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Patrick Honohan: Ireland’s embrace of globalisation defines us

State has relied on sectors that have benefited from Irish tax system for 50 years

Patrick Honohan says Ireland has relied disproportionately on a small set of subsectors over the years, such as IT, pharma and software. Photograph: Cyril Byrne/The Irish Times.

One hundred years ago this week, Thomas Kettle, once a prominent and promising young activist in the Irish parliamentary party died on the Somme.

Although he never entered the nationalist pantheon, it is Kettle’s vision that – for good or ill – ultimately characterised Ireland’s economic destiny.

Determined to be free from the oppressive control of an alien power, nationalist thinkers on the eve of the Easter Rising sought a new approach to economic structures and policies, departing from the British-dominated regime.

But their visions differed, with three main strands exemplified by Connolly, Griffith and Kettle.

James Connolly aimed for a worker’s socialist republic very different from Britain, building on a syndicalist model, with clear goals for empowering workers and improving the overall wellbeing of the working class.

This would mean an end to the control exercised by British-dominated capitalism.

Arthur Griffith’s vision was focused more on improving the performance of the Irish business sector.

He deplored the dependence that came from the heavy reliance on agriculture (and specifically the cattle trade) for exports.

Far better to build up manufacturing: a regime of protective tariffs would allow Ireland to “gain possession of the home market.”

A third approach is exemplified by Thomas Kettle, whose idea of an economic divergence from Britain, in contrast to Griffith’s, embraced a wider internationaliasation: for Ireland to become deeply Irish, she must become more European.

Despite resonating in the Easter Rising Proclamation, Connolly’s vision was not pursued in economic policy post-independence.

At most it could be said that, through the eventual adoption of welfarist measures – reflecting, in a more limited way, the evolution of policy in Britain – some of the living standard improvements that he had envisaged for the working class were eventually achieved.

The Irish economy grossly underperformed in the first half-century of independence, when policy often reflected Griffith’s protectionist vision.

Economic performance improved decisively only when that approach was abandoned.

Close engagement with of all its economic neighbours in the global economy is the defining characteristic of Ireland’s later and much more successful performance.

And it resonates with Kettle’s vision.

Decline and recovery over a century

Aggregate economic performance of Ireland in the century after the Rising is a game of two halves.

This is most dramatically illustrated in the way in which the ratio of population in Ireland to that in Britain first continued to fall for decades, before recovering sharply back to where it was a century ago.

Relative to the UK, the Irish economy is today much larger than it was at independence.

But the opposite was the case in its first decades.

Average living standards in Ireland also dropped in international economic rankings for the first half-century.

It was only after first slipping back badly that the Irish economy eventually caught up and then rose beyond its starting position relative to the UK and other advanced economies.

It is not too violent a distortion of the economic history of the first decades after the Rising to say that stagnation resulted as various forms of Griffithian policy were pursued up to the 1950s.

(Of course, this elides much: ironically, although Griffith was pro-Treaty, it was the first anti-Treaty Fianna Fáil governments whose policies most clearly followed his prescriptions.)

It was fundamentally the shift from the Griffith to the Kettle model that determined the shift in Ireland’s trend rates of growth and employment.

Ireland joining the European Economic Community was an important staging post in this expansion.

Ironically, that step too was taken in the shadow of Britain. Indeed, Britain is very far from having become irrelevant to Ireland’s economic evolution in the past 43 years of EU membership.

Continued importance of Britain

A century ago, Ireland’s international trading and financial relationships were predominantly with Britain.

As Ireland widened its economic relations with the rest of the world, the relative importance of Britain in those relations did decline, albeit slowly.

But this widening of horizons did not mean turning away from its closest economic neighbour.

Although the UK’s share of Irish exports has fallen steadily (from 94 per cent of the total on the eve of the second World War to perhaps less than 15 per cent today by some measures), half of Ireland’s agricultural exports still go to the UK and it is the biggest customer for the rapidly growing export of services.

Overall, the employment content of exports to the UK is disproportionately high.

