Economies of Ireland, North and South, since 1920

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Economies of Ireland, North and South, since 1920

When Ireland was partitioned in 1921, the combined population of the two parts was 4,354,000, of which 3,096,000 were located in the South. With a total land area of 32,000 square miles, the population density was comparatively low—137 persons per square mile compared with almost 500 in Great Britain. The North was the more heavily populated part with nearly 30 percent of the island's population but only one-fifth of its land area. The most striking fact about the Irish population in 1921, however, was that it was little more than half the level of eighty years earlier. The decline in population dated from the Great Famine of 1845, during which more than one million people died. In the course of the famine and its immediate aftermath, about two million persons emigrated, and four million more left the country in the seventy years from 1852 to 1921. The average standard of living in Ireland in the early 1920s was much lower than in Britain—approximately three-fifths of the British level—and it was about 10 percent higher in the North than in the South.

The Period 1920–1960

Prior to independence there were great hopes that political autonomy would facilitate economic development, leading to an end to emigration. As it happened, progress in the South proved to be slow and difficult until the 1960s. In the absence of sufficient job opportunities at home, substantial emigration continued and the population of the South went on declining until 1961. Neither was there any progress in this period in closing the gap in living standards compared with the United Kingdom.

This poor rate of progress may seem surprising given that the new Irish state began with inherited advantages not possessed in the same degree at the time by many of the European countries that later outpaced it. The country was no longer overpopulated; it had no national debt and possessed substantial external capital reserves; there was an extensive rail network; the banking system was widely spread; communications were satisfactory by contemporary standards; and education levels were not inferior to those generally prevailing elsewhere.

Yet the South also suffered from certain limitations that made development difficult in the world economic climate between the two World Wars and during the Second World War. The severe fall in world agricultural prices after World War I and the subsequent long-term downward trend was bound to adversely affect the South, where agriculture employed over half the labor force and accounted for almost 90 percent of goods exports. The widespread resort to agricultural protectionism in the 1930s restricted market access almost exclusively to the United Kingdom, where the indigenous farmers were subsidized in a way that kept prices low. The South made matters worse for its own agriculture in the 1930s on the U.K. market by engaging in a trade war commonly known as the "Economic War" and based on a dispute between the two governments about land-annuity payments. Even apart from this, conditions were never for long conducive to a strong agricultural performance prior to accession to the European Community in 1973.

As regards industry, the partition of Ireland deprived the new independent state of the only region with substantial industrial development. Manufacturing in the South accounted for only 10 percent of the labor force, and of this, two-thirds were engaged in processing of food and drink. A big drive to develop industry might have been expected, especially given that the need for industrialization featured strongly in the nationalist philosophy leading up to independence. In the first decade of independence, however, the new government took the view that the overall prosperity of the economy depended on agriculture, and economic policy concentrated primarily on raising the efficiency of that sector. The use of protectionism to develop new manufacturing activities was limited because of the adverse impact on agricultural costs.

The change of government in 1932 brought a switch from the long-established position of free trade to a radical experiment in protectionism and economic nationalism. Indeed, pressure for change had mounted even before Eamon de Valera took office. By 1931 the worldwide Great Depression, which had begun two years earlier, had taken its toll on Irish agricultural exports. The tightening of U.S. immigration laws and reduced job opportunities abroad had led to a fall in emigration, so the need to create jobs at home was even more urgent. The government had been forced to yield to these pressures in 1931 by restricting the dumping of cheap imports on the Irish market.

The new government in 1932 made widespread use of tariffs, quotas, import licenses, and other such devices to shelter the domestic market from foreign competition, and it also extended state-sponsored bodies in industry and commerce. The high levels of protection persisted until the 1960s. This approach led to sizeable increases in manufacturing output and employment in the 1930s, but had little further momentum after the Second World War once the immediate postwar recovery ended. Although manufacturing employment had doubled by then, the initial base was so low that this increase was quite insufficient for Ireland's employment needs, and there was little further progress during the 1950s. The chief benefit of protection was that it led to the establishment of many firms that would not have existed without it. Indeed, in the troubled world economic conditions of the 1930s it is doubtful if any other approach would have achieved as much. Nevertheless, the hasty and indiscriminate application of the strategy resulted in an industrial base that was weak and vulnerable.

