Name:	Elaine Baker

Student Number:	97591521

Course:	ECN 3115: Applied Public Policy - Economic Growth

Course Assignment:	Use the theory of economic growth  to (i) describe and (ii) explain the growth performance of Ireland over the period 1950 to the late 1990s.

Word count: 	3055

Due Date:	Thursday 10th February 1999

Economic Growth

Economic growth can be defined either according to how it is conventionally measured using GDP, GNP or GNP per capita, or according to the concepts on which it is based, such as a growth in the capacity of a country to provide goods and services or as a growth in the welfare of it's people.

Description of Growth

Derived from (CSO, 1995)

The following table compares GDP per capita growth to that of other EU countries.

	Ireland	UK	Europe	
1950-60	2.2	2.3	3.7	
1960-73	3.7	2.6	4.2	
1973-88	2.1	1.9	1.9	
1988-94	4.7	0.4	1.0	
				
1950-94	2.9	2.0	2.9	
(O’Grada and O’Rourke, p.212, 215)

In the 50s Ireland grew more slowly (2.2%) than other European countries (3.7%).  

Between 1960 and 1973 GDP grew by 4.4% while an increase in population meant GDP per capita grew by 3.7%.  GNDI per capita grew by 4.2%.  However, during this time European growth was also high and Ireland was not converging with Europe.  Growth slowed between 1973 and 1979 but remained in the 3-4% area.

In the 80s Ireland's GDP growth rates declined sharply, but not as much as the European average, which would seem to imply a little convergence.  However, the more appropriate measures, GNP  and per capita disposable income, did not grow at all over the period 1979-86 which would suggest little convergence before 1987.

Convergence began during the 1988-94 period, which saw Ireland growing quickly while Europe did not recover.
(Haughton p.39) (ERSI p.19)

Exceptional GDP growth of 7.3% in 1994, 10.7% in 1995 and 8.4% in 1996 (Eurostat) where no other EU country has had GDP growth exceeding 5% during this period has attracted much attention.

Have GDP and GNP figures reflected growth in a conceptual sense?

It is important to look at other indicators of growth as defined conceptually, as the above figures are illusionary as indicators of welfare, of economic capacity, or even of total output for the following reasons.  This is especially the case from the 1970s onwards.

The widespread and growing use of transfer pricing by multinationals has meant that the value added in Ireland is overestimated.  Many TNCs declare that vastly larger value is added in Ireland than is actually the case, in order to avoid tax on their operations in other countries. (O’Hearn, p.80). GNP (which counts only incomes in Ireland arising from output, and not output value itself) since the late 80s has been much lower than GDP.

However GNP too is a questionable indicator.   When a woman takes up paid work, not only does her paid work begin to be counted as part of GNP, but spending on household appliances and paid childcare needed to replace her household work are also added despite there being no increase in the amount of home services produced  (Fingleton, p.300).  The number of women in the Irish labour force has increased from 328,800 in 1951 to 469,000 in 1993. (O’Grada, p.95)  Between 1991 and 1996 the economic activity rate for women aged 25 to 49 in the EU increased from 68.3% to 71.3%, while in Ireland it increased much more, from 49.2% to 60.4% (Eurostat).  Therefore a significant degree of GNP convergence can be attributed to convergence in the amount of childcare and housework counted as economic goods.

GNP figures are not good indicators of welfare.  Welfare is affected by the relative amount of goods and services a person has access to, as well as the absolute amount.  Recent extra expenditure in Ireland has been largely concentrated in property, luxury cars and clothes.  A significant part of the demand for these types of goods is derived from a demand for relative status or conformity to standards rather than absolute welfare.  Therefore recent economic growth figures do not necessarily imply we now have a society which is better off as a whole.

Economic growth has involved dramatic increases in the transport of goods, and the burning of fossil fuels. The increase in pollution and congestion  are examples of the negative effects of increasing production and consumption.  The impact of this shows how GDP growth can damage people's welfare now and in the future.

Ireland has sacrificed a good deal of equity for the goal of growth, not least by haven-like corporate taxation.  This has meant that manufacturers have funded very little of the high education standards and infrastructure from which they now benefit.

It is evident that growth as measured in GNP cannot be directly correlated with the concept of growth in welfare and living standards.

Other indicators of growth

However, it is clear that there have been significant rises in standards of living since the 1950s and especially in the 1990s.  For example, growth enables greater revenue from taxation which has enabled a much higher standard of government services.  Higher levels of education are both a cause and an effect of growth.  The following table shows the percentages of each age group having completed at least upper secondary education.  Participation in education was very different from Europe when today's 55-59 year olds were in school.  By contrast among 25-29 year olds, participation has converged to the EU average.

