Questions and answers about coronavirus and the UK economy
Questions and answers about coronavirus and the UK economy

Ireland’s economy since independence: what lessons from the past 100 years?

A century ago, advocates and opponents of Irish independence presented arguments about the future of Ireland’s economy outside the UK. With the benefit of hindsight, we can see that predictions made by both sides have come to pass at different points over the past 100 years.

A hundred years after achieving independence from the UK, Ireland is a prosperous and open European democracy. In terms of GDP per capita, Ireland is the richest country in the European Union (EU) with the exception of Luxembourg (Eurostat, 2021). But for many years, economists have recognised that using GDP per capita to assess living standards is misleading in the Irish context due to the activities of foreign multinationals (Honohan, 2021).

When other, more appropriate measures – such as consumption or the total amount of domestic and foreign output claimed by Irish residents (or gross national income, GNI per capita) – are compared, Ireland is placed somewhere in the middle of the league table of European living standards. While the pace of Irish catch-up growth from the 1990s was indeed impressive, the story of the twentieth century is one of convergence, not exceptionalism (Ó Gráda and O’Rourke, 2021).

Of course, seeing Irish economic history since independence as a process of convergence does not imply a relentless and steady catch-up with the rest of Europe; nor does it imply that convergence was an inevitable consequence of independence. As with most economies viewed over a long period, Ireland experienced a number of ups and downs, with economic crises and periods of growth influenced by global economic conditions, as well as both appropriate and inappropriate policy decisions.

If Ireland’s economic destiny was not predetermined, then how were its economic prospects viewed in 1922?

Before independence, nationalist and unionist politicians and commentators contested the economic case for independence and the prospects for Irish prosperity outside the UK. In general, the economic arguments for and against Irish independence revolved around fiscal capacity (the new country being able to raise enough taxes), administrative competence and trade with Britain.

Irish nationalists had long complained of over-taxation and government mismanagement, and blamed free trade with Britain for Ireland’s lack of industrialisation outside the province of Ulster (Hynes, 2014; Barry, 2020). They compared Ireland’s population, area and revenue to those of similarly sized European nations such as Denmark, Portugal and Switzerland, and asked why Ireland could not take its place among them (Keown, 2016).

Meanwhile, unionists argued that ‘Home Rule for Ireland’ would lead to ‘Home Ruin’. They feared that a protectionist government in Dublin would erect tariffs, cutting off businesses from their main export market in Britain and discouraging investment. They also raised concerns over the quality of governance of an independent Irish state, warning that nationalists’ lack of expertise in fiscal matters would lead to extravagant and unsustainable public expenditure (Barry, 2020).

A hundred years on, we can attempt to assess these predictions with the benefit of considerable hindsight.

Ireland in 1922

Ireland on the eve of independence was predominantly a rural economy, save for the industrialised areas in the North East (Ó Gráda and O’Rourke, 2021). It was poorer than the rest of the UK, with a GDP per capita that was just 62% of Britain’s (Geary and Stark, 2019).

Yet living standards were comparable with other countries in Europe (Ó Gráda and O’Rourke, 2021). Finland, Norway, Sweden, Portugal and Spain all had lower GDP per capita than Ireland, while Denmark’s was not much greater (Geary and Stark, 2019).

During this time, Ireland’s external trade was dominated by Britain: to which it exported agricultural products and from which it imported manufactures. Trade policy was determined in London and this mean that Ireland effectively operated a free trade policy. Without a parliament of its own since the Act of Union of 1800, MPs were elected to the Westminster parliament to represent Irish interests, but economic policy was determined in London.

After a guerrilla war from 1919 to 1921, the Anglo-Irish Treaty created a free state with fiscal independence, covering 26 of Ireland’s 32 counties. The remaining six counties in the north remained part of the UK, as Northern Ireland.

How did independent Ireland manage fiscal policy?

Despite unionist fears about the fiscal capacity of an independent Ireland, Irish fiscal policy was decidedly conservative for its first 50 years of independence. Public finances were helped significantly by the effective cancellation of Ireland’s national debt. After a period of negotiation, a substantial proportion of Irish debt was written-off in 1925, although the political price of formally accepting the existing border with Northern Ireland was high (Fitzgerald and Kenny, 2020).

Between the 1920s and the 1950s, budget deficits were controlled, and debt interest rarely exceeded 2% of the total value of goods and services produced in the country (its gross national product, GNP) (Fitzgerald and Kenny, 2019). Indeed the economic crisis of the 1950s was compounded by excessive fiscal caution rather than excess (Ó Gráda and O’Rourke, 2021).

A decisive turning point came in 1972, when policy-makers first deliberately budgeted for spending more than they could collect in tax revenue (a current account deficit). Once large current account deficits emerged, they proved extremely difficult to close (Whitaker, 1983).

The 1977 government was elected on promises of a dramatic fiscal expansion, and the initially low national debt burden grew rapidly into the 1980s. High interest rates and political inactivity obstructed any efforts to bring the crisis under control, as unemployment and emigration surged.