During the Second World War the shortage of imported supplies dispelled all notions of economic development and the paramount need was to secure basic necessities. Even as late as 1950 the degree of trade dependence on the United Kingdom had not been reduced, and nearly 90 percent of exports went to that market. Neither had the composition of exports been much altered—live animals and food still comprised more than three-quarters of the total. The 1930s and 1940s were not auspicious times for increasing the scale or diversifying the destination and composition of trade, even if Irish policy had been directed more effectively toward that goal. The growth rate of real GDP in Western Europe from 1913 to 1950 was only 1.2 percent per annum, and the total volume of merchandise exports in 1950 was less than in 1913.

In the 1950s, when the Western world moved toward restoring free trade, the limits of the protectionist strategy were gradually recognized in Ireland. A new outward-oriented strategy began to emerge, but at a pace too slow to make any impact in providing jobs for the large numbers leaving agriculture, so the 1950s became a decade of high emigration and great economic gloom about the future of the country. The slow progress in moving to an export-oriented strategy is apparent in the fact that the volume of merchandise exports did not regain the prewar peak until 1960—long after most West European countries had recovered from an even greater decline in trade during the Second World War.

Northern Ireland did not fare well either in the interval between the First and Second World Wars. The North was the only part of Ireland to have experienced an industrial revolution in the nineteenth century. When the country was partitioned, there were more manufacturing workers in the North, even though its population was less than half that of the South. Manufactured goods accounted for two-thirds of the North's exports. The major manufacturing industries of Northern Ireland—linen and shipbuilding—depended almost entirely on sales outside the area, however, and were highly exposed and vulnerable to fluctuations. Linen was also adversely affected by long-term changes in consumer tastes and habits. Its critical U.S. market was severely damaged by the Great Depression, and the industry never recovered fully again in Northern Ireland.

Shipbuilding was also badly affected by the Great Depression, which led to worldwide overcapacity in shipping, intense competition, and weak markets for new ships. A stay of execution was granted to the Belfast shipyards by the Second World War, which brought booming demand for new ships and repair work—a demand that was well maintained in the early postwar years. In fact, unlike its impact on the South, the war's effect on the economy of the North was highly beneficial. Subsequently, however, shipbuilding in Northern Ireland shared in the long-term decline of the industry in the United Kingdom. Competition from low-cost countries and unstable demand were at the root of the decline, but these forces were aided and abetted by poor management.

Agriculture in Northern Ireland enjoyed more favorable access to the British market in the 1930s when trade barriers developed, and this advantage continued until the 1960s, when the South negotiated improved access to the British market. But agriculture was much less significant to the overall economy in the North than in the South. In both areas the economy as a whole fell behind Britain in the period from 1920 up to the Second World War—in terms of the growth of total output and output per head of population. Wartime demand in Britain for ships and other manufactured goods led to boom conditions in Northern Ireland, which gained substantially during the Second World War relative to the South and to Britain. In the postwar period up to 1960 the growth of income per capita in both areas of Ireland kept pace with that in Britain, but in the South only because of massive emigration and significant population decline. Population in the North had largely ceased to decline in the twenty years before partition, and thereafter it followed an upward trend.

The Period 1960–1990

The new outward-looking strategy developed gradually in the South during the 1950s and was most fully articulated in 1958 by the then secretary of the Department of Finance, T. K. Whitaker, in the report Economic Development. The strategy had three main elements. First, capital grants and tax concessions were provided to encourage export-oriented manufacturing. Second, the Industrial Development Authority was given the task of attracting foreign firms to Ireland, again aimed at exports. And third, protection was gradually dismantled in return for greater access to markets abroad, culminating in an Anglo-Irish Free Trade Area Agreement in 1965 and accession to the European Community in 1973. Great efforts were also made to improve the physical infrastructure—electricity, telephones, roads, and other transport facilities. Perhaps most important of all, even though the benefit took a long time to show up, was the emphasis placed on education in the seminal report Investment in Education, completed in 1965 under the chairmanship of Professor Patrick Lynch, which foreshadowed the major expansion in education.

