Before Leprechaun Economics

Notes from the Western Periphery

INDIGENOUS INDUSTRY The benefits of industrial protectionism were felt in Westport, with the establishment of successful companies like the Irish Sewing Cotton Company on Altamount Street, Westport.  Picture courtesy of Harry Hughes

When nations take umbrage at real or imagined slights, there is often an underlying truth that outsiders see but insiders won’t. This is the case with the angry objections to the term ‘Leprechaun Economics’, used by New York Times columnist and Nobel Prize winner Paul Krugman (‘Yellen’s New Alliance Against Leprechauns’, June 7).
Take the case of Apple Inc. It allocates much of its global profits to Apple Sales International (ASI), registered in Ireland. So, it pays our low 12.5 percent corporate tax rate? Alas, no! ASI can be registered for tax purposes anywhere you like. So Apple and other Irish-based multinationals often end up paying almost nothing, and we get blamed.
So Krugman commented:
“How big a deal was this? On paper, Ireland’s gross domestic product suddenly jumped 25 percent, even though nothing real had changed — a phenomenon I dubbed ‘leprechaun economics’ a term that has stuck. (Fortunately, the Irish have a sense of humor.)”
Over this and the next column, let’s examine why our economic statistics are distorted, how we provoked the EU and the G7 to be so annoyed with our corporate tax regime and why Krugman talks of Leprechaun Economics.
Ireland’s progress from the economic basket case of the immediate post-independence decade (see my ‘Saorstát Éireann: The first decade’ column, May 25 – available on mayonews.ie) to a prosperous honey pot attracting foreign multinational enterprises is a fascinating story. It’s best best narrated in stages, so let’s look at stage one: life before Leprechauns.

Keynes lecture
The Cumann na nGaedheal governments of 1922 to 1932 had continued with pre-independence policy norms: a fixed link with sterling and free trade. However, by the early 1930s the world economy collapsed into depression and fragmentation. Nations turned inward, fell back on their own resources, and there was a proliferation of exchange controls, tariffs, import quotas and the like. That the incoming Fianna Fáil government in 1932 switched to a policy of protection was hardly surprising.
The motivation for protection was the need to create an Irish manufacturing sector from an almost zero base, partition having split off the heavily industrialised Belfast region, leaving the Free State with the modest remainder.
The pro-free-trade politicians of the previous administration invited the famous English economist JM Keynes to deliver a lecture in Dublin on April 19, 1933, on the expectation that he would call for an end to protectionist madness.
Imagine the horror of the ranks of pro-free-traders when Keynes declared: “Ideas, knowledge, science, hospitality, travel – these are the things which should by their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible, and, above all, let finance be primarily national” – and concluded: “If I were an Irishman, I should find much to attract me in the economic outlook of your present government towards greater self-sufficiency.”
What is never quoted is what immediately followed these remarks, and heavily qualified them:
“But as a practical man and as one who considers poverty and insecurity to be great evils, I should wish to be first satisfied on (some) matters. … I should ask if Ireland is a large enough unit geographically, with sufficiently diversified natural resources, for more than a very modest measure of national self-sufficiency to be feasible without a disastrous reduction in a standard of life which is already none too high.”

Protectionist policy
Keynes foresaw exactly where the vindictive treatment of a fallen Germany by the Treaty of Versailles in 1919 would lead. His lecture was given one month after Adolf Hitler became German Chancellor, and three weeks before the burning of books in the square of Unter den Linden in Berlin on May 10. Keynes’s worst nightmare had come to pass.
Keynes’s was the wider vision that may not have struck much resonance with Free State policymakers, preoccupied with existential development challenges. He had temporarily abandoned the liberal economic agenda but was to work diligently during and after the coming war to restore that agenda and to avoid repeating the errors of Versailles.
The new Fianna Fáil government, on the other hand, urgently needed to industrialise and decided to erect protective barriers to shield start-up infant industries. The policy of tariff protection put in place in 1933 endured through WWII (a time when access to vital imports was a more pressing problem than protection) and continued through the period of post-war recovery into the late 1950s. Eventually, the completion of European reconstruction cruelly exposed the failure of the Irish development strategy based on protection and import substitution.
While policymakers in Ireland were less assertive and innovative than might have been desired, in the absence of a competitive and export-oriented industrial sector there was very little that could have been achieved to accelerate development and decoupling from the UK.
By the mid-1950s the Irish economy had hit rock bottom with regular balance of payments crises, peak emigration of 80,000 in 1958 and a population reduced to 2.8 million. With a few exceptions, protection and insulation from the world had failed miserably. However, major policy changes were about to be made that would revitalise the economy. These will be described in the next column.

John Bradley was a professor at the ESRI and has published on the island economy of Ireland, EU development policy, industrial strategy and economic modelling.