Close call for Irish economy on three occasions in short history
When the policy settings are right, the natural growth potential of the economy is impressive
The 1960s saw a change in direction of economic policy under Sean Lemass from that of his predecessor Eamon de Valera
In 1963 the independent Irish State was just over 40 years old and, over that period, its economic performance had, to say the least, been poor. Apart from the obvious difficulties of the second World War, the 1950s was a very disappointing decade.
While other economies were expanding strongly in a postwar reconstruction boom, the Irish economy performed poorly. Net outward migration averaged 40,000 a year and the population continued to decline. The population peaked at over 6.5 million in 1841 but had fallen to just 2.8 million by 1961.
Much of this reflected the failed policy of the De Valera governments in attempting to build a sustainable industrial base behind a wall of very high import tariffs. It was never likely that the small Irish market, in itself, would provide the size to enable industries to reap the natural benefits of economies of scale.
However, the seeds of a more successful period had already been sown before the start of the 1960s. In 1958 TK Whitaker, secretary of the Department of Finance, produced a seminal document, Economic Development. It argued that the Irish economy would only flourish by embracing the notion of free trade, ending protectionism and building an industrial base which was firmly focused on export markets.
The change in direction of policy, led by Whitaker and Seán Lemass, produced a relatively quick change of fortune. Net outward migration fell sharply in the 1960s and, for the first time, there was net inward migration during the 1970s. In spite of two oil crises at either end of that decade, the Irish economy managed an average GDP growth rate of almost 4.5 per cent a year during the 1970s.
Fiscal excesses of the Haughey era
However, just as we were getting it right, policymakers failed the economy again. The 1977 general election was fought, and won, promising very generous tax reductions. By the early 1980s, both the exchequer and balance of payments deficits amounted to mid-teen percentages of GNP, inflation and short-term interest rates exceeded 20 per cent, and government debt interest absorbed 30 per cent of tax revenue. The subsequent adjustment had, as expected, significant negative impacts on the economy. Annual GDP growth slowed to not much more than 1 per cent a year, the unemployment rate soared to more than 17 per cent and there was a resumption of net outward migration.
The Celtic Tiger
However, once these fiscal difficulties were behind us, many of the supply- side policies put in place during the 1960s and 1970s began to bear fruit: the focus on exports as a source of industrial growth, the benefits of the education reforms of the 1960s and the impact of the turnaround in migration flows in 1970s, as the increased birth rate of that decade was reflected in a strong flow of young, well-educated entrants into the labour force. A virtuous circle of positive feedback loops was now in place.