The Irish Miracle: How Ireland Went from Economic Basket Case to Masterpiece – UPDATE 2010!
Posted by iusbvision on December 6, 2006
[See our Nov. 2010 update below – Editor]
Of all the European Union, Ireland is now the place to be. In the 1970’s emigration from Ireland was at near record levels, but since 2000 over 50% of new immigrants are returning Irish citizens and 40% of its population is under 30 years old. According to the Seidman Research Institute of Arizona State University, Ireland’s GDP growth in 2003 is 136% higher than the EU 15 average; in 1987 it was 69% of the EU 15 average. Unemployment dropped from 17% in 1987 to 4% today, during the 1990’s Ireland’s economic growth averaged 6.9% (for those who don’t know economics well, that is an amazing growth rate) and after the tech bubble busted, Ireland’s growth rate still maintained over 4.5%. Government debt shrank as well, falling from 112% of GDP to 33%. Ireland’s standard of living has also surpassed most of Europe.
So how did Ireland do it? First, a warning, if you have Marxist leanings the facts I am about to present to you are going to prove to be tremendously inconvenient and may even put you into shock. You have been warned.
In 1987 the government started to embrace major reforms. The government realized that it could no longer be the people’s employer and enacted massive cuts in spending, slashing many government programs and agencies from 3-10%. According to The Economist Magazine, Ireland cut its capital spending by 16%.
The government created two highly aggressive and somewhat politically independent agencies that are made up of people from government and the private sector; one agency whose sole purpose is to encourage business and investment to stay in Ireland and the other is a go gettem’ agency that is designed to bring foreign investment and business into Ireland. These agencies have the authority to get tasks done. When Apple Computers was struggling in the late 1990’s it had threatened almost 2000 manufacturing jobs in Ireland. The agencies cut the taxes for the struggling Apple to help it deal with the competition and to prevent it from taking the jobs elsewhere.
The agencies act as a partner to private investment, they find the locations that meet the company’s needs and do much of that opening hard work for them. Locally, the City of Mishawaka has a similar program. Ever wonder why so much business has moved to Mishawaka? When the South Bend Tribune needed a new site to put its newspaper, radio and TV into one facility, the City of South Bend was not eager to help the Tribune out. Mishawaka on the other hand just asked the Tribune how much space they needed and what kind of infrastructure they needed in place to support the business. The city did the work to find and prepare a proper location, so the Tribune and its subsidiaries are moving to Mishawaka. It is amazing what can be accomplished when an ideologically based envy and resentment of wealth and the private sector do not get in the way of good government.
A business is not an island unto itself, it needs smart and talented people to hire and Ireland heard the call. Ireland built universities in 10 enterprise zones where they wanted foreign business to settle in. The private sector works with the universities to make sure that the educational needs of the local employers are met. Ireland also offers a special tax break for those with skills that are in demand and to those with exceptional talent such as many famed musicians and actors and other artists. This policy helps to attract talent from all over the world.
Ireland knew that they had to bring in foreign companies and investment fast to get the economic ball rolling so they created a tax haven. Ireland lowered the corporate income tax rate to 10% for manufacturing companies or companies that trade services internationally and would move into a selected enterprise zone. The EU had a fit over this move (winy socialist’s that they are) saying that Ireland’s tax policy was not fair. So Ireland agreed to no longer offer the 10% tax rate to selected business and opted to lower the corporate income tax top rate to 12.5% for everyone. By comparison, according to the Tax Foundation, our corporate income tax is 39.3% and American companies pay an effective rate of 37.7%. Even leftist politician John Kerry said in the 2004 campaign that our corporate income tax is too high and that we need to lower it to attract some business back that has gone over seas.
Over 1000 international companies have moved facilities into Ireland since 1987. Names like Motorola, Dell, Wyeth, Intel, Microsoft, Citigroup, IBM and pharmaceuticals such as Bristol-Myers Squibb all have major operations in Ireland. I am old enough to remember when big pharmaceuticals such as Bayer, Alka-Seltzer, Whitehall, and Miles all had their major manufacturing and R&D right here in Northern Indiana and now they are almost all gone. Ireland has embraced an aggressive, pro-growth, pro-innovation culture that we can learn from.
The last piece of the puzzle that has made Ireland such an economic success is that it has been steadily dropping personal income tax rates over the years; dropping from a 65% top marginal rate (for the ultra wealthy) in 1985, to 56% in 1989, to 46% in 2000, to 44% as of 2001. Aside from the top marginal rates, the standard income tax rate was dropped to 32% in 1989, to 24% in 2000, to 22% in 2001 and I expect all of these tax rates to keep falling. Ireland is trying to find the optimal tax rates that both promote and encourage investment and economic growth while still bringing in growing revenues to the government (for those of you who are economics majors I think we can say that Ireland is riding the Laffer Curve).
Should we demonize Ireland as a bunch of selfish and greedy consumers who sit idly by while their government engages in tax giveaways to the rich, or should we examine Ireland’s growing standard of living, top notch education, and low unemployment and admire them for the lightning fast turnaround from an economic basket case to a prosperous example that the world could follow?
UPDATE – After so many years of prosperity and doing it right what happened in Ireland?
What happened to Ireland is the danger that can result from economic prosperity that lasts for a long time, namely, the people and the politicians become complacent. As the economic good times roll the government gets awash in money and the people stop keeping the government’s feet to the fire. When people become complacent it becomes easy to say yes to knew spending, the left who is driven mad by the prosperity driven by capitalism, adopt a new narrative, “As wealthy as we are and as good as the economy is cant we help XX and cant we do XX program and YY program”? The next thing you know government is going into debt, regulations begin to stifle wealth creation, and as the cost of government rose less wealth moved to Ireland.
This is an easy trap to fall into. This is why the people must have Tea Party like vigilance when it comes to economic policy and restraining government even when times are good. Granted much of what has hit Ireland was due to the global economic collapse that was largely the fault of government manipulation of the mortgage and securities market in the United States, but Ireland had begun to forget what economic policies made them the envy of Europe in the first place.