	25-29	30-34	35-39	40-44	45-49	50-54	55-59	
EU 15	68%	65%	62%	59%	53%	48%	43%	
Ireland	69%	63%	58%	50%	40%	37%	33%	
(Eurostat Yearbook 1996)

		1962			1992		
per 1000 people:		UK	Ireland		UK	Ireland	
							
Televisions		230	33		435	300	
Telephones		161	44		452	309	
(O’Grada, p.35)

Life expectancy  and access to health services has greatly improved.  The levels of access to electricity and communications in Ireland has vastly improved over the past 50 years, and has also partially converged to European standards.  Ireland ranked 17th in the UNDP Human Development index in 1995, at 93% of a development benchmark for a range of indicators.  This implies high living standards and quality of  life.

Emigration and immigration are very responsive to opportunities and standards of living in Ireland relative to other countries.  Therefore from one perspective Ireland's growth can be evaluated in terms of the number of people who have been able to stay in Ireland.  The emigration of the 50s and the 80s indicate a gap in living standards relative to Europe, while the net immigration of the 90s indicates convergence.

Explanations of growth

Population and demography

Much of the convergence in living standards can be attributed to population structure.  Over the past 40 years the EU average dependency ratio (inactive : employed) ranged between 1.2 and 1.5.  By contrast, the Irish dependency ratio was above 1.7 in 1960 from which it rose to a peak of 2.3 in 1985.  Since 1985 it has declined the EU average. (ERSI, p.13)

Productivity growth (GNP per worker) 
1960-73	4% per annum
1973-87	2% per annum
1987-98 	3% per annum
(ERSI, p.7)

Productivity has been increasing at a more steady rate, while changes in population structure explain some variation in GNP per capita, including a significant part of recent high GNP per capita growth.

Investment - public and private

Investment as a percentage of GDP:

	Ireland	UK	EU 12 	
1960-69	19.5	18.1	22.8	
1970-79	25.0	19.2	22.8	
1980-90	21.6	17.5	20.1	

(O’Grada and O’Rourke, p.215)
see also (Haughton p.39)

Growth theory establishes investment as a key factor affecting growth.  Investment rates in Ireland have been above the EU average only during the 70s and early 80s and they have been consistently below those of countries with similar income (O’Grada and O’Rourke, p.215). This could explain lack of convergence before the 90s.  

In comparison to other European countries, a high proportion of Irish investment has been in transport and in education, and has been steered by the public sector. O’Grada and O’Rourke (p.215) argue that this type of investment is relatively unproductive and inefficient and therefore Ireland grew slowly. However, despite the fact that it’s lack of short term financial productivity makes it unattractive to the private sector, this type of investment is a key to growth in the longer term and it’s benefits are being seen in the 1990s.

Since 1985 investment rates in Ireland have again fallen below the EU average (O’Hearn p.85).  During the 1980s, government investment as a proportion of GDP fell from 5.7% to 1.8%.   Foreign direct investment has been increasing but this has been outweighed by falling domestic private investment. (Haughton p.39) FDI tends to have an immediate effect, and government and domestic private investment a longer term effect.  This can explain higher growth in the 90s but can also predict slower growth in the future.

The role of EU grants has been significant in facilitating capital formation and long-term development.  EU regional policy and aid have significantly contributed to education and infrastructure in Ireland.

Public policy -  industrial, trade and investment

Trade, investment and industrial policies are very much linked.  Theory establishes that growth is promoted through policies favouring high levels of investment, and trade and industrial policies favouring high growth in technology.

A free market in theory results in a superior allocation of productive resources, but this theory takes the resources and the uses to which they can be put as given, whereas growth theory must examine changes in these resources and uses (O’Sullivan, p.374).  

Growth theory suggests that the mechanism by which freer trade and openness to foreign investment results in growth, is through technology dissemination among competing firms, especially in the manufactured traded sector.  However, labour productivity convergence in the EU between 1970 and 1990 has been dominated by  the increasing productivity in and growing importance of the services sector, which is mainly non-traded internationally (O’Leary).  

Technology involves forms of organisation of people and resources as well as production methods developed through science and engineering.  Technology may be spread in many different ways, and incentives to adopt, adapt and develop technology include but are not confined to international competition and trade.  Interaction between researchers and students in the EU has been promoted under various programmes.  The last 50 years have seen a media and communications revolution.  Consumers and producers now travel to and communicate more with other countries, causing the spread of ideas and both demand for and supply of better technology.  

There are relative advantages to policy which promotes the development and adoption of appropriate technology in more direct ways, rather than policy which simply promotes free trade and expects this to follow automatically.  The former gives leeway to adapt trade policy according to economic, social and environmental criteria.

Ireland’s recent success, exaggerated by illusionary figures and obscuring previous and future problems, has been held up by some commentators such as Sachs (1997) as proof that foreign direct investment is the crucial key to growth.

