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New roots for the Irish miracle?
By the turn of the century [2000], according to some reckonings, 70 percent of Irish manufactured exports were by US-owned firms...
This was, of course, encouraged by tax breaks and a form of industrial policy. But part of this process was a shift away from English investment:
Between 1960 and 1970 British-owned companies represented 22 percent of new industrial enterprises in Ireland. But by 1980 they accounted for less than 2 percent. Significantly, the proportion of exports to Britain from Ireland halved between 1956 and 1981.
In other words, Ireland found a more complementary economic partner, namely the United States. The Irish economic miracle is in part the American economic miracle.
That is from the often interesting Luck & the Irish: A Brief History of Change from 1970, by R.F. Foster. Here is a previous MR post on the Irish economic miracle.
Posted by Tyler Cowen on February 28, 2008 at 06:35 AM in Data Source | Permalink
Comments
I thought this was the standard view? The whole low corporate tax was pretty much meant to encourage American firms to put their European base in English-speaking Ireland.
Posted by: greatzamfir at Feb 28, 2008 6:58:19 AM
I am a Brit who lives in Ireland. I work for a large American multinational company.
The standard view greatzamfir refers to is the correct one, at least that is my experience.
The level of corporation tax in the Irish republic is 12.5%. That has big effects on companies looking to expand into Europe. When an American company wants to expand into Europe it is natural for them to go to an English speaking country, and preferably one where english is the common tongue. That means either the UK or the Irish republic. The major difference between these two places, from an outside investors point of view, is that profits are automatically ~18% higher in Ireland because of the lower corporation tax.
The same logic does not work for British companies. They already have a base in Europe, their base in Britain. They have little reason to go to Ireland except the tax rate, but to move they must sell fixed assets and buy again, not an easy thing to do. It would be easier to move part of the business to the far east or to contract it out.
Also, the Irish punt was tied to the British pound until 1979. After that it floated. The republic then joined the euro. So currency rate uncertainty that did not exist in the past became an issue.
I would be interested to know what the absolute levels of the investment mentioned were. I expect that in the past the level of investment by companies for any outside country was low.
Some mention the question of Irish discrimination against the English because of history. In practice though Ireland is quite tolerant and this is not a problem.
Posted by: Anonymous at Feb 28, 2008 7:55:02 AM
The whole low corporate tax was pretty much meant to encourage American firms to put their European base in English-speaking Ireland.
This is right. If you look at your click-through license for software from Microsoft or whomever, you'll find that the company is defined for purposes of the license as located in Dublin. A measurable chunk of Irish GDP is tax revenues from Microsoft alone.
There's also the broader question of why this growth didn't happen at least a generation earlier. This is more a question of politics than economics. Tom Garvin's Preventing the Future argues that the interlocking interests and ideological views of small farmers, the church, and the old Civil War political class combined to stop a strong education system from becoming established when it was needed.
Posted by: Kieran at Feb 28, 2008 11:44:19 AM
FDI was certainly a factor. So was tax policy. So was the increase in female labor force participation (this last spurred to some greater or lesser degree by declining birthrates).
But the overwhelming factor--utterly dwarfing or at least preceding these and all others--was Ireland's uniquely perfect positioning in the globalizing world economy in the late 80s.
In the '80s Ireland had a wildly underutilized economy, loaded with untapped human capital: tens of millions of underpaid, underemployed, well-educated, *english-speaking* workers. It was still heavily agrarian. Smart boys driving tractors and smart girls keeping house.
And Ireland had been investing heavily in education for *forty years.*
Add in a political system that was emerging from decades of strife and turmoil.
Now: import capital, management practices, technology, fiscal and monetary policy from more-developed nations. Guess what happens?
The *very first* regression correction any economist applies in empirical cross-country growth studies is for the thoroughly documented "convergence" phenomenon--less-developed (i.e. low-gdp[-per-capita]) economies tend to catch up with more-developed economies. This effect is especially powerful when the less-developed country is in close political, economic, and/or geographic proximity to more developed countries. Ireland had all three. Think: US and EU.
(I'm always especially stunned when the Catos of this world, blindly and without empirical support, attribute Ireland's rise to the small tax cuts it's made—they're still at 32% of GDP, compared to 27% in the U.S.)
More--including an unrestricted link to The Economist's article on Ireland's rise--here:
http://trueconservative.typepad.com/trueconservative/2007/12/government-ba-2.html
Posted by: Steve Roth at Feb 28, 2008 1:22:13 PM
encouraged by tax breaks and a form of industrial policy
What is the definition of "industrial policy?" I wouldn't think that a broad and neutral reduction of the tax rate and regulatory framework would count. What China is doing in manipulating tax rates to, first favor low-grade manufacturing, and then disfavor it while favoring R&D is more like industrial policy in the sense that it explicitly favors certain industries and tries to promote and discourage industries.
