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

What is the economic legacy of Northern Ireland’s Troubles?

The economy of Northern Ireland continues to be influenced by nearly 30 years of the Troubles. While there has been much economic improvement since the agreement finalised in Belfast on Good Friday 1998, the gains have been unevenly distributed.

The recent rioting in Northern Ireland (NI) contrasts with the 23rd anniversary of the signing of the Belfast (Good Friday) Agreement on 10 April. Looking at these events in juxtaposition provides a sharp reminder that while significant economic and social improvements have been made since 1998, much progress is still needed.

For example, so-called ‘peace lines’ that separate Catholic and Protestant neighbourhoods – Belfast’s monuments to a failure of reconciliation – have continued to be built since 1998. And the economic consequences of violence persist in a range of areas including mental health provision, the ‘brain drain’ and the duplication or boycotting of activities based on continuing sectarianism.

In this piece, we briefly survey research that has sought to measure the economic consequences of the Troubles, before moving on to discuss two major economic legacies of political instability: claims that the NI economy needs to be rebalanced; and the persistence of illegal paramilitaries.

How the Troubles affected Northern Ireland’s economy, 1969-98

Even if we can conclude that violence distorted economic activity in ways that we continue to live with in 2021, the long-run failings of the NI economy were (and are) not solely the result of the Troubles.

First, the productivity failures of NI long predate the eruption of civil unrest in the late 1960s (Birnie and Hitchens, 1999). Second, the onset of industrial decline also began before the Troubles: manufacturing employment shrank by approximately 15,000 jobs between 1949 and 1966 (Brownlow, 2020).Further, NI was far from the only formerly industrial region to experience painful adjustment during the 1970s and 1980s.

The economic consequences of violence have been estimated by a number of studies. Using the ‘value of a statistical life’ (VSL) approach, one suggests that £14 billion has been lost to cover personal injuries, material damages and law and order costs (Birnie and Hitchens, 1999).

Another more narrowly focused study found investment levels far more responsive to violence than employment (Fielding, 2003). The research indicated that a 10% increase in fatalities reduced investment in machinery and investment by about 5.6%; but there was no corresponding relationship between fatalities and employment.

While more recent work suggests that there was a GDP reduction equal to 10%, compared with a ‘no-Troubles’ baseline GDP. If additional grants related to the Troubles are included, then the scale of the reduction associated with violence increases to 15-20% (Dorsett, 2013).

These studies have used different approaches but broadly the economic costs can be summarised into three categories: direct costs from the violence; indirect costs; and indirect consequences arising from behavioural changes.

This categorisation can be seen in more detail in Table 1. Direct economic effects include damage to equipment or buildings as a result of violence. These can have a knock-on effect on businesses’ output, for example a firm may decide to spend money on security rather than new equipment or technology that would help to expand their business.

Table 1: Summary of the economic effects of violence

Examples of direct economic effects  
- Damage to business premises and equipment
- Damage to economic infrastructure
- Injuries to, or death of, members of the public, thereby reducing the stock of workers’ skills and experience (known as human capital)  
Examples of indirect economic effects:  
- Redirection of government expenditure towards heightened security and policing, including any consequences for the cost of doing business
- Redirection of business expenditure towards heightened security
-Redirection of government expenditure towards attracting or retaining business investment in the affected region  
Examples of behavioural changes:  
- Relocation of business investment away from the affected area
- Workers deciding to move away from the affected area
- Changes in the pattern of household expenditure (particularly a decrease in tourism)  
Source: adapted from unpublished work conducted by the author

What the table does not capture is that in addition to violence reducing the level of inward investment, it also tended to reduce the quality of investment projects that were undertaken. For example, low quality projects rejected elsewhere sometimes went to NI as a result of the desperation of policy-makers to create jobs. A famous example was the DeLorean debacle in the early 1980s (Brownlow, 2015; Brownlow, 2016).

The legacy of violence and the rebalancing issue

Turning from the economic repercussions of the Troubles to its continuing legacy, we can relate the previous discussion to the oft-made claim that the NI economy remains excessively dependent on the public sector. The private sector in 2021 accounts for 83% of all employee jobs in the UK, but only 73% in NI.

Claims that public sector dependence has damaged the NI economy are long-standing. It has been argued that the relatively large public sector has pushed wage and benefit levels above where they would otherwise be (Gibson, 1996). But the growth in employment levels in NI since the 1990s (and the observation that NI’s unemployment rate has been lower than the UK average in recent years), despite the persistence of a large public sector, tends to suggest that this proposed ‘crowding out’ mechanism is misleading.

To some extent the relatively large share of the public sector has been shaped by the political situation both during the Troubles and in the period since 1998. During the mid-1960s, reflecting the relative weakness of the NI economy, the financial support provided by the UK government, or fiscal transfer, was equivalent to around 7% of the region’s GDP.

