Ireland in Five Easy Pieces V: Economic Development

One of the major critiques of British rule in Ireland by nationalists was the state of the economy.  Irish economic development, they alleged, had been repressed by its subjugation to British trade interests.  If there was one object lesson in indifferent, not to say inhumane, British management that nationalists could point to it was the Great Famine.

Conversely, and ipso facto, nationalists believed that Irish management of the economy would allow its potential to be fully realised; our native creativity would see entrepreneurship flourish and Ireland’s fertile lands would provide food for its people and for export.  Native management would see to the exploitation of natural resources on behalf of the people.  There was no good reason, nationalists argued, why Ireland could not be as prosperous as its nearby European neighbours, save for its colonial subjugation.

In order to offset generations of economic repression at imperial hands, nationalist intellectuals believed that after independence Ireland was entitled to a period of protectionism to allow its fledgling native industries to grow until they were ready to compete internationally.

For the first ten years of independence the Cumann na nGael Government maintained the free trade with Britain that was vital to Ireland’s main exports.  There were overwhelmingly food-based since the 1921 partition had shorn the new state of the industrial base in and around Belfast.  More than that, after the Famine, most of Ireland’s agriculture was pasture yielding dairy and beef, an activity light in employment with little added value in processing the basic produce.  The food and drink sector provided what little non-agricultural economic activity existed.  High levels of emigration provided economic opportunities abroad for those who could not find them at home.

The new Government imposed selective tariffs in certain manufacturing sectors, created the beginnings of a central bank in the Currency Commission, launched a major infrastructural project with the Shannon Hydro-Electric scheme and established a number of state agencies to undertake activities beyond the capacity of the private investors such as the Dairy Development Board, the Electricity Supply Board, and the Agricultural Credit Corporation.

A strong proponent of protectionism was Eamon de Valera, a surviving commander of the 1916 Rising, former Presidnet of the revolutionary republic and, in 1927 founder and leader of Fianna Fáil.  The party’s rank and file derived from those who had taken the republican side in the civil war and whose electoral base was the small farmer and urban worker.  De Valera did not see protectionism as a mere transition.  He took the economic nationalist approach much further in seeing protectionism as a permanent feature of national policy.  He was deeply committed to a vision of Irish nationalism that saw Ireland’s Christianity as divinely ordained and manifestly so in our history.

Based on this set of beliefs, de Valera framed social and economic policy around two key instruments, namely protectionism and accelerated land division.  The parceling out of land from the large estates to their farming tenants had been underway and managed by the Land Commission since 1881.  It had continued after independence but for de Valera its new purpose was now to be a key national objective, namely the settling of as many people on independent holdings that were in turn to be as self-sufficient as possible.  For de Valera, independent Ireland itself would replicate the virtues of the small farm on a national scale; self-reliant, based around the stem family, devotional, living the life, as he put it in a celebrated 1943 radio broadcast, that God intended.

De Valera’s vision of independent Ireland has been much mocked since but it had the virtue of being internally coherent.  He held that because of economies of scale Irish manufacturing could not compete with industrial behemoths like Britain, Germany and the United States.  He also knew that the price of protectionism was a loss in competitiveness, just as land division could not be as competitive or productive as larger holdings.  The economic cost of both would be accepted by Irish people because of the societal values thus made possible.  Exports from surplus food and small-scale decentralized manufacturing would be required only to the extent that Ireland needed imported commodities like oil, coal, steel and tea.

De Valera was far from alone in his belief that materialism and urban living were conditions for spiritual corruption.  It had its roots in the Enlightenment and European romantic nationalism.  The Judaeo-Christian tradition itself conflates frugality (read poverty) and virtue.  Indeed looking at Irish history some clerical observers were led to conclude that Ireland’s history of oppression and poverty was divinely ordained to keep the Irish spiritually pure and devotional.  One priest warned that Ireland should not so much fear Anglicization so much as Los Angelesation, for many the materialistic Mecca of western capitalism.