The outward-looking strategy worked well in the buoyant world economic conditions of the 1960s. The strategy began to be questioned, however, following the first oil crisis in 1973. Although a vast increase in manufactured exports had been achieved, most of the increase had come from new foreign-owned enterprises that exported the bulk of their output. Concerns about the high and rising dependence on foreign industry were exacerbated in the 1980s when the flow of foreign investment fell and nearly 10,000 jobs were lost in foreign firms. This highlighted once more the need for indigenous industry, but the situation of the indigenous firms was even worse, owing to the combined effect of import penetration after the elimination of trade barriers and the disturbed economic conditions following the oil crises.

The 1980s were also made difficult by poor macroeconomic-policy decisions and excessive public borrowing in the 1970s, especially by the new 1977 government. The first half of the 1980s would have been difficult anyway because of the repercussions of the second oil crisis, but the South's problems were greatly exacerbated by the struggle to restore order to the public finances—a task that was tackled with the necessary determination only by the government elected in 1987.

In every quinquennium of the period 1960 to 1990 (apart from the first half of the 1980s) the South experienced an average annual GNP growth rate of about 4 percent, but this proved insufficient to make any significant impact on the central problems of surplus labor and relatively low living standards. Population decline had been arrested in 1961, and over the years 1961 to 1986 a significant increase had been achieved, amounting to 25 percent during this period. With the depressed conditions in the 1980s, however, and a renewed surge in emigration in the second half of that decade, population began to fall once again. In 1993 total employment was only just back to the 1980 level after the large fall in the first half of the 1980s, and the 1993 level was still 7 percent below that of the 1920s—an altogether unique experience in contemporary Europe. In terms of living standards, the South had begun to narrow the gap vis-à-vis the United Kingdom, but the record of the United Kingdom was a poor one in comparison with continental West European countries. Accordingly, with the average level of GNP per capita in the South remaining throughout the period 1960 to 1990 in the range of 60 to 65 percent of the average for the European Union, there was no convergence toward European living standards.

In Northern Ireland the government was accorded increased powers to develop industry in the postwar period and took advantage of them to attract external investment in particular. These efforts enjoyed some success until the outbreak of conflict in 1969 hampered efforts to attract investment. On top of the unstable political situation came a series of adverse shocks—the two oil crises, the weakening of U.K. regional policy, and the strengthening of sterling following the exploitation of North Sea oil. Northern Ireland suffered a catastrophic fall in manufacturing employment up to the mid-1980s, followed by an essentially static level. The North is a classic example of an area specialized in a narrow range of activities vulnerable to world market forces. In such a setting industrial survival depends on adapting to higher-value products based on new technologies. Northern Ireland essentially failed to adapt, so it has suffered massive deindustrialization. Its overall growth in GDP per capita in the postwar period up to 1990 just about kept pace with that of the United Kingdom, so the South, which had been catching up on it since 1960, surpassed the Northern level by the early 1990s. There was never significant economic interdependence between the two parts of Ireland, and a further impediment was introduced in 1979 when the South broke the long-standing link with sterling and joined the European Monetary System.

The Celtic Tiger

The extraordinary transformation in the economy of the South in the 1990s has been commonly designated as the "Celtic Tiger." In this phase the South experienced a wholly novel phenomenon of rapid and sustained growth in employment. The rate of employment growth from 1993 to 2000—averaging 4.75 percent per annum—was without precedent in Irish history. As a result, the unemployment rate fell from 16 percent to below 4 percent—close to full employment and less than half the average rate of the European Union nations. Significant net immigration also developed, comprising both returning Irish and inflows of refugees and other foreign immigrants attracted by the buoyant labor market. The focus of attention in labor-market policy swung from labor surplus to labor scarcity.

