How Ireland does it

The Irish economy (the "Celtic tiger") has become the envy of many others ever since it took off in the 1990s. Behind the miracle lies sensible fiscal policies, a wage accord with labor, and--surprise, surprise--a range of industrial policies. The New York Times explains how Enterprise Ireland, a government agency, works. The agency takes equity positions in startup firms, leases space in Midtown Manhattan to provide accommodation for young Irish firms looking to expand in the U.S., helps set up operations in China by hooking up Irish firms with Chinese government officials, and finances R&D.

Colm O’Gorman, who teaches entrepreneurship in master of business administration courses at Dublin City University, said the government agency is at the heart of several trends. Enterprise Ireland “supports research and development at Irish companies and universities,” Professor O’Gorman said, “and it is encouraging more women to become entrepreneurs, as the role of women has changed in Irish life.”

And oh, the corporate tax rate is only 12.5 percent, which must help too.

Comments

[Justin Rietz]

Perhaps you are being a bit tongue-in-cheek, but I would have led with the corporate tax rate :-)

[Carsten]

and maybe you should also mention the billions of euros of transfer payments that ireland received (and is now not willing to share with other countries).

[jsalvati]

I've heard a couple people claim (or imply) that industrial policies can be good for development. I presume that that the claim is that such policies provide some public good or correct some other market failure, but I have not seen an explanation of these public goods (or what the other market failures are) . Could you explain why industrial policies can work or point to someone who already does? I think such an explanation would go a long way towards convincing people with strong libertarian leanings to be more amenable to industrial policy. If no one has a good explanation for what those market failures are (which certainly doesn't automatically mean they don't exist) could you say that?

[Will Ambrosini]

On industrial policy, doesn't the effect size matter more than sign?

All countries have some measure of industrial policy. It's not surprising we'd find it countries that have done well economically.

[Henry Farrell]

The "billions of euros of transfer payments" is a complete canard - the serious estimates suggest that transfer payments had at most a quite moderate impact. Much more important were the canny development of industrial policy, a virtuous circle of returning-emigrants-with-skills boosting GDP and making it more attractive for yet more emigrants to return, access to European markets and the industrial peace that prevailed as a result of a proto-corporatist arrangement between unions, employers,government and a plethora of minor social partners.

The piece linked to is considerably better than the average US depiction of Ireland. For some reason, libertarian think tanks keep on depicting Ireland as an example of the success of free markets, which misses out on most of the real story. As an emigrant Irishman I've become an aficionado of this particular brand of globollocks - a piece by Tom Friedman at http://www.nytimes.com/2005/07/01/opinion/01friedman.html?ex=1277870400&en=342cb2bd52a44f4e&ei=5090&partner=rssuserland&emc=rss, from a couple of years back is a particularly fine example of the genre.

[wjd123]

"The Irish economy (the "Celtic tiger") has become the envy of many others ever since it took off in the 1990s. Behind the miracle lies sensible fiscal policies, a wage accord with labor, and--surprise, surprise--a range of industrial policies."--Dani Rodrik

For an interesting paper on "The Institutional Determinants of Wage Moderation" by Lucio Baccaro and Marco Simoni go here:

http://mitsloan.mit.edu/iwer/pdf/baccarosimoni.pdf

The conclusion is presented on page 40. They argue for how Ireland and Italy found a path to wage controls that didn't break with democracy and therefore produced a solution seen as legitimate. (Don't miss their footnote at the bottom of page 41.)

A non-democratic statement about the way to wage moderation is presented by Belgian's ACV at the bottom of page 30.

[Adam Jackson]

jsalvati - Dani's got a good paper on exactly this:

http://ksghome.harvard.edu/~drodrik/UNIDOSep.pdf

[Gallagher]

There is a very good book that came out last year titled "Foreign Investment, Development, and Globalization: Can Costa Rica become Ireland?" by economist Eva Paus (http://www.mtholyoke.edu/~epaus/book/newbook.html).

The book shows how Ireland was not only able to attract FDI but coupled attraction policy with industrial policy to build endogenous industrial capacity. Conversely, Costa Rica has attracted a lot of FDI (most notably Intel) but it has failed to translate into spillovers and economic growth because they dismantled industrial policies.

Interesting for Ireland, the source of funds for many of their industrial policies were through the social funds allocated through EU accession. Costa Rica, through the CAFTA agreement will get no such help.

[DC]

Ireland's workforce was boosted by the age structure of the population as well as greatly increased participation of women in the labour market. That the workforce was both well-educated and English speaking helped.

Also: German recession + monetary union = low interest rates = credit and property fuelled boom.

Anyone have any thoughts on these points?

[$9,000,000,000 Write Off]

I’ve shepherded many clients into Irish headquarters and plants, and the only attraction anyone mentioned was the low tax rate, cheap labor and access to European markets. Foreign investment, more than a shag pad in Manhattan, turned Ireland into a tiger.

Its the same three reasons that explain why 750,000 cars are made in Slovakia and pharmaceuticals were, until repeal of favorable tax laws, made in Puerto Rico. Its why the OECD wants to eliminate “tax competition”. Low taxes and cheap, unregulated labor markets in free trade zones are generating all of China’s growth. If I were president of Cuba or North Korea, I would (1) eliminate corporate tax, (2) annihilate any social safety net to force people to take jobs, (3) beg foreign investors to set up shop, and (4) shoot officials who demand bribes or promulgate self-aggrandizing regulation. This approach has delivered millions from poverty in the forgoing countries (although Ireland and Slovakia never shot anyone, I think).

[Jorge]

I agree with Will's point.

[jsalvati]

Adam Jackson - Awesome! Thanks.

