Can the Tiger Claw Back?

The Celtic Tiger is one of the most remarkable economic stories of the past twenty years. In 1987, its GDP per capita was 30% below the EU average. Now, it boasts one of the highest in the world at $44,000, 20% higher than the European average. Factors like wise fiscal and monetary policy planning are responsible for Ireland’s transformation from a third-world country to one of the richest in the world.

After an unwise protectionist policy left the country poor throughout most of the 20^th century, Ireland reached its turning point in the late 1980s. Reduced government spending and lowered interest rates proved some of the more stimulating components. Corporate tax rates dropped to 0% as the government shifted attitudes toward multinational corporations. Lower income tax rates incited people to spend. The European Union’s assistance in the form of subsidies supplemented this economic reform. And in 1992, the freshly implemented EU single market afforded Ireland (heavily reliant on exports) a critical advantage.

The task of rebuilding Ireland was out of the government’s hands. Economists believed economic growth would follow but not at the rate it came; that would take a miracle—the “Irish miracle”.

With an accommodating stance toward big business, Foreign Direct Investment (FDI) followed. Companies like Intel, Dell, and Pfizer invested heavily Irish operations. The English-speaking, well-educated workforce was appealing to them and so was the low-cost environment. Only later did another advantage become apparent: Irish productivity.

For centuries, Ireland was described by poverty. Tormented by suppression, civil war, and famine, it could never achieve the prosperity and security of its wealthy European neighbors. But it did. Just two years ago, the Economist selected it as the world’s best country in quality of life. Still, an important question looms. Can the country maintain this success to reverse its fortunes for good? At the hands of its dedicated workforce and the government’s meticulous planning, Ireland will rewrite history and continue this age of prosperity.

 
Outside help

Ireland’s economic successes are attributed in part to large multinational firms like HP and IBM. Companies like these commit immense resources employing about 5,000 to 6,000 people each. Ireland’s initial draw of cheap labor and low taxes has lost strength since the late 80s but the multinationals keep coming. The corporate tax rate which was raised to 12.5% still stands relatively low to the EU’s average of 30%. American firms, who are the largest source of FDI, still find it better than their 35% domestic rate.

As for cheap labor, increasing demand created upward pressure on wages in recent years. Just this month, officials raised the minimum wage to 8.65 euros ($11.85).  For multinationals, this cheap labor advantage has been lost to countries like India and China. And it’s not just the wages that keep rising. Michael O’Donovan, General Manager of EMEA Operations at Microsoft Ireland, mentioned that infrastructure costs like utilities are very expensive as well. But more importantly, he said that the talented multicultural workforce and favorable business climate among other things offset this.

Critics of Ireland’s ability to maintain growth point towards weak 2005 FDI figures. After achieving a 9 billion Euro gain, Ireland lost foreign investment by 18 billion Euros. But this decline hasn’t been the trend. It showed a positive slope for more than the past decade. Many economists point to recent US legislation which encourages repatriation of US profits abroad as the major culprit. How did Ireland fair in the wake of this? It showed resilience. Real GDP was undeterred posting gains for 2005 at 4.7%. GDP figures for 2006 showed even more strength with a 6% gain. Estimates for 2007 are at 5.4%.

As an entry point to EMEA (Europe, Middle East, and Africa), Ireland still possesses a competitive advantage over its lower-cost European counterparts. Managers like O’Donovan cite the work force and cooperative government as reasons to stay and expand.

 A little bit of hard work

Irish history is related workforce’s strength. Job scarcity responsible for heavy migration and dwindling population numbers was the country’s theme. 4.5 million Irish immigrated to America during an 80 year period starting in 1840. While the rest of Europe was recovering from the post-war boom, more than one seventh of the Ireland’s population (400,000) left in one decade alone (1950s).

This embedded in Irish culture a willingness and desire to work. It showed when economic conditions turned for the better. Supporting this is the run-up in participation rates. The numbers increased from 60% in the late 80s to 70% present day. Everyone wanted to work notably women. Their role historically reserved to housekeeping and childrearing, women entered the workforce bringing themselves above the international average. Unemployment fell from 17% in 1987 to 4% in 2003. Productivity surged. And this work ethic only continues. Looking at productivity as GDP per person employed per hour for 2007, Ireland’s is higher than the US, UK, Japan, and others at 45.33.

The ease in changing from agriculture to services is another achievement. Doing so in only three decades sheds light on the population’s adaptability. By 2005, only 5% remained in agriculture while 67% took to services. Comparing it to the 1961 breakdown of 36% agriculture and 39% services, the Irish proved proficient at the quick smooth transition.