Posted by: guy in the veal calf office at Feb 28, 2008 2:44:32 PM
attribute Ireland's rise to the small tax cuts it's made—they're still at 32% of GDP
You're kidding right? Small tax cuts? 0% corporate tax rates for selected companies that they enticed to set up shop. 10% manufacturing corporate tax for manufacturers in certain enterprise zones (to be reset to the general rate soon now that the general rate has been dramtically lowered). 12.5% for general corporate taxation.
If you think those are high rates you really need to do some homework.
True, Ireland has high rates on personal income tax rates and they have a high sales tax (VAT), but those don't really deter investment. Ireland is actually following in the footsteps of the Scandanavian and Nordic countries. Those countries (excepting Iceland, the "Nordic Tiger") have insanely high personal income tax rates, and they all have insanely high sales taxes (VAT and various excise taxes on things like alcohol and gas), and yet their economies do rather well in spite of this apparent insanity. Why? Because they have relatively low corporate income taxes, or at least they were relatively low until other countries copied them and lowered them even more.
What great insight, that people won't set up or expand a business unless they make money, and the more money they make the more likely they are to set up shop. Too bad we don't try that in the US, instead we get candidates like Hillary Clinton campaigning on the explicit message of "taking away their profits", with "their" referring to corporations. Who will invest in the US instead of elsewhere (or nowhere at all) if this foolishness comes to pass?
Posted by: happyjuggler0 at Feb 28, 2008 2:52:15 PM
Here is a link for the Forbes Misery Index, which is basically a summing up of the tax rates (as opposed to taxes received as a % of GDP, which can be a lousy measure of how punitive taxes are) of a bunch of various taxes. Ireland is on the lower end of the scale, especially compared to other European countries.
So even by the metric of overall tax rates (instead of merely corporate tax rates) Ireland is lower tax than virtually all of "old Europe".
Posted by: happyjuggler0 at Feb 28, 2008 3:15:00 PM
"tens of millions of underpaid, underemployed, well-educated, *english-speaking* workers": Ireland? Tens of millions? Begorrah!
Posted by: dearieme at Feb 28, 2008 8:05:06 PM
And, the people are so hospitable. Not Canadian nice, perhaps, but much nicer than the average Euro.
Posted by: M. Hodak at Feb 28, 2008 10:39:34 PM
Hodak
Actually the Irish are nicer than Canadians, on the whole.
This isn't 'the American economic miracle' this is 'the European Community'.
Ireland is a nice place for American corporates to set up to export into the EC with low tax rates. They wouldn't be there if Europe wasn't a huge (and growing) market: almost as large in total GDP as the US.
Posted by: Valuethinker at Feb 29, 2008 8:53:00 AM
Kieran is close in looking for the roots of the Irish miracle. It was not luck, but it certainly was thoroughly Irish. To quote from an unpublished comment of mine:
"The fourth institutionalisation of a focus for the future that I met is in Ireland. ..... this informal network has, and has had for over 30 years, the higher Irish Civil Service as its core. That, and its success in modernising Ireland, makes it particularly interesting for me. When I first encountered it – in the early stages of modernisation when they were concentrating on reforming education – I was entranced to find that it was largely conducted as a running conversation on Irish rules. (To do 5 hours business, talk about something else for the first four; the business is then done in the following half hour.) The conversation simply enlarges when something has to be done – for example, when I first saw how the system worked, the relevant ecclesiastics were drawn in to ensure that as individual bishops who blocked educational reform retired, they were replaced by priests who would help the process. Because everyone important knows and simultaneously does not know what is going on, the issue of legitimation scarcely arises."
Once the educational foundation had been laid, the conversation that manages Ireland went on to other topics. The politicians were made to understand that they could get away with a good deal of personal corruption, but not pork barrel waste of scarce resources. A consistent strategy was operated of getting the most out of European policies by being helpful friends with everyone when a Brussels deal was being done, and picking up useful crumbs from all the resulting agreements. Politicians were educated in the need to cut headline corporate tax rates (overall burdens are a different matter) to attract overseas corporations. And so it continues on a host of different matters relevant to the future of the country.
Posted by: David Heigham at Feb 29, 2008 11:11:52 AM
dearieme: '"tens of millions of underpaid, underemployed, well-educated, *english-speaking* workers": Ireland? Tens of millions? Begorrah!'
Exactly, only 4.2million people live in the Republic of Ireland. (1.75million people live in Northern Ireland).
Valuethinker: 'almost as large in total GDP as the US.'
The Europe overall is much larger than the US in terms of GDP, the EU by itself is also larger.
Steve Roth. I mostly disagree with you. Certainly there are plenty of educated people in Ireland, and have been for many decades. There are plenty in Britain too. However, the change in corporation tax has made the crucial difference.
The overall tax burden is high, but also not really relevant. Companies don't look at individual taxes much when locating, they look at taxes that affect them. When the tax rate changed was when companies started moving to Ireland en masse.
The issue is, as happyjuggler0 says, is about distribution of taxation.
Posted by: Anonymous at Feb 29, 2008 11:12:13 AM