De Valera’s accession to power in 1932 gave him the platform to implement his ideas.  De Valera’s determination to reset Anglo-Irish relations helped precipitate protectionism.  Because of his refusal to continue compensation payments arising from the land acts, Britain imposed punitive tariffs on Irish agricultural exports in what became known as the ‘economic war’.  By the time this was sorted out in 1938, world war was in the offing.  When hostilities broke out in 1939, de Valera declared neutrality and the Irish economy suffered if not an actual embargo by the Allies (spurred by Churchill’s rage at Ireland’s position), then certainly a highly straitened regime of imports.  Ireland could feed itself but shortages of fuel, grains, tea and tobacco were to be acute during the war and in following years.

Surely, you may well suggest, this provided the perfect conditions for de Valera’s vision of Ireland – self-sufficient and aloof from the depredations of a materialistic world gone mad? It did not work out that way.  The planned acceleration of land division ran out of steam, much to de Valera’s deep frustration, and droves of Irish people went to the munitions factories of Britain searching for a steady income and a better life.  Emigrants sent vital money home, to the tune of about £100 million a year.  The Irish economy remained in desperately poor shape, completely dependent on the British market and even more pointedly on the dollar convertibility of British currency.

The isolation of World War II, the refusal of Irish people to embrace frugality and the realities of economic life both domestically and internationally put paid to de Valera’s vision.  However, it would take many years and the economic nadir of the 1950s to spur the evolution of an alternative economic approach.

So limited were the entry points for capital investment in Ireland that the injection of some $116m from the Marshall Plan between 1948 and 1951 merely boosted consumption and imports, leading to a balance of payments crisis and the abject deflation of the economy in 1952.  Emigration to Britain and the US soared during the bleak 1950s.  The State’s population declined to below three million.  Doubts began to creep in about whether the whole notion of independence had been a valid one.  Hand Ireland back to the British and apologise for the state we’ve left it in, quipped writer and former IRA man Brendan Behan.

A series of initiatives put in place the building blocks for economic development.  Irish education created a talented workforce. The Industrial Development Authority (IDA) was established in 1947.  By the early 1950s, European leaders were committed to trade liberalisation and that would lead to the EEC and European Free Trade Association.  For trade reasons alone if Britain was a part of these developments, Ireland had to be too.

De Valera finally retired from active politics and passed the torch to Seán Lemass, a man long determined to bring about the development of the Irish economy without any philosophical hankering after an Irish Ireland.  Along with the head of the Department of Finance, the pioneering, if very careful, official Ken Whitaker, Lemass launched the First Programme for Economic Expansion (1958-63), and reiterated it with the Second and Third Programmes covering the rest of the 1960s and early 1970s.

There is a debate about whether these programmes were more symbolic than real but they did capture a sense that a new Ireland beckoned if it embraced the possibilities of economic development as a virtue in and of itself, and if Ireland looked to engage in the outside world.  Lemass gave political and democratic authority to the pursuit of economic development.

Behind the language of the programmes lay a new direction for the Irish economy.  Given the failure of the indigenous non-agricultural sector to develop any reach beyond the tiny domestic market, Ireland would have to import investment to boost exports and growth.  The IDA was mandated to bring foreign manufacturing to Ireland. Foreign Direct Investment (FDI) was to become the engine for Irish economic development up to the present day.

Ireland was particularly well placed to attract newly mobile international capital.  It was English speaking and had a well-educated young workforce and elastic labour supply.  The US began running large deficits in the 1960s to finance the Vietnam War, adding to the availability of the dollar as the medium of global capital.  Petro-dollars boosted the supply of international mobile capital.  Once Ireland joined the European Economic Community in 1973, it had the distinct advantage for US firms of being inside one of the largest and largely closed markets in the world.  European funding (some €69 billion over 40 years) and the imposition of European health and safety standards would add to Ireland’s development as a modern economy.

It would not be an early home run though, and momentum built only slowly and falteringly in the 1960s and 1970s.  The oil price crisis in 1973-74 hit the Irish economy hard.  Expansionary fiscal policy helped, but only at eventual cost to the exchequer.  Thirty years after the budget deficit crisis of the early 1950s, Ireland was hit again with a budget deficit crisis and economic decline in the 1980s, with high unemployment and mass emigration.

By the late 1980s, however, the fiscal situation had stabilized, the Irish workforce was competitive, the impact of EU supported infrastructure was increasingly evident, the IDA had had major success in attracting FDI mainly from the US, and the world economy was taking off thanks to globalization and deregulation.