In order to evaluate trade, investment and industrial policy choices since the 1950s, they must compared with the alternatives.  Below I have mapped out the some choices in long term growth policy. 

In the 1950s there was a choice to be made between freer trade or continuing protection.  

Protection during the 50s was largely directed towards already established industries such as clothes, soap, metal, glass and cement, and not at the development of new technology or diversification into new products. Industry owners often devoted their energies to increasing the tariff protection for their firms rather than to diversifying or responding to the market, despite the fact that there was domestic demand for products such as steel pipes and paper (O’Hearn p.42).  Increasing imports of inputs for domestic industry and of new products not supplied domestically led to balance of payments problems.  The choice was to stem aggregate demand or to promote import-substitution.  The former policy was pursued in the early 50s through wage restrictions, causing a reduction in demand for domestic goods as well as for imports, and leading to high unemployment (O’Hearn p.38, O’Grada p.27).

Taking the path of import-substitution, through incentives for new industries and the adoption of new technology, could have successfully helped economic growth.  However, it is likely that growth would still have been slow relative to Europe.  This is because a large amount of different industries supplying a little of everything to a small market like Ireland would not have benefited from the economies of scale of similar industries in Europe.

The policy choice of freer trade and liberalisation was made in the 1958 "Economic Development" Whitiker strategy, due to the problems associated with protection above, and in the context of conditions attached to Marshall Plan aid.  This policy favoured the development of exporting industries.  Exporting industries would benefit from larger markets and economies of scale and enable Ireland to import more than we could produce ourselves.

However, this was not a laissez-faire policy.  Subsidies of domestic suppliers through tariffs were replaced by subsidies of exports through the IDA and tax breaks.  The IDA played an important role in strategically promoting growth in particular sectors and of particular types.

Strategic intervention promoting exports can be directed towards domestically owned industries or foreign multinationals.  

Investment in domestic exporting industry can be difficult to fund entirely out of domestic savings.  Ireland in the 50s and 60s did not have the capacity for large scale investment, and domestic investment rates were low.  Different forms of foreign investment could have been attracted.  For example, mechanisms could have been set up to allow Irish entrepreneurs to borrow funds from foreign savings.  Alternatively the Irish government could have borrowed and re-lent money to viable new businesses, conditional upon them adopting and developing appropriate new technology.  Government agencies could have encouraged equity participation of foreign firms in Irish firms rather than a pattern of total ownership of subsidiaries.  

Another policy option was to strategically encourage domestic exporting industries to establish linkages with foreign firms by becoming suppliers of inputs.  This pattern has been very successful in Taiwan where Taiwanese firms have long-term supply contracts with, but are not owned by, Japanese firms (O’Hearn, p.20 ).   Alternatively, supply of consumer goods to foreign markets could be encouraged.  Córas Tractála was set up to promote exports from domestic industry but this was not as effective as the attraction of multinationals.

The policy decision given most weight and resources, however, was to encourage exporting foreign multinationals to establish wholly owned subsidiaries in Ireland.  This took the form of fixed asset grants, accelerated depreciation allowances, and a 10% manufacturing corporate tax rate (of more benefit to TNCs than domestic manufacturers due to the potential for transfer pricing)  (Walsh, p.84).  As Krugmann explains, the success of this policy was aided by Ireland’s position close to Europe and as part of the EU.  However, from the 60s to the 80s the costs of these policies were very large relative to the benefits.  

Large growth in new industries was needed to offset the rapid decline in previously protected Irish industry.  By 1980, employment in Irish firms fell by over 80% in textiles and clothing, and by more than half in metal products.  

Foreign investment grew during the 60s and peaked in the 1974-83 period.  (O’Hearn, p.42)  However, there was little expansion and re-investment by existing TNCs.  The disadvantages of low and falling labour shares in output did not bring the advantages of increasing capital or profit shares, as these profits were invested abroad and not in Ireland (ERSI p.22, O’Grada p.44)

In addition, policies attracting TNCs were not followed through with policies ensuring that linkages between the TNCs and the local economy were established.  The fact that they were TNCs rather than autonomous firms meant that they sourced nearly all their physical inputs from sister companies abroad (O’Hearn p.46).  Most high-skill supplies required by foreign companies in Ireland were imported, sometimes at a high transportation cost penalty (O’Sullivan, p.366).

Development through multinationals created the problem of dependence.  The types of electronic assemblies and chemical production set up in the 60s and 70s were footloose and the core activities and technology development of multinational companies took place elsewhere.  Global restructuring meant scaling down or abandonment of activities in Ireland during the 80s and employment in all foreign sectors fell drastically (Haughton, p.41).  

