For long the laggard of Europe, the Irish economy during the late 1990s was the most successful, not just in the European Union (EU), but in the entire Organisation for Economic Co-operation and Development (OECD). For the period between 1995 and 2000, gross domestic product (GDP) grew in volume at an average annual rate of 10 percent, far ahead of any other industrial country, including the United States and Japan. In terms of GDP per capita, Ireland passed the United Kingdom in 1997. Its GDP per head in 1999 was $25,200 in PPPs (purchasing-power parities, which allow for currency fluctuations and eliminate price differentials between countries), placing Ireland eighth among OECD economies. The value of GDP in 2000 was E103.5 billion, equivalent to E27, 322 per capita, more than 115 percent of the EU average.
GDP is the measure of a country's output; gross national product (GNP) quantifies income and is a truer reflection of the wealth retained in an economy. For most major industrial countries the two figures are broadly comparable. But in Ireland's case GNP is typically significantly lower than GDP: Capital outflows from the large foreign-owned sector are not matched by inflows of repatriated earnings from the relatively small corps of Irish subsidiaries overseas. Irish per capita GNP increased from 62 percent of the EU average in 1973 to 93 percent in 2000. The principal problems of the economy—high unemployment and mounting government debt—have disappeared. The unemployment rate dropped from 15.7 percent in 1993 to 3.6 percent in 2001; government debt shrank from over 120 percent of GDP in 1987 to 34 percent in 2001. The OECD, not given to hyperbole, has described Ireland's recent economic performance as "stunning." Growth is likely to slow to more sustainable levels of 4 to 5 percent for the period to 2010.
The defining characteristic of the modern Irish economy is its openness. Ireland relies heavily on trade and foreign investment, with the combined value of imports and exports equivalent to about 140 percent of GDP, one of the highest such ratios in the world. It was not always so. When Ireland became independent in 1922, it was essentially an agricultural country. Inevitably perhaps, the newly independent nation, seeking to be self-sufficient, adopted a policy of economic nationalism. High tariffs on imports, quotas, and a policy of import substitution were designed to protect the nascent inward-looking economy. Despite sporadic periods of economic growth, this approach failed. At the beginning of the 1950s the continuing flight from the land, high unemployment, massive emigration, economic stagnation, and a balance-of-payments crisis led to a fundamental shift in policy.
Throughout the 1950s and 1960s the process of opening up the Irish economy to international trade and foreign investment gathered momentum. The architects of the volte-face included most notably T. K. Whitaker, secretary of the Department of Finance and subsequently governor of the Central Bank, and Seán Lemass as industry minister and later prime minister (taoiseach). By 1952 the newly established Irish Trade Board was promoting exports. The Industrial and Development Authority (IDA), set up in 1949, was given the mandate to create jobs by promoting investment by indigenous and foreign firms, offering capital grants and tax breaks as incentives. In 1965 Ireland agreed to a free-trade area with Britain; in 1967 it joined the General Agreement on Tariffs and Trade (GATT); and the apotheosis of the new policy came in 1973 when Ireland joined the European Economic Community (EEC), the precursor of the European Union.
The Celtic Tiger economy of the 1990s has been hailed as an overnight phenomenon, but modern Irish development began in the 1960s as a result of these radical policy changes, in tandem with massive investment in technological education and communications and a surge of inward investment attracted by competitive costs; an available, efficient, English-speaking workforce; investment incentives, including a low rate of corporation tax; and free access to the vast European market.
But free trade initially was a two-edged sword. While foreign direct investment (FDI) grew by an average of 27 percent a year between 1973 and 1981, domestic companies in traditional sectors—textiles, apparel, and engineering—were decimated by the exposure to competition. The oil crisis of the 1970s and mounting government debt in the 1980s further diluted the benefits of EU membership. But the economy did grow by over 3 percent a year between 1973 and 1988.
By 1987 the public finances were in crisis; government debt was equivalent to an untenable 120 percent of GDP. A newly elected government made swingeing cuts in public expenditure and negotiated the first in a series of national wage agreements with unions and employers. These agreements were in effect social contracts, with moderate wage increases linked to tax cuts and enhanced spending on agreed social and economic programs. The agreements brought stability to industrial relations, maintained Ireland's competitiveness, and bolstered investor confidence. The year 1987 set the scene for a period of unprecedented growth in the Irish economy.