The IDA used access provided to US boardrooms through Irish American connections to sell Ireland; sealing the deal was down to hard bargaining in a highly competitive market.   The IDA certainly relied on the Government’s 12% tax regime, access to the European market and the quality of the Irish workforce too.  But the IDA also consistently adapted to changes, rolling FDI through cycles of development from ‘screw driver stuff’ to software, high tech, pharmaceuticals and services.

The IDA’s success was in fact transformative.  Irish incomes began to rise and unemployment to fall.  By the early 1990s, Irish growth rates were taking off.  By the early 2000s Ireland had become the Celtic Tiger, boasting sustained double-digit growth.  Involuntary emigration, the curse of Irish families since the Great Famine, came to an end.

However, all was not well by the mid-point of the first decade of the new millennium.  Increasingly economic growth was switching from being export-led to being demand driven.  Irish competitiveness was slipping because of the boom’s impact on costs and expectations.  The construction sector was burgeoning beyond a normal share of the economy.  Personal debt was accelerating.  House prices were booming, fueled by cheap and available Euros.

The creation of the Euro – in non-physical form January 1999 and as legal tender in January 2002 – put this process into overdrive by boosting Irish credit.  As Eurozone capital looked for better returns in an era of low interest rates, Irish banks became willing recipients, offering good returns for investments.  In many ways this was how the Eurozone was supposed to work; moving capital from areas of low marginal rates of return to areas of high return.  However, the investors and regulators did not look too closely on the use this money was put to – retail banking, personal credit and, increasingly, mortgages.  The flood of Euro capital into Ireland put the property market into overdrive.

After a second thirty-year interlude, Ireland was faced with a budget crisis in 2008 as US banking troubles sent a tsunami of financial collapse around the globe.  With property prices plummeting, Irish banks saw vital equity disappear.  Without taxpayer’s money, they were insolvent.  However, governments across Europe now found that the Eurozone was not an aggregated risk as investors quickly disaggregated the national bond markets.  Irish bond rates became unsustainable and Ireland was obliged to apply for an EU/IMF bailout.

How did Ireland cope with this unprecedented crisis?  By any measure Ireland has done remarkably well.  It grappled with the budgetary crisis by slashing expenditure, public sector salaries and increasing taxes.  A series of austerity budgets applied painful but fiscally effective medicine between 2008 and 2014.  It pumped €64 billion into the banking sector and restored two pillar banks to bring the sector more into line with the economy so that banks could serve the economy rather than the other way around.  It created a vehicle for non-performing property investments in NAMA, theNational Assets Management Agency. Ireland exited the bailout ahead of schedule.  Meanwhile, the IDA aggressively pursued foreign direct investment, hitting a record in 2013.  Irish economic growth is now one of the best in the Eurozone, despite a generally depressed global economy.

We should not forget the cutbacks in services, the high unemployment, the loss of wealth and pensions, the negative equity in the property sector – all salutary lessons about the dangers of willfully blind credit and demand-led growth.  However Ireland had successfully faced down the gravest financial challenge it had encountered since independence.

Even if we paid a high price for the Celtic Tiger years, I don’t think its possible to look back on them without some fond memories and positive impressions.  They were great years of confidence and optimism.  They coincided with the Northern Ireland peace process and the resolution of deep-rooted antagonisms between Ireland and Britain.  Anglo-Irish relations blossomed.   Young entrepreneurs flourished in those heady days, creating an invaluable reservoir of expertise that will stand to us.  ‘Riverdance’ enthralled us, and the world, with its brio and energy, its sensuality a long awaited riposte to post-Famine strictures.  Dublin flourished with new restaurants and culture, with towns across Ireland soon following.  Above all, we had achieved full employment and ended enforced emigration.  Now we’re getting back on our feet economically and financially, but this time with greater deliberation and maturity.

I hope this series of blogs has been helpful and that it encourages you to look at Ireland’s story more closely in the wealth of historical publications, literature and material available online.  The study of our history rewards the reader well, enriching an understanding and appreciation not just of the centennial commemorations ahead but also of Ireland today and how we got to be who we are.

Eamonn McKee

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