But the need for greater security expenditure, more interventionist industrial policy as well as addressing issues of previous underinvestment in housing, education and public administration drove public sector spending upwards. As a result, by the early 1970s, the share of the fiscal transfer increased to approximately 17% of GDP and it averaged 18% between 1980 and 1999.

If one assumed that greater political stability brought about by the 1998 Belfast Agreement would have automatically created a public finance ‘peace dividend’, then the response is less easy to explain. Looking at the average net fiscal balance (tax income compared with government spending) for UK regions between 2000 and 16, the result for NI was equal to 19.9% as a share of regional GDP.

Since the late 1990s the share of transfer has hovered around 20% of GDP. This lack of a clear peace dividend is in part explicable in terms of NI’s relatively weak GDP. The two other poorest UK regions, the North East and Wales, have similarly high fiscal transfer figures over the same time period (14.6% and 17.9% respectively) (FitzGerald and Morgenroth, 2019).

Yet, in terms of the relative share of fiscal transfer, the level of GDP might not be the whole story. It has been suggested that tolerance of higher taxes increases during a crisis (such as wartime), and this does not fully reverse in its aftermath (Peacock and Wiseman, 1961)., It is unclear if this played a role during the Troubles, but the composition of public expenditure in NI remains very different from the rest of the UK.

For example, NI spends a much higher share on public housing and public order than elsewhere. The legacy of housing discrimination and the continuing need for policing and intelligence operations can help to explain these continued differences.

Education: a need for greater efficiency and equity

NI also spends more per head on education, yet much remains to be done to improve efficiency and equity in the education system. Particularly as evidence of educational underperformance persists, despite the higher spending.

The additional costs associated with maintaining religiously segregated education can go some way to explaining the imbalance between educational expenditures and outcomes. These poor educational outcomes are also unevenly spread, overlapping across gender, income and religion.

If we consider2017-18 data coveringthe social gradient of exam performance (that is, the percentage of school leavers with five or more GCSEs at grades A* to C including maths and English), 83% of Catholic girls from high-income backgrounds fit into this category, as do 82% Protestant girls with a similar background. In contrast, only 37% of Protestant boys from low-income backgrounds achieve this level, a figure that is appreciably lower than the next worst performing group: Catholic boys from low-income households at 47%.

Paramilitary ‘business models’ as a legacy of violence

A related legacy of the Troubles nearly a quarter of century after the political settlement is that illegal loyalist and republican paramilitaries have persisted but adapted what might be called their ‘business models’. Why has this been the case?

Although there is clearly an ideological aspect, economics suggests that some level of violence remains a way to ensure that paramilitaries keep a credible reputation for violence. This enables them to secure behavioural compliance and/or financial rewards. More ‘conventional’ forms of organised crime – such as involvement in armed robbery, protection rackets, money laundering, counterfeiting, smuggling and drug dealing – have at various times been used to fund a variety of paramilitary groups.

These paramilitaries had a business model that in the recent past was needed to coordinate labour (‘volunteers’) and capital inputs (weaponry). They also engaged in ‘training’ and ‘marketing’ activities, for example shows of strength at funerals. Given paramilitaries’ capacities in terms of credibly threatening violence, it is no surprise that most criminal gangs continue to have links with paramilitary groups.

Given the large sums involved in paramilitary revenue streams, such as drug dealing, some degree of ‘leakage’ of funds will occur. Paramilitaries, like ‘purer’ organised criminal gangs, will have members tempted to line their own pockets as well as funding other group-based activity.

The level of leakage is difficult to estimate; the organised crime task force has in the past suggested more than half of revenue goes to paramilitary activity. Paramilitaries thus may use violence to deter and/or punish such leakage. Different groups specialise in different business models. Republican groups have been more involved in oil frauds such as smuggling, laundering and rebated fuels. Within loyalism, the Ulster Volunteer Force has been less directly involved in drug dealing that Ulster Defence Association (UDA).

Operations in March by the Paramilitary Crime Task Force, involving more than 80 officers, including those from National Crime Agency and Police Service of Northern Ireland to disrupt the drug dealing activities of the South East Antrim UDA. This group is a breakaway faction of the UDA and has been heavily involved in organised crime and murders in recent years.

There has been some speculation about the role of the South East Antrim UDA in either directly fermenting (or at the very least indirectly ‘piggy backing’ on) the recent rioting. Whatever the truth, paramilitaries are a legacy of the Troubles. Their business models continue to distort economic and political development.

From business and government spending to education and even crime, the legacy of the Troubles continues to play a role in Northern Ireland today – and this is likely to continue for years to come.

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Author: Graham Brownlow
The author would like to thank his QUB colleague Tony Gallagher for the numbers on educational attainment.
Photo of Belfast murals by Ashley Lait

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