of GDP in previous years.
Strikingly, Ireland’s economic performance during the 75 years following 1926 was exactly what you would have expected, given Ireland’s initial income level and the tendency of poorer countries to converge on the rich: Ireland lies neither above nor below, but precisely on the regression line. There was nothing unusual about Irish growth over this period taken as a whole. The timing of Irish growth was, however, highly unusual.
The Interwar Period and the Second World War: 1922–50
During the first ten years of Irish independence the new state’s trade policy was, comparatively speaking, remarkably liberal. The election of Fianna Fáil in 1932 coincided with a dramatic shift towards protection, but there was nothing unusual about this. Everybody adopted protectionist policies following the onset of the Great Depression in 1929. As we saw in Chapter 2, even the traditionally free-trading British moved decisively towards protection from November 1931 onward – that is to say, before Ireland.
Ireland was very protectionist during the 1930s, but not unusually so.4 A striking feature of its economic policy during this period, given what came later, was its attempts to restrict the foreign ownership of Irish-based firms. However, Ireland was by no means alone in adopting such restrictions, and they were often evaded by means of fancy legal footwork, as indeed was the case in other countries. More unusual was the so-called Economic War with the UK, which lasted from 1932 until 1938. This had its origins in pre-independence schemes to transfer land from British landowners to Irish tenant farmers. The Irish Free State inherited the obligation to transfer money to Britain to compensate these landowners. When de Valera came to power he refused to continue the practice; the British government retaliated with measures restricting agricultural imports from Ireland; and Ireland counter-retaliated. The dispute was eventually settled on terms highly favourable to the Irish. A capitalized £100 million liability was settled with a £10 million lump sum payment, and Ireland gained control of three ports which had remained under the control of the British Royal Navy under the terms of the 1921 treaty. Even taking the undoubted costs of the Economic War (which hurt larger farmers particularly badly) into account, it is entirely plausible that its net economic impact was actually beneficial.5
Not only were Ireland’s economic policies typical during this period, so was its economic performance. The problem, of course, was that a typical performance during the Great Depression was very bad indeed. And the war that followed was also very difficult for the Irish economy, even though the country was spared the horrors of the fighting. Imports of energy and other essential requirements were very scarce; domestic industry suffered accordingly. As a predominantly agricultural economy, with no heavy industry to speak of, the Irish Free State did not benefit from the demand for war-related matériel in the way that Scotland or Northern Ireland did. Even worse, it found itself selling its agricultural output to a hard-pressed British customer, which quite understandably used its monopoly position to lower the prices it paid for Irish agricultural produce.
In common with almost all of Western Europe, Ireland experienced a strong boom between 1945 and 1950. As noted in Chapter 5, in formerly belligerent powers, especially on the continent, the boom largely took the form of reconstruction. In the Irish case it was far more consumption-driven, as consumers made up for lost time and bought American and other imported goods. Construction also benefited, as did industry.6 Such a consumption-driven boom was surely less sustainable than the more investment-based booms experienced in continental Europe at the time. Nevertheless, the overall impression that one gets when placing Irish economic policies between 1922 and 1950 into a comparative perspective is that there was nothing unusually perverse or self-destructive about Irish policy choices during this period. Irish politicians were relatively liberal during the 1920s, and were protectionist like everybody else from 1932 onwards. They were hardly to blame for the deprivations of the Second World War, nor could they be praised for the inevitable recovery that followed. And the country’s economic performance during the first 30 years of independence was also pretty typical for the time.
Ireland’s not so Golden Age
In contrast, Ireland’s performance during the subsequent 25 years was very disappointing. Whereas Ireland had been an average performer during the dismal interwar period, it performed well below average during Europe’s ‘Golden Age’. Figure 7.2 shows that Irish growth during this period was much lower than it should have been compared to others, given how poor Ireland was at the outset. The 1950s were particularly bad (Panel A), and the GNP (aggregate income) data plotted for Ireland in the figure understate the case, if it is the living standards of ordinary people that we are concerned with. Throughout post-war Europe governments erected modern welfare states, but Ireland lagged far behind. If independent Ireland can be said to have ‘failed’ during any period, it did so most obviously during this decade.
