Echoes of the Millennium: The path to prosperity

By Brendan Keenan

It is hard to comprehend the difference in the prospects of the Irish citizens of today, confronting the dawn of a new century, compared with those of their predecessors in 1900.

Ireland is hailed as the economic model of era — the focus of studies in U.S. business schools, and of speeches by Australian politicians. It is a member of the boldest economic experiment in history, in the shape of the single European currency, and the fastest-growing economy in that bloc.

Its problems are those of labor shortages, immigration, traffic jams and house prices. And it is not just the people of 1900 who would find all this amazing.

The 19th century had been a disaster for Ireland. It had seen its economic position decline inexorably when compared with other small European states. All remedies seemed to have ended in failure. The failure culminated in the disaster of the Great Famine, when a million died and two million fled.

Yet there were grounds for optimism 100 years ago. Political change was in the air. Before too long, surely, Ireland would have Home Rule, and the ability to shape economic policy to its own requirements. Then, things would be different.

Before today’s generation loses the run of itself, it is worth pointing out that the 20th century, too, was largely one of economic failure. Ireland fell even further behind other European states during the century. All the policies to reverse this process got nowhere. Only in this, the very last decade, have all those amazing things happened. A bookmaker, looking at all those years of failure, and the few ones of success, might want to lay odds on things not working out in the 21st century either.

So it is instructive to put ourselves inside the mind of those 1900s citizens. The fact is that they would have been wrong about almost everything they anticipated.

Home Rule never came. Instead, there was World War, Insurrection, Civil War, Independence, Partition and, eventually, a Republic of 26 counties. Not only was all that unforseeable, it was unimaginable. The one thing we can say for certain about the future is that it never turns out as expected.

The first Irish government had more financial freedom than a Home Rule administration would have had. But it also inherited an economy ravaged by civil war and was in financial trouble from the start. One sign of the times was that the Irish banks refused to lend to the government, until pressured to do so by the British Treasury.

It was not that Ireland was a particularly poor country in 1900, although incomes seem to have been ill-divided even by the standards of the time. Living standards had trebled since the Famine, although this was mainly due to the fall in population.

Even in terms of gross national product, Ireland did not fare too badly. Total GNP in 1914 was about £140 million, compared with over £50,000 million now. Per person, measured in U.S. dollars, that came to around $770. This put Ireland behind countries like Denmark and Germany, but ahead of Sweden and well ahead of Italy and Spain. All of them, with the exception of Spain, were to leap well ahead of Ireland in the next 100 years.

Deindustrialization

The problem was the structure of the economy. It had not just failed to industrialize during the 19th century, it had actually gone the other way. In the decades following the Famine, the industrial workforce and the urban population fell heavily and the country became more and more dependent on agriculture.

There was one exception — the Lagan Valley. It is hard to imagine now the scale of Belfast’s industrial strength at the turn of the century. It had the biggest shipyard in the world, the biggest textile machinery manufacturer, the biggest ropeworks and, according to some, the biggest manufacturer of mineral waters.

As well as being the world’s largest producer of linen, the area was also the leader in the manufacture of tea-drying equipment, which was a direct spinoff from the technology to control temperature and humidity in the linen mills.

But this sort of development and spinoff just did not happen elsewhere on the island, apart from small pockets. When the first statistics for the new Free State were collected, they showed 10 percent of the workforce employed in manufacturing. This compared with an average of more than 20 percent for other small European states such as Denmark and Sweden.

More than 50 percent of the population was employed in agriculture, compared with around a third in other places. And, according to economic historians, it was the wrong kind of agriculture, at least as far as economic development goes. A combination of climate, land-ownership and prices had made Ireland largely a producer and exporter of cattle. This could be very profitable in good times, but it provided less opportunity than crops, or even milk and poultry, for further development in things like processing, machinery or agri-chemicals.