The IMD World Competitiveness Yearbook for 2007 shows the Irish labor force is more motivated than ones in Germany, the Netherlands, US, and the UK. Centuries of hardship transformed them into driven, hard-working employees. Given an opportunity for the first time, they took it and ran—they won’t be quick to let go either.

Combined with these habits, the government identified that an investment in human capital would prove advantageous. In 1995, it implemented the “free fees initiative”. Education always having huge societal value in Ireland, it was a huge relief for those struggling to get an opportunity. Tuition for institutions of higher education (colleges and universities) would be paid for. A competitive atmosphere was instilled giving more opportunities to those deserving.

What’s even more encouraging is the growing interest in fields relevant to the country’s future. More students are choosing science, engineering, and business concentrations. In fact, the proportion of Irish science and engineering graduates between the ages of 20-34 per a 1,000 population was higher than Japan, UK, and the EU. At 16.26, it stands as the world’s highest.

Ireland is young. Demographics show the proportion of people aged 25 or younger stands at 40%. Compared to Europe’s 30%, it is significantly higher. The baby boomer generation was delayed and with that the prosperity. But as baby-boomers in other countries are retiring, those in Ireland are only mid-career.

The conductor

With lofty ambitions of becoming a premier knowledge-based economy, the Irish government continues a heavy investment in human capital. Reforms of the late 1900s stopped the brain drain. Now, the country is looking to reverse it. Bringing in students and professionals from all over the world will add to the already present workforce. To facilitate this, Ireland has opened the free fees initiative program to the entire EU. Drawing on the best and brightest students across Europe establishes a higher degree of competition bringing with it enhanced reputations to universities. World-wide recognition of its educational system is a goal.

Economic openness to global markets is vital to bringing in more FDI. Learning early that protectionist policies retard growth and competitiveness, the Irish gained a head start in globalization. By the time most countries embarked on the concept, Ireland was busy developing innovative solutions to enhance it. Throughout the late 90s and 2000s, Ireland ranked at the top in surveys like the OECD (Organization for Economic Co-operation and Development) for economic openness. While others are playing catch up, Ireland is busy distancing itself from the pack.

Current multinationals cite the government’s openness and communication as key to their high satisfaction with the country. It’s accessible and responsive nature is a product of the country’s small size; the government can develop direct relationships with them. Michael Dell had a word on this relationship, “I don’t think it’s coincidence that Ireland and Dell share the same character and connection. Every success we’ve achieved around the world has been due to the old Iris recipe of big dreams, hard work, and strong relationships.” Agencies like the Industrial Development Agency (IDA) make this happen.

Its advantage in openness is responsible for the service sector’s growth. Further expansion of government initiatives like the International Financial Services Center (IFSC) for accounting, legal, and financial management sectors is expected. To date, the IFSC maintains 20, 000 high-value jobs with more in store for the future. Financial powerhouses like State Street, Merrill Lynch, AIG, Citi—among many others—have operations here.

Maintaining centers like this is Ireland’s evolving technological infrastructure, another factor giving Ireland the edge over locations like Eastern Europe. And doing its part is another successful government project--the Digital Hub. Established in 2000, the hub is a nine-acre site near Dublin geared toward digital media research and enterprise. Noteworthy members include MIT’s media lab, which explores new uses of technology. In conjunction, Dublin’s budget now includes a 20% percent tax credit for investments in R&D.

The Dublin tax credit is one example of the favorable tax treatment toward intellectual property (IP). There are many accommodative policies for IP from scientific research to copyrights. To become a premier knowledge-based economy, this value-added sector is important. Tapping into the country’s base of well-educated, technically-focused youth will only breed innovation. The development of home-grown Irish industry will loosen an over- reliance on foreign investment.

To facilitate more IP creation is a growth in venture capital. As post-dot com bust concerns eased, Ireland has been a large recipient. For 2006, Ireland’s venture capital investment was up 13 % while the rest of Europe suffered losses. Government projects like the National Technology Park in Limerick do their part. Partnering with the University of Limerick, part of the Park’s task is to assist companies in the search for capital.

The government has been able to maintain fiscal responsibility while taking on these new initiatives. Even with their low tax rates, they’ve managed to keep away from excessive financing through government debt. The debt to GDP ratio stands at only 25%. Looking at the EU average of 70%, it’s very low.

Looking to the future, challenges remain. With Ireland’s explosive growth, the EU took notice. Subsidies have stopped their significant inflow. And with the admittance of the poorer Eastern European countries, Ireland may have to give back. Low corporate tax rates are also being eyed. Irish politicians must defend this policy aggressively. Too large of an increase may scare off current FDI along with prospects. Alarming changes may overshadow Ireland’s other differential advantages.