Irish Economy Research Papers
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In the past decade the Irish economy has improved dramatically, with the standard of living and employment reversing its long-standing downward trend. This rapid economic growth in Ireland was the result of the development of an industrial core of firms specializing in information technology, software development and financial services. These firms clustered in Dublin during the 1990s as the result of the convergence of a number of factors:
- Geographic location
- Education level of the population
- Transportation and communication infrastructure
- Government policies that led to low inflation
- An attitude of cooperation with both trade unions and business
- Direct business incentives
The generally business-friendly climate fostered by the government further augmented Ireland’s economic growth by making Dublin one of the more attractive locations for firms seeking to establish a presence in the European Union (EU) through inviting foreign direct investment as well as assisting entrepreneurs in start-up operations. The direct role of the government in fostering the growth of targeted industries in Ireland makes the phenomenon different from most other similar industry clusters in the industrialized nations, which are largely the outcome of decision-making in the private sector. The outcome of this process was a significant decrease in unemployment and a sharp increase in the ability of the nation to both domestically form capital and to attract multi-national investors.
One of the key factors in drawing specific industries such as information technology and financial services to Ireland is the education level of the population, which is high even by European standards. The emphasis of the education system is to produce large numbers of technicians and Bachelors level engineers that specialize in applied industrial applications. This provides a stable base of technical skills to support a broad range of industrial activity. The educational system in the past decade has also emphasized computer literacy, which has produced one of the highest levels of computer use in the EU and operates as incentive for businesses that highly depend on information technology to locate in Ireland.
The Historical Rise of the Irish Economy in the 1980's
During the 1980s, the government of Ireland recognized that industrial growth and prosperity are closely tied to the infrastructure of the nation and took the initiative to insure that it met the standards of any type of multinational industry. For the past few decades, government policy has concentrated on improving and maintaining the transportation and communications networks throughout the nation and particularly around Dublin, which is viewed as the heart of the nation’s population and industrial base. Telecom Eireann, the state owned telephone company, has installed one of the most sophisticated fiber optics telephone networks in the world, for which the government spent $11 billion during the 1980s. In addition, its trans-Atlantic fiber-optics cable allows rapid communications links for e-commerce from North America, which has proved an essential element for growth in the information technology sector. The essence of the strategy that the trans-Atlantic cable makes possible is to present Ireland to American firms as not only a gateway to the EU, but also as a place that permits the retention of the essential character of the American parent firm through a reliable instantaneous communications system.
An important element in Ireland’s success in attracting business operations is the mature Irish banking system that is stable, international in its outlook, and well capitalized. The two largest banks, the Allied Irish Bank and the Bank of Ireland, engage in extensive business financing. They have branches in most industrialized nations, both inside the EU and overseas. In addition, these banks own subsidiaries in several nations, which can operate to steer business and financing toward Ireland.
At the same time that the government established policies to foster industrial growth, it also altered its fiscal and monetary policies. From the time of Ireland’s formation in 1921 to the late 1980s, the government had engaged in extensive borrowing in order to finance social programs. By the end of the 1980s, the public debt had grown so large that the relatively small industrial and agricultural sectors were unable to support it. The nation had to depend on foreign investors to finance its debt. In order to attract these investors, however, the nation had to set very high interest rates, which peaked at approximately 15%. While this attracted the foreign investment necessary to finance its debt, it hampered the capital formation process of domestic business by limiting their ability to borrow money. By the early 1990s, the government adopted an austerity budget, trimming its social expenditures and lowering the interest rate as its debt burden decreased. As a result, the interest rate decreased to relatively low range of 3% to 5%, which stimulated business formation and domestic consumption. In the long-term, the increase in business activity in the nation provided sufficient tax revenues to finance government borrowing without resorting to an increase in interest rate in order to attract foreign lenders.
In general, Ireland has also economically benefited from its membership in the EU. The EU had designed Ireland as a member nation in need of economic assistance prior to the current economic boom. As a result, Ireland has received a large number of economic concessions and subsidies from the EU, which helped to stimulate its economy over the long term. While many of these concessions and subsidies are gradually being eliminated, the nation continues to receive direct financial benefits from its membership in the EU. At the same time, however, membership in the EU has led Ireland to adopt the Euro as its currency, which in effect reduces the ability of the Irish government to directly control monetary policy. The value of the Euro is contingent on the monetary and fiscal policies of the EU member nations that have adopted the currency as a whole, with Ireland representing a relatively small component. Although the EU sets guidelines for policy, it does not have full power to enforce adherence to recommended policy. As a result, Ireland could again face serious fiscal difficulties due to the actions of other EU member nations. Currently, the Euro is relatively weak against the dollar, which provides an export incentive for Irish goods to the United States while attracting foreign direct investment.
The Irish economy has become so strong that the government anticipates the nation will require an additional 200,000 skilled workers by the year 2006. To remedy this problem, Ireland is encouraging Irish émigrés living in other nations to return to Ireland. The government is also likely to permit large-scale immigration of people from other nations. The labor shortage is causing upward pressure on wages, and has created a significant number of openings in positions deemed critical for the operation of industry, particularly in information technology. In the next decade, it is likely that the general economic growth of Ireland area will continue, spurred by its increasing dominance of financial, software and information services in the EU. The pace of growth, however, will be slower because of the inherent limitations created by the need for additional infrastructure development to accommodate growth.