How Ireland developed

Notes from the Western Periphery

HIGH-TECH ALLURE The Irish headquarters of multinational Google, the Google Docks Office complex in Barrow Street, Dublin.

An té nach bhfuil láidir, ní foláir dó bheith glic  
(He who is not strong must be wise)

John Bradley

The 1950s brought about a catastrophic decline in the fortunes of the Irish economy. The British cheap-food policy was depressing the value of our agricultural exports, and we had few other manufactured exports. Any increase in the Irish standard of living quickly ran into the sands of a balance of payments constraint and had to be choked off by raising taxes.
Ireland in the 1950s, the years of my childhood, was depressingly isolated.
At the initiative of Dr TK Whitaker, the dynamic new young Secretary of the Department of Finance, a blueprint for recovery was drafted. The disparate policy changes were described in ‘Economic Development’ (published 1958) and initiated by Taoiseach Seán Lemass in the First Programme for Economic Expansion (1958 to 1963). A diverse range of ideas and proposals were advanced, mainly in the areas of agriculture and the agri-food sector. The Controwl of Manufactures Act – which had prevented foreign ownership of Irish industry – was relaxed, but not formally abolished until the 1960s.
The low rate of corporation profits tax (initially zero on profits from manufactured exports), the liberalisation of trade and foreign investment, and the freedom to repatriate profits were crucial. They led inexorably to the decline of the protected manufacturing sector, the rise of a new foreign-owned sector and the eventual emergence of native Irish success stories. Yet, the tax initiative lay buried in Appendix 2 of ‘Economic Development’ on page 232 and is not mentioned in the main text.

Transformative transition
With the benefit of hindsight, we now recognise ‘Economic Development’ as a transition between old and new perspectives, and not a wholehearted embrace of a modern view of the economy. The vision of ‘Economic Development’ was mainly of agriculture-led export growth, with a mainly indigenous base. What actually came about was a massive influx of high-technology, export-oriented multinational investment and the complete transformation of the whole economy.
The IDA strategists quickly realised that Ireland’s crucial advantage in winning inward investment in high-technology, high-profit sectors, was its low rate of tax on corporate profits.
Unlike an incentive system that provided capital grants and risked requiring continuing subventions, the benefits of the tax-based incentive was that it only kicked in when firms were up and running and making profits. It also proved to be a crucial benefit to high-profit firms, which are located at the earlier stages of the product life cycle and are at the cutting edge of product and process innovation.
The tax incentive was kept relatively stable over many decades. All international proposals to remove it were opposed vigorously by the Irish Government.

Virtuous circle
Other factors came together to reinforce Ireland’s success and interacted to create a virtuous circle of superior performance that replaced the previous vicious circle of decades of under-performance. Educational standards in the Irish workforce had lagged behind the world, but policy changes now brought about a steady build-up of the quality, quantity and relevance of education and training – including curriculum reforms and ‘free’ second-level education. EU Structural Funds were used from the late 1980s to expand the third-level sector, building many Institutes of Technology. The general level of educational attainment in Ireland today rivals that of many wealthier European states.
The lesson of the 1950s is that the true significance of the internal elements of a national strategy is not always fully understood by its designers. Had the 1950s policymakers been less radical, and corporate tax rates been only reduced marginally rather than initially slashed to zero, the Irish economy today would probably look more like that of Greece than Silicon Valley!

Double Irish
So what about those Leprechauns? It is not really our 12.5 percent corporate tax rate that has resulted in massive distortion of our national statistics and prompted Paul Krugman to describe us as being a Leprechaun economy. Other states have similar rates. Rather, a massive concentration of multinationals in Ireland has led to undesirable abuses.
For example, the so called ‘double Irish with a Dutch sandwich’ is a tax-avoidance technique used before 2015 by large corporations. It involves a combination of Irish and Dutch subsidiary companies to shift profits to other low or no-tax jurisdictions. This is great for enterprises but plays havoc with the standard GDP measure of Irish output used by the CSO.
Progressives in the US have long tried to limit US companies ‘off-shoring’ revenues, but they face fierce opposition from most Republicans and their supporters in big US corporations. Maybe President Biden will have more luck. Meanwhile, blame the Irish!
However, Irish planners should look to a future where our international competitive advantage will rest more on the quality of our infrastructure, the excellence of our education system, our ability to innovate, and the wider benefits of living and working in Ireland, than mainly on a low corporate tax rate, inward investment and tax fiddling.
It would also get Paul Krugman off our back if we stopped using our erratic and highly distorted GDP as a measure of our growth!

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.