Irish underperformance continued during the 1960s. As can be seen from Panel B of Figure 7.2, this was the decade during which Greece, Portugal and Spain experienced their economic miracles. Ireland, by contrast, was still an underperformer. Importantly, a comparison with Britain alone would miss this: from 1960 onwards the Irish economy grew more rapidly than the British one. But growing more rapidly than an economy which was itself an underperformer was not enough to prevent Ireland from falling even further behind mainstream Europe. Why was Ireland’s performance so poor during these two crucial decades? I want to highlight two reasons.7 The first has to do with delayed liberalization, and the second with Ireland’s excessive dependence on the poorly performing British economy.
A first explanation for poor Irish performance during the European Golden Age, and particularly during the 1950s, is the delay in reversing interwar protectionist policies. These policies were, as already noted, not unusual in the context of the 1930s, and were maybe even beneficial at a time when everyone was protecting their domestic markets; when an export-oriented growth strategy was therefore not feasible; and when jobs were scarce everywhere.8 But by the 1950s protectionism was clearly no longer appropriate. As we have seen, European countries were gradually removing barriers to trade and integrating their economies with each other – first within the context of the OEEC, and later within the context of the EEC and EFTA. This meant that export-oriented growth strategies could now be, and were in fact, adopted throughout Western Europe, while the rapid growth of the period implied that protection was not needed in order to create jobs. Ireland was slower to lower its tariff barriers than core European economies, behaving instead like other peripheral European economies such as Finland, Greece or Spain. In Ireland’s case this relatively slow reduction in tariffs persisted into the 1960s, which was a costly mistake. On the other hand, Ireland was relatively precocious in seeking to attract foreign direct investment. The Industrial Development Authority (IDA) was established as early as 1949, and soon started trying to attract inward multinational investment. Tax relief on export profits was introduced in 1956.9
The timing of trade liberalization in Ireland and the rest of the European periphery to a large extent reflected the impact of the formation of the EEC and EFTA. No Western European country, no matter how peripheral or economically backward, could avoid responding to this disruption of the prevailing European trade regime. Spain abandoned its long-standing autarkic trade policy regime in 1959, joining the OEEC in that year and embarking on a process of trade liberalization. In 1960 it abolished quantitative restrictions on 90 per cent of its imports, tariffs were gradually reduced over the succeeding years, and the country opened itself up, at least to some extent, to inward foreign investment.10 Portugal became a founder member of EFTA, although it managed to negotiate a transitional deal allowing it to delay tariff reductions on sectors representing about half of its imports.11 Finland started lowering tariffs from 1957 onwards, and signed a trade agreement with EFTA in 1961.12 Greece signed an Association Agreement with the EEC in 1961. This granted it a 22-year transitional period leading to eventual full membership; Greece was allowed to lower its tariffs vis-à-vis the EEC gradually, but benefited from an immediate reduction of EEC tariffs on Greek exports.13
Initial income and subsequent growth
A. 1950-60
B. 1960-73
Sources: as for Figure 7.1
And so it is no surprise that Ireland also took the plunge, at more or less exactly the same time, and applied for EEC membership in 1961 along with Britain. Nor is it surprising that when Charles de Gaulle vetoed the UK bid in 1963, and the Irish application lapsed in consequence, Ireland unilaterally cut its tariffs. It did so again in the following year, and in 1965 signed the Anglo-Irish Free Trade Agreement (AIFTA). At this stage Ireland was fully committed to eventual EEC membership, which was finally achieved in 1973.14
What was unusual about Irish trade liberalization was the extent to which it remained focused on the economic relationship with Britain. To be sure, the AIFTA was seen as a stepping stone towards eventual EEC membership, but despite this European motivation the reality was that Ireland was not yet well integrated with the European economy as a whole. And this was a problem, since access to the British market alone was a far less appealing carrot to dangle in front of potential multinational investors than access to the much larger and more dynamic EEC market.
This leads us to the second explanation for Ireland’s relatively poor performance during Europe’s Golden Age. If the poor performance in the 1950s was due to protectionism, and if Ireland started to liberalize from the end of the 1950s onwards, why was its performance so disappointing between 1960 and 1973? The comparison with other peripheral European economies, in particular Greece and Portugal, is illuminating. As we have seen in Figure 7.2, Greece and Portugal grew extremely rapidly during this period, while Ireland remained an underperformer. And yet Greek tariffs were even higher than Irish ones during the 1960s. What can explain the superior performances of Greece and Portugal? Why did Ireland not keep pace?
