Investment has played a large part in the Irish growth story. David Pierce examines how the country has pulled itself out of economic drudgery to become one of the leading European centres for financial services
For decades, the Irish economy was the laggard of Europe with poor growth rates, low income and mass emigration. GNP per capita (which excludes foreign-headquartered business) as a percentage of the EU15 average was just under 70% in 1960. It was little changed, oscillating slightly below 70%, until 1980. The decade of the 1980s was a dreadful time in the Irish economy and by the end of it per capita GNP had actually fallen to 65% of the EU average. From then on, however, things began to improve and just 10 years later Ireland had caught up with and, indeed, had moved ahead of the EU average in terms of income per head.
This remarkable transformation has been labelled the Celtic Tiger in reference to the Asian tigers, which previously set the standard in terms of high growth rates. A rapid catch-up is an unusual experience, which is normally confined to emerging or developing economies. The more developed economies, by contrast, tend to exhibit smaller and much more gradual movements in per capita income. The UK, for example, hit a bad patch in the 1960s and 1970s when, relative to the EU, it fell from 120% to 100% of the average. Thereafter, however, it has remained close to the average. The same is true of Germany and France, both of which also fell back but managed to remain slightly above the average. Large developed countries, in Europe at least, tend to experience similar rates of growth and generally exist in a stable, non-tigerish environment.
The irish story
Economics teaches us that investment is the key to economic expansion. As spending accelerates, firms perceive the need to increase output and invest in order to do so. Investment was a big factor in the Irish story but it was by no means the only one. Numerous theories have been advanced to explain the Tiger phenomenon, none entirely satisfactory, but sufficiently numerous to underline that the process was complex, little understood at the time and certainly not anticipated in advance. There is, however, growing acceptance of the proposition that the rectification of past policy errors over a period when virtually everything that could go right went right is a plausible explanation. Wage moderation and cost competitiveness, together with less intrusion by the government, provided a launch platform in the midst of a global boom. In these circumstances, exports, consumer spending and investment were all major contributors to growth.
The period 1995 to 2000 is generally regarded as the golden period when the bulk of the expansion occurred and GNP growth averaged 9% per annum. Investment contributed just over one-third of total recorded growth. Housing construction which was reasonably strong at the time, accounted for about three-quarters of a percentage point while other construction (civil engineering, roadworks etc) added a further one per cent. This left machinery and equipment - it accounted for 1.6% per annum on average or just over half of total investment in this five-year period. On first glance, these figures are surprisingly small but they do not tell the full story. Second-round effects in the form of wages paid and other spending percolates throughout the economy. Investment is a catalyst, which is why the Irish authorities place such importance on it. There is no doubt that it was a key ingredient in the Celtic Tiger mix.
Investment is not something that happens by accident. Ireland has a long track record in actively stimulating foreign investment. Neither is it a matter, as some European competitors would have us believe, of simply lowering tax rates. It requires a comprehensive policy mix, sustained over a long period. In addition to taxation, these policies must encompass regulation, labour force supply, training and education, as well as access to key markets.
The global slowdown of the early 2000s had a negative impact on cross-border investment. Thankfully, this is changing. "2004 was a year of quality in investment from overseas companies in Ireland" according to Ireland's Industrial Development Authority (IDA) chief executive, Sean Dorgan. The Authority's annual report states that 2004 was "the best year since 2000 in terms of the quality, depth and value of the investment decisions won." Highlights of the year included; Intel's announcement of a E1.6bn investment to produce next generation nanometre microchips in Leixlip; Guidant's 1,000 person expansion in its medical technologies facility in Clonmel; breakthrough R&D investments from Bell Labs, IBM and HP; bio-pharmaceutical investments from Centocor and Pfizer; major European centres from Merrill Lynch, Kelloggs, Business Objects and McAfee; and upgrading and expansion in Dell's Irish services operations.
In total, IDA-supported companies provided almost 11,000 jobs in 2004, bringing total employment in the sector to 129,000. These companies now account for E70bn in exports and E16bn in direct domestic expenditure on wages, materials and services. They paid over E2.7bn in corporation tax in 2004, proof that low tax rates generate business and ultimately higher tax receipts, a model which is increasingly being adopted in the new EU member states.
The IDA is working in the US to position Ireland as a 'knowledge economy', which means that Ireland adds value in both servicing and manufacturing sectors. This requires considerable investment by the Irish government, State agencies, universities and industry in the education system; infrastructure; technology; research and development and the supply chains. The requirement internationally for the sort of skill, innovation and experience that Ireland can provide to business is huge.
Ireland has the experience of hosting foreign companies and continues to build on this. The infrastructure; work ethic; work force; and intellectual capacity are all tried and tested, and its success is reflected by the number of companies which have chosen Ireland as their European base - over 1,240 to date. For companies investing in Ireland in the future, the benefits will be significant. English speaking, euro-denominated and a low corporation tax are just some of the positives. But it is also the added-value element, the crucial knowledge of how to open doors to the enlarged EU and particularly an intimate knowledge of the new accession countries that can make the difference. It is also the flexible, adaptable and multi-skilled workforce, and above all the Irish personality - the ability to harness relationships globally to deliver the business goals of some of the world's foremost organisations located in Ireland, that will continue to push forward this success into the future.
For many years the Irish economy lagged behind Europe in terms of poor growth, low income and mass emigration.
1995 to 2000 has been recognised as the boom period where most of the growth occurred for Ireland.
The country is now considered a European leader in terms of skill, innovation and experience, with the English language, the euro currency and low corporation tax being cited as some of its benefits.
The forces at play in investment - most obviously, regulatory change, uncertain markets and shifting demographics - are as strong today as they were when Professional Adviser launched its sister magazine Multi-Asset Review in 2017.
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