"Beer, beef and biscuits," is one description of the Free State’s economy at the time of independence. Guinness, Jameson’s distillery and the biscuit-maker Jacob’s just about represented the country’s industry. The policy of the new government was bound to reflect the interests of these groups, especially the farmers.

Perhaps it would have been different if there had been Home Rule instead of independence. Heresy? Only over the very long run. Former Taoiseach Garret FitzGerald, both of whose parents fought in the War of Independence, argues that independence was a good thing, because the Republic has benefited more as a sovereign state in the European Union than it ever would have as a semi-autonomous region of the UK.

But, as an economist, FitzGerald concedes that you have to get right up to EU membership in 1973 before you can make that case.

The first government, under W.T. Cosgrave, wrestled unsuccessfully with the need to protect Irish agricultural exports to Britain and the need to protect Irish industry from British imports. These, after all, were seen as the main cause of the deindustrialization of the previous century.

Alas, what might have been the most effective measure — breaking the link with sterling and devaluing the Irish pound — was rejected. The currency question was left to a Commission made up mainly of bankers, which, not surprisingly, favored the link. The 1927 Currency Act put this into law.

A theory for another time

Curiously, that first government now looks surprisingly modern in its attitudes. It believed firmly in sound public finances and control of public spending. It favored free trade and low taxes. Its decision to cut a shilling off the old-age pension to lower business taxes was well-remembered until very recently.

But not even Margaret Thatcher would have dared speak like Industry and Commerce Minister Patrick McGilligan when he told the Dail, "People may have to die in this country, and die of starvation."

It just goes to show that, in economic affairs, it is not the theory that matters but how well it meets the conditions of the time. Not that, with hindsight, there was much the first government could have done that would have turned any better, except perhaps the fateful decision not to break the link with sterling — and even that would have had a lot of unpleasant consequences.

Other ways of thinking were about to get their turn with the election of Fianna Fail to government in 1932. Fianna Fail offered a real alternative — perhaps the biggest alternative that has ever been put to the Irish electorate. The political importance of free trade had lessened with the decline of the beef, beer and biscuits lobby. Guinness and Jacob’s had built plants in Britain to get around tariffs, and the small farmer, for whom the home market was more important, was the backbone of Fianna Fail support.

The new policy was to protect home industry behind a wall of tariffs, quotas and licenses. Imports of such goods would be uneconomic and the home-producers would have the market to themselves. It worked too, up to a point. Combined with the creation of new state companies like the Sugar Company and Bord na Mona, industrial employment rose by a half from 1932-38. This during the Great Depression — a period of mass unemployment in the major economies like the U.S. and Britain.

It was a pity that it also coincided with Fianna Fail’s "Economic War" with Britain. The new government refused to pay land annuities due for the buying-out of landlords at the end of the 19th century. Whatever the merits of the case, Britain, not surprisingly, retaliated with restrictions on Irish imports. Nationalists spoke with pride of how farmers "killed the calves for Dev" when farming exports were cut off, but the damage was considerable. One effect was to weaken the export sector even further, and the lack of an export policy was one of the major flaws in the Fianna Fail strategy.

World War II brought another flaw to light. These companies had to import much of their raw material and semi-finished goods. These were hard to obtain during the war, causing severe shortages of consumer goods. But then, Ireland must always depend on obtaining most of its needs from overseas, a point rarely mentioned in debates on national security and membership of international organizations.

Ireland’s international role became the central issue after the war — something that seems largely forgotten, despite its importance. The U.S. launched the Marshall Plan in 1948 to try to restore the war-ravaged economies of Europe and protect them from Communist takeover.

Ireland needed the Marshall money badly. However, recipient countries had to join a new organization, the OECC, and open their markets to U.S. exports (there is no such thing as a free lunch). The first stage was the removal of quotas on imports, with 90 percent due to go by 1955.

The American administrators of Marshall Aid were instrumental in bringing about the formation of the Industrial Development Authority. It was supposed to develop native industry, but the old guard in the Department of Finance put paid to that. In a bizarre memo, given the American origins of the policy, the department warned of the socialist dangers of such meddling in business affairs.

