Short-term economic strategy will reap whirlwind

One has been reluctant to forecast rain on the Celtic Tiger's parade, but since the topic of the tiger's viability has finally been forced upon us by the European Commission, it seems the proper moment to offer the Government a bit of free advice.

It was, in fact, former Taoiseach Dr Garret FitzGerald who courageously made the first high-profile foray into the unknown when he suggested at the recent Kenmare Economic Workshop that Ireland's continued economic demands were being perceived by its European partners as "irritating" and "over the top".

Never has it been more true that a successful nation is one that fully understands its place in the world. Given that globalisation is a fact of contemporary life, individual states have essentially two choices: either protect domestic industries from external competition as best they can, or make something the rest of the world wants to buy. Of course, a clever combination of the two is also possible. Within the EU, it is no longer open to any member-state to protect itself from global competition through national measures.

What's more, Europe is clearly moving in the direction of greater integration into the world trading system. Ireland has opted to act as an idiosyncratic "receptor" economy, the basic terms of which are unsustainable given long-term political trends. In this unsustainability lurks great danger.

The State needed above all to encourage its people to think big thoughts about how to develop genuine, long-term Irish prosperity. The industrial policy successes of other small states should have been studied assiduously, and where appropriate, adapted to Irish conditions.

Instead, the State has relied almost exclusively on stupefyingly short-term planning. Largely through corporate tax breaks aimed at multinationals, it has chosen to stand for as long as it could at the crossroads of mobile global capital. By acting as a conduit for US high-tech goods into Europe, Ireland has in effect asked Europe to subsidise US competition.

There has been much debate about the role of structural funds in creating Ireland's wealth. It is clear, however, that the structural and cohesion funds have allowed Ireland to develop, on a cost-free basis, the infrastructure needed to funnel US industry into the State. It is unconscionable that successive governments have failed to make clear to the general population that the superlow corporate tax regime in Ireland is the necessary precondition for US inward investment; fine workforce or not, if the corporate tax rates approaches anything like a European average, the multinational jobs will go.

It is entirely unclear what types of industries policymakers are planning as replacements. Many have said that the multinationals are not all that influenced by tax rates. Yet the proof will come if and when the tax rate is forced to a European average. The precise legal status of the "agreement" between Ireland and the Commission for the internal harmonisation of corporate tax rates at 12.5 per cent is still unclear.

In my view it is extremely unfortunate the State accepted structural and cohesion funds, or indeed discovered the ubiquitous tax break, as heretical a statement as that may be in the current mood of economic invincibility. Had the State over the years been satisfied to measure its own economic development in modest increments, it might have had something more enduring to show. But the sad fact is that the Republic has simply managed to import its old emigration; it actually transferred, via the tax break, the US companies its sons and daughters might once have worked for in New Jersey and California.

It is often said by those who wish to discredit the notion of a national industry that in the global economy, multinationals are literally companies without homes, and thus it does not matter where they locate. This argument ignores two essential facts. The first is that, under such logic, the State's bid to embed multinationals will be doomed from the moment when basic conditions change. The same impulse that sent the companies to Ireland will just as quickly send them off again to India or Hungary. Secondly, while multinationals lack homes they do have centres of gravity in the places where they originally developed.

A national capacity to develop competitive indigenous industry is of incalculable value, in that it guarantees stocks of imaginative know-how that cannot be acquired from importing multinational jobs alone.

On all economic fronts, even in the face of gathering storm clouds, the level of political denial is extraordinary. As far as agriculture is concerned, government ministers appear to be shocked by the fact that the EU is demanding "re-nationalisation" of farm supports. But this information has been available in black and white for years.

What is the long-term plan for national agriculture? As with the long-term plan for national industry generally, one waits in vain for even a public recognition of the looming problem.

The real reason the Government is desperately considering "regionalising" this utterly un-regionalised State for purposes of capturing more EU funding is that it is fully aware that agriculture as a source of large-scale employment is disappearing, and that there is under present conditions no industrial replacement, nor any national plan for it.

Similarly, commentators are expressing shock and dismay that the EU institutions are now scrutinising various tax-incentive schemes, such as the urban and renewal programmes, as possible violations of state aids rules. It almost beggars belief that the State would on the one hand be creating yet more tax incentive schemes under which wealthy business people would be relieved of their duty to pay full taxes; and at the same time seeking yet more European money (which comes after all directly out of the pockets of European taxpayers) to fund public projects for which the State itself seems unwilling and unable to pay.

If Irish policymakers cannot answer the question "What happens without US investment in Ireland?", then Irish people have reason to be nervous. We should be thinking at least 20 years into the future, no matter how the picture must be adjusted over time. But the way events are proceeding, one wonders whether successive governments and policymakers are thinking much beyond the moment.

Dr Sara Dillon is a lecturer in International Trade Law at University College, Dublin.