Although politicians made a concerted attempt to address another fiscal crisis in 1987, the biggest contributory factor to fiscal stabilisation was a marked uptick in economic growth, aided by the creation of the EU’s ‘single European market’ and a favourable international climate. The deficit fell rapidly: from 9.1% of GNP in 1987 to just 3.1% the following year.

In the 1990s, Ireland drew international attention for its outstanding growth record, underpinned by enormous foreign investment inflows and moderate wage increases. Between 1990 and 2017, the total number at work almost doubled, from 1.15 million to 2.22 million (OECD, 2021). While current and capital expenditure increased rapidly, rapid output growth ensured that total state spending fell to just 33% of GNP by the turn of the millennium (Gov.ie, 2021).

It was at about this juncture, however, that the export-led growth of the 1990s transitioned to the property bubble of the post-millennial period. During the 2000s, while policy-makers consistently ran budget surpluses, the Irish Exchequer became increasingly reliant on transient revenue from the property boom. When this evaporated, it left a gulf between tax receipts and public spending obligations. This, in tandem with enormous guaranteed bank liabilities, pushed the state into a bailout in November 2010.

What happened to Irish trade?

One of the most striking features of Ireland’s external trade over the last 100 years is the transformation of its direction. In the early years of independence, Irish trade was dominated by trade with the UK, which was the destination of over 50% of Irish exports as late as the 1970s – see Figure 1. Today, however, less than 10% of Irish exports go to the UK.

Yet Britain remains the main destination for Irish agricultural products, and many employment-intensive sectors such as food processing rely on this relationship, highlighting the problems that any Brexit-induced reduction in trade between the two countries would present. The diversification of Irish trading partners, particularly with respect to the countries of the EU, is also clear (see Figure 2) and has been identified as the foundation of modern Irish prosperity (O’Rourke, 2017).

Figure 1: Ireland’s trade with the UK, 1924-2020

Source: Trade and Shipping Statistics of Ireland and Comtrade, courtesy of John O’Brien (@jlpobrien)

Figure 2: Ireland’s trade with the EU, 1924-2020

Source: Trade and Shipping Statistics of Ireland and Comtrade, courtesy of John O’Brien (@jlpobrien)

On the basis of reducing economic dependence on Britain, pre-independence nationalist commentators might have found some vindication based on this pathway to prosperity. But to draw a line between Irish independence and export-led growth would be to oversimplify the situation.

If unionist arguments against independence on future trade policy had been evaluated at other points in the last 100 years, a very different conclusion on Irish trade might have been reached. Engaging in a trade war with Britain was one of the first things that the newly elected Fianna Fáil-led government undertook in the 1930s (O’Rourke, 1991).

Subsequently, Ireland experimented with replacing foreign goods and services with domestic substitutes – policies known as ‘import substitution industrialisation’. Although these policies were effective in increasing industrial employment, they proved unsuccessful as a route to sustained economic growth (Bielenberg and Ryan, 2013). If independence was necessary for Ireland’s changed trading relationship with the rest of the world, it certainly was not sufficient.

Benchmarking?

Despite the ups and downs of the past 100 years, Ireland’s performance has been broadly in line with what could be expected considering its opening position. Set alongside European contemporaries, it experienced a comparable level of growth relative to initial income level from 1926 to 2001.

Of course, the long-term view obscures considerable volatility, and Ireland only caught up with the expected trend during the boom years of the 1990s (O’Rourke, 2017). Ireland did eventually emulate other small European economies, but not for many decades after achieving independence.

An alternative benchmark for Irish performance post-independence is other peripheral regions that remained part of the UK. Figure 3 shows Irish, Northern Irish and Welsh GDP per capita as a share of Scottish GDP per capita at different points over the twentieth century.

It is clear that Irish living standards fell further behind in the first decades following independence, only returning to its pre-independence relative position by around 1980. Convergence with Scottish GDP per capita in the decades since then has been dramatic. Convergence did not occur for Northern Ireland: today, it is in a similar position relative to Scotland as it was in 1925.

Figure 3: Relative GDP per capita (Scotland = 100), 1900-2000

Source: Rosés-Wolf database on regional GDP (version 6, 2020)

What is the final verdict?

Although GDP is a crude measure of wellbeing, there are few that would argue that economic growth has not improved the lives of Irish people in the last few decades. Indeed, that Ireland has become a nation where more people enter than leave – positive net migration – after decades of emigration can be celebrated as the fruits of economic success.

But is it right simply to divide Irish economic history of the last 100 years neatly into two periods: a ‘poor’ period of relative underperformance; and a later ‘good’ period of convergence?

Before passing judgement, it should be acknowledged that the early Irish state, born into the turbulent years between the two world wars, remained a democratic country – an achievement not many new democracies that emerged during the same period can emulate. Looking at more recent history, economic growth and prosperity have not lessened Ireland’s capacity for economic policy mistakes either, as the housing bubble and banking crisis of the late 2010s remind us.

As Ireland looks towards the next 100 years and faces the immediate challenges of Brexit and the fallout from Covid-19, the hope is that lessons can be learned from both the failures and the successes of Ireland’s first century of independence.

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Authors: Robin Adams, Alan de Bromhead, and Ciarán Casey
Photo by Andrei Carina on Unsplash
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