Even if the character and geographic pattern of migration flows have changed over the years, the influence of British labour market conditions on Ireland has remained remarkably strong.

Britain has been a vital recourse for many young people in the recent crisis: some 100,000 Irish people migrated to the UK between 2011 and 2015.

Indeed, the timing and extent of the recovery in Irish unemployment after the crisis seems to have been influenced as much by the evolution of unemployment in Britain as by the pick-up in job growth in Ireland (and, surprisingly, little by developments in the euro area).

While the US is more important in certain fields – notably as a source of inward direct investment – by any overall reckoning, the UK is still Ireland’s largest economic partner.

Globalisation: growth with volatility

A Kettle-style embracing of globalisation (without turning its back on Britain) has been the defining characteristic of the Irish economy in the past few decades.

This choice has not been trouble-free.

Even if Ireland has succeeded – especially, but not only, in the period 1994-2000 – in growing fast in the global economy, to which it had opened up so decisively, we hardly need to be reminded that Ireland’s economic development since 1916 has been marked by recurrent crises.

Indeed, Ireland has had more than its fair share of sizable business sector and governmental policy errors that were amplified by their international dimensions.

In addition to the recent banking collapse, there has been a catalogue of corporate failures, some of them on a scale which reflected the leverage that can only be generated by globalisation – for example Irish Shipping and GPA.

Global forces can amplify business and policy errors.

The privately controlled economy is not inherently stable and this calls for greater policy attention to vulnerabilities.

Specifically, small economies can be lured into excessive reliance on one line of business – a form of “monoculture” – by the power of globalisation, both in supply of resources and demand for what they are good at producing.

Ireland was prone to a form of monoculture a century ago also, based in those days (as Griffith bemoaned) on agriculture and specifically the cattle trade.

But the anti-Griffithian export-oriented industrial structure that has emerged over the past 50 years could also be considered to be a type of monoculture, as Ireland has relied disproportionately on a small set of subsectors: IT, pharma, software, whose characteristics are arguably not especially related to inherent Irish resources, but are characterised by an ability to benefit from the structure of Irish taxation: this is surely another vulnerability to be watched and managed.

The property and construction bubble of the 2000s can also be seen as displaying features of monoculture, pumped-up by unlimited access to global credit.

But limiting exposure to the global economy on a Griffithian basis would have entailed a substantial penalty in terms of overall living standards.

If less exposed to global shocks, that poorer semi-autarkic economy would still be a vulnerable economy: vulnerable to internal shocks, crop failures, domestic policy failures, and with thinner buffers to absorb the shocks.

Inequality

What would Connolly say today?

To be sure, Connolly too was an internationalist.

But he demanded a society where workers’ living standards were protected.

Even if globalisation has not had the lasting adverse structural impact on middle and lower income households in Ireland, that it seems to have had in the United States, the volatility that it can bring calls for societal buffers.

Ireland’s partial adoption of a British-style welfare state from the 1950s laid some foundations in this respect.

Clearly, Ireland is not a workers’ republic.

But Ireland’s tax and social protection policies have delivered a degree of inequality in net disposable income close to that in the UK (despite a more unequal distribution of market-sourced income).

In the recent crisis, although absolute poverty and deprivation indices clearly jumped, relative measures of inequality did not change by much.

The partial insulation of living standards in Ireland from market inequalities may reflect (albeit imperfectly) the degree to which and the ways in which Britain has addressed these issues over the past century.

In this respect also, the old connection was not altogether sundered.

Kettle

Thomas Kettle, once a prominent and promising young activist in the Irish parliamentary party and a professor at University College Dublin (UCD), was largely forgotten in the years following his death on the Somme on September 9th, 1916.

As he had foreseen, while the leaders of the Rising would be acclaimed as heroes and martyrs “I will go down – if I go down at all – as a bloody British officer”.

But, although he never entered the nationalist pantheon, it is Kettle’s vision that – for good or ill – ultimately characterised Ireland’s economic destiny.

This article is based on the 2016 Trinity College Dublin Henry Grattan Lecture delivered by Patrick Honohan in London earlier this year.

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