Tuesday 27 September 2016

State's role in our economic performance over past century is profound

Published 31/03/2016 | 02:30

'Click to view full size graphic'
'Click to view full size graphic'

How has the economy of independent Ireland fared and what role did the State founded in 1922 have in economic performance? During a time of very extensive reflection on the past 100 years, this question has hardly been posed. It is well worth addressing.

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Measuring economies, even in today's world of massive computing power, is very tricky. That is because economies are very complex systems. Measuring them in the distant past is largely guesswork. Think, for instance, of GDP. It is the most commonly used measure of how much an economy is producing and how fast it is growing, but it was not even invented until decades after the state's founding.

Nor is there much in the way of other hard indicators for the early decades of the Irish state. But of those that exist, they support the commonly held view of a nation that was very poor by today's standards. They also show that prosperity was a long time coming.

Assessing what happened to the Irish economy in the State's first decades is probably best done by looking at the number of people at work.

When the first census was taken by the new State in 1926, it showed that 1.22 million people were at work. At the time of the 1951 census, exactly the same numbers were working. Zero growth over a quarter of a century is a pretty dismal record.

It is abundantly clear from this - and other indicators - that efforts to improve agricultural productivity and to industrialise met with only limited success. There is still a great deal of disagreement on why that was, but there is no doubt that the new State came into being at a tough time which made economic development difficult.

Before the new State's 10th birthday was marked, the Great Depression had taken hold internationally and protectionist policies were becoming the norm, something that suited the first Fianna Fáil government which believed strongly (and wrongly) in self-sufficiency. The Economic War with Britain was triggered soon afterwards. Not long after that, the Second World War broke out. Both conflicts throttled the Irish economy.

It could just about be argued that up to mid-century, Ireland had done relatively well given all the factors that had been militating against economic growth. But that certainly cannot be said of the 1950s.

Europe was then recovering rapidly from the most destructive conflict in its history and the democracies were all opening up to trade. But Ireland stuck with protectionism. The effects were disastrous. The numbers at work plummeted over the course of the 1950s by almost one tenth. We were falling ever further behind the rest of free Europe as it was on the cusp its first ever period of mass prosperity.

By the late 1950s the Irish State as a project was looking like a failure, and that was the case even if one believed that a frugal, spiritual life counted for more than prosperity. Many citizens clearly didn't share that view and exercised the exit option. So great was the flow of emigrants that Ireland was the only state on Earth to experience a fall in population in the 1950s, according to the data set of economic historian Angus Maddison (whether a weak economy pushed people abroad, or whether emigration drained the economy of the capacity to grow, is a subject this column will return to soon).

Eventually, sense prevailed. Direction was belatedly changed. The opening up of the economy in the 1960s yielded dividends. Most measures of prosperity began to improve and the 120-year period of almost uninterrupted population decline went into reverse from 1961. Joining the then EEC in the 1970s brought new opportunities, and, as the graphic shows, that decade saw the first sustained increase in jobs since independence.

But just as things began looking up, yet another huge self-inflicted blow was delivered. Reckless public spending followed by a sustained failure to bring the State's finances back from the brink of bankruptcy led to the 1980s being a lost decade. By the census of 1991, fewer people were at work than in 1926 or 1951. That amounted to the worst employment-creation record in the developed world.

But from the mid-1990s to the recent property crash, Ireland went to the other extreme - the Celtic Tiger generated the highest jobs growth of any OECD economy over that period. By all of the many measures that now exist, Ireland surged suddenly to bring itself up to the prosperity levels of our peers. Even when the recent crash and its many painful and lingering legacy effects are taken into account, most of the net gains of the Tiger era have been retained. We are no longer the laggard of North-West Europe.

Again, the debate about what caused the extraordinary lift-off in the 1990s, so clearly illustrated in the accompanying graphic, goes on. All economists agree that many factors were at play, including getting the public finances in order, the benefits of improved education kicking in, greater national competitiveness, the creation of the EU's single market and many others.

It is my view that entrepreneurialism is the single most important factor - we were poor for so long because we had too few successful companies and we got rich by importing our entrepreneurialism (mostly from America) in the form of foreign direct investment. It can be no coincidence that global flows of such investment increased six-fold over the 1990s, just when the Irish economy blasted off.

The role of foreign companies in the Irish economy - in terms of exports, employment and tax revenues - is without parallel in any other developed economy. In the unimaginable event that they all departed overnight, Ireland would suffer an economic collapse much greater in depth and duration than the property-related one recently suffered. Thankfully, it is almost impossible to conceive circumstances in which such a nightmare might come to pass. It is far more likely that the underlying strengths of the Irish economy will see further investment-attracting success.

The State that was established in 1922 can take credit for this enormous success. The then very unusual route to development of attracting foreign companies has been a State-led process over more than half-a-century. But it must also take a great deal of the blame for the three separate decades of disaster suffered since independence. I can think of no European state that has played as big a role - for ill and for good - in a national economy over the past century.

Irish Independent

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