A key factor in the Greek success story was the country’s Association Agreement with the EEC. Foreign direct investment (FDI) had been encouraged since the early 1950s, when a series of FDI-friendly policies were introduced,15 but tariff-free access to EEC markets provided an essential additional stimulus to inward investment. Between 1962 and 1964 more than three-fifths of all manufacturing investment was foreign; Michael Kopsidis and Martin Ivanov argue that FDI during this period ‘diversified and modernised Greek industry’.16 Continent-wide markets for cheap consumer goods produced in Greece also benefited traditional Greek-owned light industry.
In Portugal too EFTA membership is seen as having been crucial in promoting a more outward-looking and dynamic economy. According to one estimate, annual inflows of foreign direct investment were more than 30 times higher during the 1960s than they had been between 1943 and 1960.17 Portuguese accession to the EEC in the 1980s would lead to a further step increase in inward foreign investment, as happened also in Spain.18
A key difference, therefore, between the Irish case on the one hand, and the Portuguese and Greek cases on the other, was that Ireland had neither an Association Agreement with the EEC, nor membership of EFTA.19 Irish historians often assume that once Ireland had signed the AIFTA, it was to all intents and purposes a free trader, and there is something to this. Local firms had to adjust to British competition, and this was good for efficiency. But there is a big difference between accepting free trade between oneself and just one (not particularly successful) economy, and becoming part of a continent-wide customs union. Until EEC accession, the IDA had to try to sell Ireland as an export platform into the UK and Commonwealth, but this was never as effective a sales pitch as the one it was able to make after 1973. From then on, Ireland was selling into the EEC as a whole, and that made all the difference.
One very striking feature of the data between 195420 and 1973 is that Ireland’s growth performance was very close to those of both Northern Ireland and Wales. All three economies were underperforming in a similar way, growing less rapidly than they should have been given their initial income levels (Figure 7.3). This suggests that all three were facing a common problem or set of problems. Some of these may have been institutional in nature, such as a fragmented trade union structure that made the corporatist arrangements then in vogue on the continent difficult to achieve.21 But an excessive reliance on the sluggish British economy is another plausible candidate.
Initial income and subsequent grwoth, 1954-73
Source: as for Figure 7.1 Wales and Northern Ireland: data underlying Dorsett (2013), graciously provided by author. Scotland: data graciously provided by Brian Ashcroft.
Irish GNP per capita as percentage of UK and French GDP per capita
—— As share of France
—— As share of UK
Source: as for Figure 7.1
In consequence, while GDP per capita grew more rapidly in Ireland than in the UK during the 1960s (Figure 7.4), this was not sufficient to prevent Ireland falling even further behind a major continental economy like France. This would change in 1973.
Ireland in Europe
As Figure 7.4 shows, Ireland immediately stopped falling further behind France once it entered the EEC in 1973: on one estimate membership boosted Ireland’s per capita growth rate by almost two percentage points.22 Even before the Irish economic miracle of the 1990s, Ireland was once again growing just about as rapidly as would have been predicted within a convergence framework (Figure 7.5). Foreign direct investment, based on selling into the EEC, was a major factor improving Irish performance from 1973 onwards, and the Common Agricultural Policy also helped. But as Figure 7.6 shows, another notable feature of the Irish economy after its entry to the EC was its rapidly decreasing dependence on the UK for its imports, and especially its exports. Virtually all Irish exports went to the UK before the Second World War, and the share was still 61 per cent on the eve of entry in 1972. It had declined to just 37 per cent in 1983, stood at 31 per cent in 1992 on the eve of the Single Market, and was only 14 per cent in 2015. EC membership led to a far more diversified Irish economy, less dependent on its immediate neighbour, and healthier as a result.
Initial income and subsequent grwoth, 1973-90
Source: as for Figure 7.1
Share of the United Kingdom in Ireland’s imports and exports
—— UK share of imports
—— UK share of exports
Source: Mitchell (2003) and www.cso.ie for 1972 onwards.