[Per Kurowski]

Dani Rodrik “and--surprise, surprise--a range of industrial policies. The New York Times explains how Enterprise Ireland, a government agency, works.”

Absolutely anything could work but the question now is will it be able to keep on working. Success carries the seeds of its own disaster and this does seem very true when it comes to government agencies falling into the trap of thinking “now we know how to do developing”.

As I see it you have to be able to continuously mix, in equal proportions, the enthusiasm that comes from the certainty that one way or another you will figure out how to succeed, with the humility that comes with accepting at all times that you really haven’t the foggiest about how to do it.

[gabriel]

I also have assisted quite a few firms to set up shop and to transfer valuable amounts of know-how and other intangibles to Ireland. One of the major factors for this migration is the low corporate tax rate and the help that the Irish government provides to those firms to make the transition as profitable as possible.

[AK]

The tax rate is key. I've worked in finance at two very large US tech firms that have used transfer pricing to shift large profits to Ireland. I've seen internal sales reports that show large sales in the EU (France, UK, Germany, etc.) but other accting reports that show most of the EU area profits in Ireland -- a country with a very small population. Why would a company that does huge business with banks, for example, show more profits in Ireland than in England? Many companies have whole departments that focus on transfer pricing. The tax rate is key and it would be interesting to see more research on how much of the GDP increase in Ireland is a product of paper profits and how much is real economic activity.

[GreatZamfir]

Ak, I think Ireland is fairly often used as an example why GNP is a better measure for wealth than GDP. Irelands GNP is almost a quarter lower than its GDP, while for most countries these are very similar.

So, looking at GNP Ireland is not entirely the miracle economy it appears to be, but it is still showing lots of growth, and most people seem to agree that behind the paper numbers really is a healthy development.

The really tricky question is not how much of the growth is fictitious, since that's relatively easy to figure out from the numbers. What is crucial is how much of the real growth consists of 'spill-over' effects from the paper money flows. If companies put their paper headquarters in ireland for tax reasons, and then also put their real headquarters there, or when they invest profits in Ireland to avoid repatriation taxes, then the effects can well be real growth for the Irish.

But if it turns out this is the main reason for Ireland's growth, than the recipe might less useful for larger, non-English-speaking countries or countries without access to the EU.

It would interesting to see what effect Irish policies would hve in, say, Hungary.

[GreatZamfir]

Ak, I think Ireland is fairly often used as an example why GNP is a better measure for wealth than GDP. Irelands GNP is almost a quarter lower than its GDP, while for most countries these are very similar.

So, looking at GNP Ireland is not entirely the miracle economy it appears to be, but it is still showing lots of growth, and most people seem to agree that behind the paper numbers really is a healthy development.

The really tricky question is not how much of the growth is fictitious, since that's relatively easy to figure out from the numbers. What is crucial is how much of the real growth consists of 'spill-over' effects from the paper money flows. If companies put their paper headquarters in ireland for tax reasons, and then also put their real headquarters there, or when they invest profits in Ireland to avoid repatriation taxes, then the effects can well be real growth for the Irish.

But if it turns out this is the main reason for Ireland's growth, than the recipe might less useful for larger, non-English-speaking countries or countries without access to the EU.

It would interesting to see what effect Irish policies would hve in, say, Hungary.

[Tony]

For someone who lived through the Celtic Tiger I cant say I have benefited much from it. Sure Ireland has created more jobs in the last 15 years but so have most countries. Irelands GDP is unrealistic as a comparison with other countries as the figures are distorted by Transfer Payments from multinational corporations with an operation in Ireland funnelling billions of dollars through it. Take Google for example has an small operation in Ireland relative to its overall global operations yet it accounts for a huge amount of Googles income, the purpose of this is to reduce Googles tax bill.

During the Celtic Tiger years (which by the way is well and truly over) the Irish government got in lots of extra taxes. It agreed wage deals with state employees and everyone was happy. Now state employees are about 10% better paid than those in the private sector. The government is no longer collecting enough in taxes to pay all these employees and is now cutting back public expenditure in areas of health, education etc to balance their books.
The effect is that Ireland is drifting back to the mess that it spent the last 15 years dragging itself out of.

Sure Ireland probably wont ever revert to the disaster it was in the 80's however only a handfull of Irish benefited from the boom and most of that was capitalising on the increase in house prices but it has no left the country in a very imbalanced position where young couples cant afford a house and have to move miles away from where they grew up. Consequently people are spending hours in traffic getting to and from work. 3 hours a day in traffic is not unusual. Very poor childcare means many young families drop their kids to a creche at 6:30 or 7am and collect them at 7pm and have them in bed by 8pm so they can get them up the next day by 6am. Average creche costs €1,000 per child per month. Average mortgage costs about €2,000 per month. Thats about €70,000 gross salary before you buy food or clothes. Thats not much of a life and it is typical of thousands of young families.

So while the economic stats look great for Ireland the reality on the ground is very different.

[Alan S]

With regard to the key reason for Ireland's attractiveness for FDI, I recall reading a paper some years ago about the Irish software industry. ( http://siepr.stanford.edu/conferences/silicon_papers/aagtjuly.pdf). The authors calculated that the "productivity" of indigeneous Irish software firms in 1997 was about one-eighth that of Irish-based MNC's - amounting to over $500,000 per employee per year at that time. Their comment on this divergence is notably restrained: "This last comparison in part may be
due to the fact that fiscal incentives spur MNCs to increase their revenues in Ireland."

Tony's more general comments seem to echo the themes of David McWilliams' entertaining, if hastily written, recent book http://www.amazon.co.uk/Generation-Game-David-McWilliams/dp/0717142248