The economy is still on course but the fruits of globalisation could yet turn sour

Investment prospects remain good but the geopolitical outlook clouds thehorizon, writes Dan O'Brien

Over the past decade the world has watched Ireland exploit its position at the centre of the transatlantic economy with awe and envy. By successfully hitching its wagon to the locomotive of globalisation, the Republic has become a model for states everywhere seeking a fast track to prosperity.

And nowhere is this more the case than in the State's success in attracting foreign investment.

But as the domestic economy changes, can Ireland continue to lure leading-edge companies to set up shop here? Recent job announcements in these pages suggest that it can, as do the numbers released last week by the Central Statistics Office. They show that foreign direct investment (FDI) rose last year, despite a fall in the amount up for grabs (we estimate that global flows declined by 22 per cent in 2001).

And despite plenty of challenges, the Republic looks set to continue to attract a disproportionate share of the kind of jobs-rich international investment that has made the foreign-owned sector such a powerful motor of the economy.

Though much is made of the narrowing of policy options in a globalised world and the loss of control over the exchange rate and the price of money since adopting the euro, most of the things that really matter in ensuring prosperity over the long term remain nationally-decided.

First is stability. Predictable policies, and a stable political context in which to frame them, are crucial in attracting capital.

Fully integrated into this EU system of governance, unfettered access to the largest market in the world and the investment-friendly policies of successive governments have combined to make Ireland one of the most stable, predictable and therefore profitable European countries in which to do business. This is not about to change. The broad thrust of economic policy is supported by all the main political parties.

Another key competitive advantage is the nimbleness of the State. As one of the most efficient and transparent civil services in Europe the smoothness of business/government interface is matched in few places elsewhere.

As regards labour costs, though hourly wage rates have risen sharply in recent years Ireland remains well below the average in western Europe. Moreover, pay is far less important an issue for the sort of firms Ireland has been so successful at attracting because they tend to be highly capital intensive. As a result their wage bill accounts for a smaller share of total costs than in labour intensive industries whose survival can be threatened by small changes in pay rates.

In terms of labour market conditions more generally, the outlook for employers, both foreign and indigenous, has improved over the past year.

Despite unemployment remaining below 5 per cent, the loosening in the labour market means the skills shortages which were a threat to FDI have all but disappeared. Add a flexible labour market, continued investment in education and good demographics and the outlook is rosier.

Few in Ireland would deny the importance of a low rate of profits tax as a carrot for foreign companies, and many fear for it as voices in the EU demand an end to fiscal competition. But this is very unlikely. As long as the British hold out on the issue in Europe, there will be no imposition of a higher rate of corporation tax on anyone.

Another threat sometimes mentioned is the accession of former communist countries to the EU in May next year. This is greatly exaggerated. Earlier expansions have not triggered FDI booms in the new arrivals above and beyond the levels of FDI growth in the wider European economy.

Furthermore, survey evidence suggests that multinationals have already factored enlargement into their long-term investment plans and will not be dashing eastwards on May 1st next year.

So if things domestically look sound, what of the international picture? Although our central forecast is that global flows of FDI will recover gradually, returning to their 2000 peak in about five years, the big uncertainty is political. Though Saddam is gone, there is more geopolitical risk abroad than at any time in decades.

The threat of further conflagration in the Middle-East, a nuclear stand-off on the Korean peninsula, tattered transatlantic relations and a question mark over US commitment to economic multilateralism have all combined to undermine confidence and raise fears that the steady internationalisation of economic activity over decades may be threatened.

While any rolling back of the globalisation process would be disastrous for the entire world, Ireland would inevitably feel the repercussions more than most.

Dan O'Brien is a senior editor at the Economist Intelligence Unit and author of the unit's reports on Ireland.