Wednesday, May 29, 2013

Factors that led to a rapid economic growth in Ireland

  Political Economy and Foreign Direct Investment in Ireland Ireland was ranked as the poorest member of the European Economic Community in 1987. A third of the country`s revenues were being used to service debts and the International Monetary Fund (IMF) had to intervene (Laura & Mathew, 2010). The country experienced a very high rate of unemployment at 17% and per capita gross domestic product stood at 69% of the European Economic Community`s average. The level of emigration was also very high as many university graduates flew outside the country in search of employment. Ireland underwent a major economic transformation over a period of 10 years from 1990 to 2000. The Gross Domestic Product (GDP) growth for this period averaged 6.3%, the highest growth taking place between 1995 and 2000 (Laura et al, 2010). By that time, the per capita GDB for Ireland had surpassed that of the United Kingdom and the rate of unemployment had reduced to 5%. The country began to realize fiscal surpluses and all debts were cleared. The emigrants returned to Ireland in large numbers due to better living conditions. This economic revival was exceptional in the developed world hence earning Ireland a nick-name; the Celtic Tiger. This case describes Ireland`s transformation from one of Europe`s poorest countries to one of its richest in just 10 years. The revival of Ireland`s economy is greatly attributed to Foreign Direct Investment (FDI) that significantly increased in the 1990s to an average of $2.5 billion per year (Gleeson et al, 2005). The per capita stock of FDI for Ireland was the second highest globally and twice that of the European Union`s average by 2002. Ireland had set a precedent of economic nationalism until the 1950s when economic stagnation forced to country to change. The government adopted a pro-market agenda which led to formation of new laws that aimed at boosting the economy. The Finance Act that was legislated in 1956 gave a tax relief on export profits. This law provided a 50% tax relief on any profits that were earned from manufacturing goods and this was set to gradually increase up to 100% in 1958 (Laura et al, 2010). The government of Ireland sent out the message to the international community informing them that their country was open for business. This was followed by joining the IMF and the World Bank in 1957 and relaxation of restrictions that controlled the Manufactures Act. This measures by Ireland`s government attracted many foreign investors who were able to easily invest in the country. There were very few restrictions and their profits were exempted from taxation. The finance minister of Ireland in 1958 advocated for a shift from protectionism type of trade to free trade (Markusen & Venables, 1999). He also proposed for the government to promote foreign investment by offering incentive grants and tax concessions. The government unilaterally lowered its tariffs between 1962 and 1964. The Anglo-Irish Free Trade Agreement was signed in 1965 which helped Ireland to achieve free trade of all manufactured goods. Ireland also joined the General Agreement for Tariffs and Trade in 1967. These economic programs helped Ireland to grow its GDP by more than 4% annually. However, unemployment rates and poverty continued to affect to country`s economy and the education system was in a mess. Ireland had formed a government agency called the Industrial Development Authority (IDA) in 1949 to promote greater investment across the country. After the government adopted export-focused industrial strategy, IDA started attracting new investments from different parts of the world.IDA managed to secure a significant volume of foreign investment by 1970s but the rate of unemployment was still very high (Laura et al, 2010). The oil crisis in 1979 threw the country into a deep recession characterized by high levels of unemployment and excessive government spending. Ireland was deeply in debt by 1987 and its economy was almost collapsing. By 1990, the rate of GDP growth reached 8.5% while the exports volume attained an increase of 23.5% between 1985 and 1990. The country`s export market had improved due to encouraging exchange rates in the 1980s and 1990s. Ireland`s competitiveness was also boosted by a 10% devaluation of currency in 1986 and the strength of sterling pound and the dollar (Gray, 1997). The government sought to improve the quality of its labor force by abolishing tuition fees at third-level education. The IT boom in America and the establishment of a common European market greatly contributed to Ireland`s economic growth. The fiscal reforms and discipline introduced in 1992 by Maastricht criteria resulted in less debt-to-GDP ratio and low deficits. The country`s export sector became more competitive after the revaluation of its pound upon joining European Monetary System. IDA started lobbying the Ireland`s government to extend tax rates due to the pressures from the European Union. IDA also conducted research that found out that the 10% manufacturing tax was important for the competitiveness of Ireland over other countries in Europe (Laura et al, 2010). As a result, the government decided to extend the rate in 1990 through 2010. These low corporate taxes in combination with the access to European market enabled the country to become an attractive preference. High operating industries such as pharmaceuticals were attracted by low tax. Ireland began to attract several foreign companies especially from the United States. The IDA continuously identified and lured target companies to invest in Ireland. International employees were used to develop contacts with target companies and IDA delegated some of its staff to collect intelligence concerning the market trends. The feedback was consolidated during the annual conference to identify new patterns and trends. The IDA`s efforts led to the arrival of Intel, a computer giant, in 1990 which was a big victory for the country (Laura et al, 2010). The IDA had developed its relationship with Intel for a decade and they offered the company a $157 million grant package which was spread over a period of 10 years. The company was concerned about the lack of experienced engineers but IDA, through McGowan, listed all Irish engineers that were working in semiconductor businesses that were willing to go back to Ireland. The entry of Intel attracted many more computer companies to Ireland as the country managed attract 40% of the United States electronic investments across Europe. The IDA also took the responsibility of recognizing the potential of Ireland becoming an offshore call center through an intelligence gathering mission overseas. IDA negotiated with Ireland`s telecom company for a deal to reduce international call rates which led to an increase in call volumes. The massive entry of foreign direct investments in Ireland was a major boost to the country`s economic growth in the 1990s (Laura & Mathew, 2010). The foreign sector attained great success in 1990s due to the aggressive export-oriented foreign companies. References Gleeson, AM, F Ruane and J Sutherland (2005) “Successfully Promoting Industrial Clusters: Evidence from Ireland” Paper presented to Workshiop in Oporto on Workshop Multinational, Clusters, andInnovation: Does Public Policy Matter? April 2005. Gray, Alan W. (1997) (ed)., International Perspectives on the Irish Economy. Dublin: Indecon Laura Alfaro & Mathew S. Johnson, 2010 Foreign Direct Investment and Ireland`s Tiger Economy (B). Harvard Business School. Laura Alfaro, Vinati Dev & Stephen McIntyre, 2010 Foreign Direct Investment and Ireland`s Tiger Economy (A). Harvard Business School. Markusen, James R. and Venables, Anthony J., 1999. "Foreign Direct Investment as a Catalyst for Industrial Development”, European Economic Review, Vol. 43, pp. 335-356.