The economic development of the Republic of Ireland has been tremendous, especially considering their lack of natural resources and sporadic periods of high emigration. The success and then collapse of its economy in 2008 has to do with its high level of interdependence with the globalized market.
It was able to harvest the power that multinational corporations have gained in our current era to bring business and money to Ireland’s shores. This has, of course, come at the expense of home grown industries that failed to take off in providing wealth and jobs to the country.
Ireland’s way to bring wealth into the nation, importing established businesses, has been the inspiration that other countries used to bring in wealth. Deng Xiaoping, the leader of China from 1978, utilized special economic zones which had been originated in Ireland.
The Shannon free trade zone was the first special economic zone that ever opened, which it did in 1959. But it was because of the tough economic conditions that had led to this innovative strategy. When we speak of globalization, the free movement of capital around the world, ireland’s story is one that owes it success to this system.
The Republic of Ireland wasn’t declared until 1949, but 1922 marks the point when the Irish Free State established and this is when the nation began to act independently. The long connection to the United Kingdom was broken, and Ireland had been given control of its own future. In this sense, the political ties with the crown had been severed, however the economic ties were not. The majority of its imports were still flowing into England, and therefore their two economies were largely still intertwined.
All of this changed when a dispute about land deeds that England felt it was due from the Irish, and what soon started was a trade war between the two nations that would go on throughout the course of the 1920s and 30s. Tariffs were placed on English goods which then led to the England placing tariffs on Irish goods, and this pattern continued for several years.
During this first period of the Irish Free State’s economic development, state run enterprises were the norm as typically happens during a nation’s early development. The economy mostly consisted of agricultural products, and the development of further cultivation. This meant taking sugar from the fields to package it up for exportation.
Because of the lack of resources, protectionism wasn’t a good strategy for economic development. It soon became clear that the outside world was needed to bring tools for industrialization. By the time of World War Two, Ireland was quite an impoverished nation. An economy based mostly on agriculture, and no modern industries to show for. The world was leaving the nation in the past.
The one sector it did have going for it was the cattle industry, and this was because after 1945 the western world saw an era of prosperity. In this, the demand for beef was rising and farmers of rural Ireland became willing to supply. The cattle trade is one that limits a farmer’s ability to fully utilize his farmland.
To raise cattle, a certain amount of the land must be left for a them to graze upon, and this limits the ability to use farm land for crops. Cows were raised on the fields of Ireland, then were sent off to slaughter houses mostly in England. This was all well and fine for a long period of time, even as the other parts of the economy began to further develop, but this one product could not driving Irish farming forever. 1973 was a big year for the world economy, the oil embargo had effects that shook the entire globe.
One of these was that the excess cash that had driven a high demand for beef was no longer available. The Irish farming industry was hit by a case of a bursting economic bubble in the cattle industry. Cows were no longer worth the value they had been purchased for, and the land the cows grazed on limited the availability of area for crops. By this time, it was clear that the economy needed drastic change. By the 1970s, it was already changing but this demand crisis exposed the uncertainty of having an economy based on agriculture.
Because of Ireland’s location, being the first island in the area of Europe when coming from the United States, it was a spot for planes to refuel on their way to the continent. Specifically the airport in the Republic’s second biggest city, Shannon, became a way to make money from the flow of international sources from providing a service. The government of this time saw this as an opportunity to revolutionize the way the economy worked. In 1959, the Shannon free trade zone was officially established. International companies that had already proved successful were able to move to Ireland, and receive tax breaks on profits and the flow of exports.
The workforce of the nation was used to fill production jobs that were brought in. companies that made drugs, lightbulbs, tools, airplanes, medical devices, weapons, and countless other products. The diversity of production began supplying the population with both employment and wages, opening up Ireland to the consumerism that was sweeping the western world for the first time.
The 1960s was a period of economic prosperity that began Ireland’s transition into the world economy and policies of free trade. Ireland became a middleman for the international capitalist world, and they had the labor force that to meet the demands of these massive multinational companies. Labor was brought here only then to be exported to the largest national markets, and as the middleman they simply took part in the production.
This sort of growth that began in the 1960s was continued throughout the rest of the country with the continued attraction of international business, but no longer just to the Shannon zone, but across the entire country. 15 year tax holidays were given to foreign companies who came into Ireland and were producing exports.
This meant that taxation rates would be suspended for the first 15 years that a company was active in the country. The entire taxation system was going through changes to further adjust to the system of free trade, and so these companies came to the country knowing that corporate tax rates were in the process of getting lower. This emphasis on foreign business meant that home grown industry was neglected and left to fend for itself. While the economy was ticking along fine, this wasn’t a problem, however it meant that shifts throughout the world could have major consequences.
The one home grown industry, besides agriculture, that was succeeding through the 1960s was construction. This was because the further space was needed for the influx of foreign firms.
The construction industry was heavily subsidized by the government to ensure that space would be available for any company looking to establish itself in the country. It was something that the government depended on for what it saw as the one way that the economy would keep growing.
Being a major player in the construction industry at this time would have brought immense wealth and guaranteed jobs. This was a mistake because an economy cannot rely on the inflow of foreign capital and jobs alone. What the government was doing for the construction industry, it should have been doing in other sectors as well. Building up its internal industry to compete with these companies that were taking advantage of the favorable tax system. There were still state owned industries, however they were seen as second to the support given to foreign entities.