The remarkable growth in employment was made possible by a substantial acceleration in the growth rate of the total volume of output to an average of almost 9 percent per annum. The employment boom led to a big increase in the ratio of employment to population, with important consequences for the standard of living. Hitherto, a low employment rate had been a major factor in depressing Irish living standards in comparison with other European countries. That low employment rate stemmed from three historically unfavorable factors: a relatively high proportion of the population in the dependent age groups, a low rate of participation in the labor force (especially by married women), and a high rate of unemployment. Now all three factors moved in a favorable direction. As a result, whereas in 1993 every ten workers had to support, on average, twenty-one dependents (all those not in gainful employment), by 2000 the average number of dependents had been reduced to fourteen for every ten workers.

The acceleration in the growth of output and employment in the Celtic Tiger economy was fueled by an enormous growth in exports. The volume of Irish goods exports rose at the phenomenal rate of 17 percent per annum from 1993 to 2000—a rate that would lead to a doubling of exports every four and one-half years, and more than twice the average rate achieved in the preceding thirty years. Tourist earnings also rose rapidly. By 2000 the South had reached the remarkable situation where its exports of goods and services were nearly as large as its total GDP.

Ireland's success in attracting an increasing and disproportionately large share of U.S. manufacturing investment in Europe, particularly in the area of electronics, was a major factor in boosting exports and output. As a member of the European Union, Ireland had free access to the markets of other member countries following the initiation of the Single European Market in 1992. This, combined with the generous tax incentives available to foreign investors, the sound macroeconomic policies pursued by the government since 1987, and the plentiful supply of well-educated English-speaking labor, made the South an exceptionally attractive and profitable location for U.S. multinationals. The foresight of the Industrial Development Authority in the 1980s in targeting the new high-tech enterprises and its dynamism in marketing Ireland's competitive advantages proved to be important elements. Profitability was enhanced by the social-partnership agreements entered into approximately every three years since 1987 by the government, trade unions, and employer organizations, which helped to secure pay restraint in return for income-tax cuts and to maintain industrial peace.

It would be wrong to think that foreign investment was the only motor driving the Celtic Tiger. Indigenous enterprise also flourished. Indeed, the most striking indicator of the globalization of the South's economy has been the emergence of substantial Irish multinational enterprises. By the end of the 1990s Irish multinationals employed nearly 65,000 persons in the United States. While this figure falls well short of the 100,000 employed in Ireland by U.S. firms, it nevertheless represents a remarkable growth from a negligible level in the mid-1980s.

No Celtic Tiger appeared in Northern Ireland in the 1990s. Nevertheless, the economy performed reasonably satisfactorily. Basically, it kept pace with the U.K. economy, which was doing well at this time relative to mainland European countries. There was a significant increase in employment, and the unemployment rate fell from nearly 14 percent in 1993 to less than 7 percent in 2000. There was no convergence with the United Kingdom in terms of living standards, however—the level of GDP per capita in Northern Ireland remained at about four-fifths of the British level. The South had already converged with the U.K. level of GDP per capita by 1997 and was about 15 percent above it in 2000. It is important to note, however, that GDP per capita overstates average living standards in the South, chiefly because of the large and increasing outflow of profits in multinational enterprises, which do not add to domestic living standards. A better measure is GNP per capita, which excludes net international capital flows, and on this measure the South was at about the same level as the United Kingdom in 2000, which would put it about 25 percent above the corresponding level in the North. A further qualification must be made in comparing living standards of the North with those of the South. Northern Ireland, as a poorer part of a larger and richer country, benefits from net fiscal transfers from the U.K. exchequer. Because incomes are lower, the North pays relatively lower taxes, while it still enjoys much the same level of social benefits as the United Kingdom generally. Using a measure that takes account of the impact of net fiscal transfers, disposable household income per capita, the North is less than 15 percent below the corresponding U.K. level. This still leaves Northern living standards in 2000 a little behind those in the South, though not as far below as the more commonly used figures for GDP/GNP per capita suggest.

While the South has gained on the North in the long run, the North scored better than the South in one significant respect: In 1995 its population had finally regained the immediate prefamine level, whereas the population in the South is still little more than half that of 1841.

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