So, in what may have turned out to be a lucky break, the IDA was left with the job of attracting foreign investment, but it was not allowed to give out grants until 1956. The key lure of zero-profits tax on exports came in 1958. The foundations of the IDA’s success as a pioneer in the attraction of multinational finance — now copied widely around the world — were laid by external pressure.

Recession, exodus

The decision to go along with it was a response to a dire crisis. The reduction of quotas on imports led to balance-of-payments deficits and shortages of foreign currency. Trying to cure this meant severe recessions in 1952 and 1955. Industrial employment was stagnant and, as Britain boomed along with the rest of Europe, emigration reached epidemic proportions. In 1957, 2 percent of the population left the country. Around 400,000 took the boat during the 1950s, an exodus not seen since the 1880s.

It had been a dreadful decade. Economic growth was just 1.7 percent, compared with an average of 4.4 in what was a boom period for Europe. The fastest-growing economies, such as Austria and Finland, averaged over 5 percent — a reminder for today of what small economies can do when they are linked to larger, successful entities.

What was Ireland to do? The answer was T.K. Whitaker’s 1958 Program for Economic Expansion. The Department of Finance, or at least its secretary, Dr. Whitaker, had joined the expansionists. Foreign manufacturers were to be attracted by grants and low taxes. Their exports would help pay for the country’s essential imports. Free trade would be resumed. In time, perhaps, the multinational entity would provide business and know-how for a competitive native industry.

It is still, essentially, the same policy being followed today. But, hard as it is to remember now, as recently as 10 years ago, this policy too was regarded as a failure. Unemployment stood at 15 percent and employment was less than in 1922. The links between the foreign plants and local industry were weak. Emigration had resumed and this time the emigrants took with them skills and qualifications expensively acquired at home.

To some extent, the jury is still out, and will be for several more years. But it is possible to see a pattern from the 1960s that gives ground for optimism. On this view, the policies did not fail but were interrupted by events, some of them unavoidable, some of them home-grown.

The 1960s were a period of rapid growth, as the foreign companies, mostly American, began to arrive. The gain in employment was limited at first, as jobs were lost in the old, protected industries. But the early 1970s have a familiar ring — growth of 6 percent, unemployment at 6 percent, and a net immigration into the country for the first time in a century.

But it all went horribly wrong. Well-meaning attempts to offset the effects of the 1970s’ oil crisis with more government borrowing and spending. Well-meaning attempts by Fianna Fail in 1977 to move the economy on to a higher growth plane with a final round of spending and borrowing. The second oil crisis of 1979 and disaster in the public finances.

The 1980s undid nearly all the good work. Industrial employment tumbled by 50,000. Taxes soared and living standards fell an estimated 12 percent. Ireland became the most indebted country in Europe. With recession in Britain and restrictions in the U.S. curbing emigration, unemployment rose to 15 percent.

Yet it is possible to argue, looking back, that the underlying recipe for success, demonstrated in the 1960s, was still there. The difficulty is to separate short-term events, like the oil crises, from long-term trends.

Hence everyone’s surprise when success resumed with a vengeance in the 1990s. It has been so spectacular partly because of a sequence of unrepeatable trends — the preponderance of young people in the population, falling interest rates in the creation of the euro, the boom in the U.S., and so on.

There is every reason to think that the 21st century will be better for Ireland than the 20th, or the 19th, or just about any century you want to mention. But this century has made us more pessimistic than our ancestors were at the end of the 19th. We do not expect the world to get better and richer, as they did.

As for Ireland, perhaps the biggest threat is that very experience of historical failure. Already, there are some worrying signs that the extreme individualism of Irish society, compared with most European ones, could threaten the rosy future. An attitude of "Better grab it while it lasts because it’s certain not to last," could be the surest way to make sure that it doesn’t.

(Brendan Keenan is the group business editor, Independent Newspapers.)