The economic joyride could not last forever, and with the 1973 oil crisis, western Europe and North America both faced economic downturns. At the same time that the demand for Irish beef had crashed, the foreign companies investing were facing the same kind of kind of crunch that was sweeping the western world.
Stagflation, that is economic stagnation teamed with inflation, was hitting the economies of the developed capitalist nations. This was the point in time in which the Keynesian economic model began to fall out of favor with the largest nations in the world. The 1970s and 1980s were very tough times in Ireland.
The abundance of poverty that was thought to have been left in the past reemerged across the whole of society. Apart from this economic slowdown, the fact that Ireland’s population was rising at a high rate as well as government mismanagement was straining the economy. By the end of the 1970s, the poor economic state the nation found itself in earned it the slander ‘the sick man of Europe’. Public expenditure (on tax holidays and minimal tax rates for foreign companies) and government debt had hit all time highs and this was placing considerable strain on the financial state of the country.
Beginning in the 1980s, during the depths of the economic slowdown, a new initiative was put into place in order to bring international financial institutions to Ireland. State reforms began to shape themselves around the rising tide of monetarism that was sweeping across the world.
Both Ronald Reagan in the US and Margaret Thatcher in the UK had enacted policies that furthered deregulation of the economy, weakened labor rights, and increased privatization of state owned industry. Ireland came into this period doing the same thing, and it saw the growing importance financialization was having in the global economy.
Financialization is the process by which profits are accumulated through interest on money lending and taking a percentage of money movement. The 1980s saw a reduction of public spending and a government led initiative to make the state more favorable to foreign business.
What happened in the 90s was a culmination of initiatives and reforms that had been taking places since the 60s. With the fall of the Berlin wall, and then later the implosion of the Soviet Union, capitalism went global. This could be compared to a moment like the industrial revolution in the sense that it changed the way that nation’s functioned with one another.
This could be called the capitalist revolution because it was the moment when the market economy went global. Institutions such as the International Monetary Fund played a role in creating such a market by offering loans to nations in need that were contingent on economic reforms that encouraged free trade and made it favorable foreign investors. Capital controls were removed and government intervention in the economy became a taboo. The result of this made it possible for business owners to start making larger profits than in earlier periods.
An economic miracle took place in Ireland during the 1990s, commonly referred to ‘Celtic Tiger’. The low tax rates that had attracted foreign business and financial institutions had succeeded in bringing a wealth to Ireland. It was enough that it was being felt by all economic classes, and so the standard of living jumped to a new high.
This rise in this economy is also the result of the modernization of the infrastructure system that was seen through these years. People were living comfortably, earning higher wages, and living longer. This period established Ireland as one of the European powerhouses, especially in the arena of credit.
The slowdown of Celtic Tiger began around 2003. The rising wages Ireland had seen had made it no longer so profitable for companies to produce there, and many began to move to places where costs were lower such as China and Vietnam. Apart from this, the government began to fund homegrown industries in an attempt to have them be able to compete on the world market.
In the same way that the Shannon free zone was used to attract foreign business, the International Financial Services Centre (IFSC) was set up to house foreign financial institutions. In the same way Shannon was special economic zone with tax incentives geared toward foreign investors, the IFSC did the same to create a banking base for Europe in Dublin. This was a sector where native institutions did become very successful and were able to compete on the global market.
In the 2000s, it was the Irish banks that helped to fund the rise in housing that took place. With the rising wealth from Celtic Tiger, many more citizens were able to purchase a house than ever before. This went on for years, and mortgages became easier to obtain. The goal was to continue the interest money rolling in, and it became necessary to approve high risk cases. Everything was going fine until the mortgage payments didn’t start coming in and it became suddenly clear that the banks were going broke.
2007 is the year when the bubble broke, and economic hardship was back on the menu. While many countries were hit very hard, Greece, Spain, Portugal, Italy, amongst others, Ireland’s troubles really came from them relying so much on foreign investment to fuel the economy. The world was was in a crunch, and the lack of foreign business meant that the country was hit once by the bursting of the housing bubble and then again by the lack of demand for goods by a world in a recession.
The first solution was a massive government bailout for the banks, and then foreign packages from the EU. Things got so bad that TROIKA commission had to come in reorganize the running of the economy. Overhauling austerity measures were put into place as a way of reducing national debt and balancing the books. These measures included further cutbacks in state spending, further prizativation of the few publicly owned business that were left, and an increase in tax rates. The result was a squeeze of the people to the breaking point, however the result was balanced budget and Ireland is once again in a period of growth.
While many praise this as an amazing recovery and proof that global capitalism is a good thing, below the surface there are still many problems. Measures to prevent a further crisis have not been put into place, and so another collapse is always lurking just around the corner. Also, they have not reduced their reliance on foreign actors to drive the economy. The tax system still remains one that squeezes the working people while it the corporations pay very little. The current corporate tax rate is 12.5%, this is the lowest in the EU. a much better solution would be in setting up an economic structure that guarantees a basic level of social insurance for all and provides funding for native industry.
It is as if the government has learned little from experiencing such an economic catastrophe. The need for an upgrade in social funding is clear, and yet the current strategy is just to repeat what has worked in the past. Another crisis lurks in the future, and that one may not be solved as quickly as the last.