The choice of putting emphasis on multinational-attraction rather than the alternatives outlined above could play a large part in explaining an “employ-me” culture as opposed to an innovative employment-creation culture, causing slower growth in the 60s, 70s and 80s.   However, technology can be adopted by multinational subsidiaries from their parents more easily than by domestic industries, and this has made convergence possible in the quickly changing world of the 90s.  That said, locally and domestically created development and growth may be slower, but can also be more steady.  Having decisions crucial to local development made by people with a long-term interest in the locality has many advantages.

Sectors and industries

	Manufacturing

The quality of intervention and the choice of the types of industries to encourage (hegemony) are also very important.  Incentives and subsidies were directed towards high-tech sectors such as chemicals and electronics.  However, even though the products produced by foreign companies in Ireland have been increasingly "high-tech" the operations that Irish people perform for these companies continued to be predominantly low-skilled before the 90s. (O’Sullivan, p.388)  

Recent growth can be connected with lessons learnt from past policy.  IDA emphasis has moved from hardware to software, which involves relatively skilled work.  This type of industry also has the advantage that workers can set up their own successful small businesses with skills they acquire, and so decreases dependency.

In addition, new emphasis is being put on the encouragement of innovation and small new enterprises, through the education system, awards, grants and training support schemes.

	Services

Irish experience largely upholds the hypothesis that growth in traded manufactured sectors has knock-on effects for services.   Demand from the manufacturing sector has meant that financial services and communications industries have experienced high growth.  Services as a whole comprised 55% of employment in 1990 in contrast to 39% in 1960  (O’Grada, p.170).  Knock-on effects in professional, teleservices, retail and catering services have been observed.  There has been growing productivity in these sectors due to computers and communication technology and high education levels.

	Agriculture

In the EU the prices of agricultural produce are subsidised to a high degree.  In 1999, Gross Agricultural Output was valued at £1,672m at market prices.   However, the factor cost of producing this output was £2,285m.  This was facilitated by subsidies of £898m (CSO, 1999).

Subsidies have masked the high costs of inputs such as chemical fertilisers and pesticides and prevented the development of more viable forms of agriculture such as through an understanding of predators and pests and using farm waste as fertiliser.  Unless agriculture can change and adopt more appropriate technology, the phasing out of quantity-based subsidies will cause a further decline.  This shows that despite increases in agricultural output, the permanent capacity of Ireland to produce food at reasonable market and environmental cost is not growing to the same extent.

Conclusion

Ireland’s growth performance over the last 50 years supports much of growth theory.  Technology and education both clearly have positive effects on growth, supporting endogenous growth hypotheses.  However, it is important to stress the quality of education and the appropriateness of technology.  The effects of investment on growth have also been demonstrated, but in a long-term rather than an immediate way.  The quality and ownership of investment whether public or private, domestic or foreign, direct or financial, are difficult to summarise but of extreme importance.  

For other countries or for future times, understandings of growth drawn from the Irish 50s to 90s experience, together with a framework of growth theory, can provide many insights, but careful consideration of differing and changing global and local circumstances is crucial.

Reference List

Central Statistics Office 1995 National Income and Expenditure Accounts Government Publications

Central Statistics Office December 1999 Statistical Release Government Publications

ERSI Medium Term Review 1999-2005

Eurostat Review 1986-1996

Eurostat Yearbook 97

Fingleton, John, “Competition and Efficiency in the Services Sector” in O’Hagen, J. 1995. The Economy of Ireland Gill and Macmillan: Dublin

Haughton, Jonaton. “The Historical Background” in O’Hagen, J. 1995. The Economy of Ireland Gill and Macmillan: Dublin

Krugmann  “Good news for Ireland: A geographical perspective” in Gray A.W. 1997 International Perspectives on the Irish Economy Indecon economic consultants: Dublin

Matthews, Alan, “Agricultural Competitiveness and Rural Development” in O’Hagen, J. 1995. The Economy of Ireland Gill and Macmillan: Dublin

O Grada, Cormac 1997. A rocky road: The Irish Economy since the 1920s Manchester University Press: Manchester

O Grada, Cormac and O’Rourke, Kevin “Economic Growth: Performance and Explanations” in O’Hagen, J. 1995. The Economy of Ireland Gill and Macmillan: Dublin

O’Hearn, Denis 1998 Inside the Celtic Tiger Pluto Press: London

O’Leary, Eoin 1997 A dissaggregated approach to the convergence question: evidence for EU countries

O’Sullivan, Mary “Manufacturing and Global Competition” in O’Hagen, J. 1995. The Economy of Ireland Gill and Macmillan: Dublin

Sachs, G. “Ireland’s growth strategy: Lessons for economic development” in Gray A.W. 1997 International Perspectives on the Irish Economy Indecon economic consultants: Dublin

Walsh, Brendan “Stabilisation and adjustment in a small open economy: Ireland, 1979-95” in 1996 Oxford Review of Economic Policy, Vol. 12 No 3 Oxford