The second major turning point in Ireland’s economic fortunes was 1992, when the Single Market transformed its economy. During the 1990s Ireland was an extraordinary overachiever (Figure 7.7). A comparison between Ireland, on the one hand, and Northern Ireland, Scotland and Wales on the other, is informative (Figure 7.8). Ireland had been gaining ground on these UK regions from 1960 onwards, as we have already seen, which might represent a gradual process of convergence occurring within the British and Irish regional economy. The Irish acceleration from 1990 onwards, however, represents something entirely different. It seems clear, not only that the European Union was fundamental in transforming the Irish economy, but also that Irish independence was essential in exploiting the opportunities that the European Union afforded. As the figure suggests, Ireland would never have done anywhere near as well as it in fact did, had it remained a mere region of the United Kingdom.
Policy flexibility at a time of rapid change was essential, and that is what independence gave Ireland. It is important to note that Ireland is not the only small European country to have performed well in the context of a globalizing economy. There is a well-established political science literature that shows how other small European countries, in Scandinavia and elsewhere, have been able to respond nimbly and flexibly to changing international market conditions in ways that larger countries have found more difficult.23 But EU membership, and the Single Market programme of the late 1980s and early 1990s, were essential in allowing Ireland to finally reap the full economic rewards of its independence.
Initial income and subsequent grwoth, 1990-2001
Source: as for Figure 7.1
Income relative to UK, 1924-2001
—— Northern Ireland
—— Wales
- - - - Ireland GNP
- - - - Scotland
Source: as for Figure 7.3
The policy mix that Ireland adopted is well known: a low corporation tax and other incentives for inward investment, including investment in education and infrastructure. Cormac Ó Gráda and I have argued that social partnership was important, moderating wage growth and providing a stable industrial relations environment in a manner somewhat reminiscent of the corporatism of the continental European Golden Age.24 Underpinning everything were two crucial factors: Ireland’s political independence, which allowed it to adopt a policy mix well suited to its own circumstances; and Ireland’s membership of the European Single Market, without which none of this would have worked. Political independence and EU membership were never at odds with each other in Ireland; each was required to give full effect to the other. Ireland’s independence would not have worked as well as it did without the EU; Ireland’s EU membership would not have worked as well as it did without independence.
2016
The year 2016 dawned on an Ireland that was both prosperous and at peace with itself, with the EU having played a crucial role in bringing this about. Anglo-Irish relations had been normalized, with Queen Elizabeth making a state visit to Ireland in 2011 and President Michael D. Higgins reciprocating three years later. The main preoccupation of the country’s politicians was the 100th anniversary of the 1916 Easter Rising. Unlike the 50th anniversary in 1966 the event was not a rehearsal of traditional Irish nationalism: there were no anti-British speeches, while all those who died in the Rising were remembered, not just the Irish revolutionaries. But the event was also very different from the 75th anniversary in 1991. By that stage so many people had been killed in the Troubles that non-republicans felt nervous about paying tribute to an earlier generation of revolutionaries, lest this be interpreted as showing support for the present-day IRA and its campaign of murder. Barely anyone showed up.
Peace changed all that. To be sure, the government announced rather solemnly that the centenary of the Rising would be commemorated rather than celebrated, but many Irish people decided that they would go ahead and celebrate anyway. Hundreds of thousands of spectators crowded Dublin city centre to watch the largest military parade in the country’s history, and many others watched on TV. A few weeks later there was a party on my street. Our oldest resident, Claire Molloy, born on the day that Patrick Pearse surrendered to the British, was wheeled up to a stage that had been erected in the middle of the road. Green ribbons in her hair, a smartly dressed officer from nearby Cathal Brugha barracks, where the peace activist Francis Sheehy Skeffington was murdered by British soldiers in 1916, read a copy of the Proclamation of Independence. Children sidled closer to the tricoloured cake. Everyone applauded.
Neither the American nor the French Revolution was particularly non-violent: the origins of most countries involved bloodshed. But whatever people might think of the morality of the Easter Rising – and there were animated debates around many Irish dinner tables in the spring of 2016 – the fact remained that it was the event that eventually led to the establishment of an independent Irish Republic. And most of us were OK with that.
In retrospect, 2016 probably wasn’t the best year for the UK to take a unilateral decision imperilling Irish prosperity and political stability.
But that is what then happened.