The European Union
Arguably, Ireland has benefited more than any other member state from being a part of the European Union. Certainly, per capita, Ireland has received the most funding; cumulative Common Agricultural Policy (CAP), Structural Fund, and Cohesion Fund transfers amount to more than E30 billion. These funds have greatly aided the development of industry, infrastructure, research, and education and training. Membership in the union has brought relative currency stability, and enhanced fiscal discipline, and it has helped to create a modern Irish society that is more open, more confident, and more international. For the industrial sector free access to the European market has been the sine qua non of the dramatic surge in exports and inward investment.
Ireland was not a part of the original Industrial Revolution and so was able to avoid the rust belt–smokestack blight of the more industrialized countries. The transition from an essentially pastoral society, with half the workforce in farming, to a modern high-technology economy, began in the 1960s. In the apt metaphor of Sir Donald Tsang, former financial secretary of Hong Kong, "Ireland went from potatoes to chips in a generation." Foreign direct investment has been the catalyst, the driving force behind the economic renaissance. Some critics argue that Ireland is over-reliant on inward investment, particularly from the United States, which leaves it highly vulnerable to shocks in the American economy.
Indigenous companies are strongest in the traditional industries and export mainly food and drink, clothing, fabrics, and handicrafts; there are a number of major Irish multinationals in the agriculture-based businesses. A flourishing new Irish high-technology sector, supported by Enterprise Ireland, the state agency responsible for developing native enterprises, is dominated by software companies (such as Iona Technologies) that are world leaders in their particular niche.
Agriculture remains an important, if declining, sector of the economy, accounting for about 4 percent of GDP and 7 percent of total employment, with both figures well above the EU average. It has benefited greatly from EU Common Agricultural Policy price supports: Annual CAP transfers to Ireland were equivalent to approximately 4 percent of GDP on average during the 1990s.
Services continue to expand, most notably the internationally traded sector—teleservices and telecommunications, shared services, and e-business—mainly foreign owned. Dublin's new International Financial Services Centre (IFSC) has four hundred of the world's leading banks and finance houses, providing specialist financial services to international clients. The Irish Stock Exchange (ISEQ) separated from London in 1995. Tourism has been buoyant; Ireland attracts 6.5 million visitors annually.
From a low of 2.8 million in 1961 the population reached 3.84 million in April 2001, the highest level for 120 years; and net immigration, growing throughout the 1990s as labor shortages lured skilled workers to Ireland, reached an historic high of 26,300. The number at work surged from 1.088 million in 1989 to 1.710 million by the end of 2000. Ireland has a growing population, with 40 percent of people under the age of twenty-five, compared with 29 to 32 percent in that age group in the other EU countries. Irish governments have boosted investment in education, especially technological education, since the 1960s. About half of secondary school graduates progress to third level; six out of ten third-level graduates major in business studies, engineering, or science/computer science. But fewer entrants to secondary schools are now opting for the basic science subjects. At the other end of the scale the new government-sponsored Science Foundation Ireland, with a budget of E635 million, is trying to promote in Ireland world-class research in biotechnology, and in information and communications technologies (ICT).
The dynamic economy has brought challenge as well as beneficence. Dublin has attracted more than its share of new investment, particularly in services; the gap in living standards between the more affluent eastern region and the rest of the country is widening. But the capital's streets are clogged with traffic, property prices have spiraled, there is a shortage of affordable housing and there is a tight labor market.
An influx of foreign workers and asylum-seekers has presented Ireland with the challenge of adapting to a multiracial, multicultural society practically overnight. Young Irish people, of a generation who "has never known failure" in the phrase of one historian, expect to have, in their own place, a lifestyle and a standard of living to match any in the world.
SEE ALSO European Union; Investment and Development Agency (IDA Ireland); Irish Pound; Migration: Emigration and Immigration since 1950; Overseas Investment; Trade Unions; Women and Work since the Mid-Nineteenth Century
Gray, Alan, ed. International Perspectives on the Irish Economy. 1997.
Ireland: National Development Plan, 2000–2006. 1999.
Kennedy, Kieran, Thomas Giblin, and Deirdre McHugh. The Economic Development of Ireland in the Twentieth Century. 1988.
Mac Sharry, Ray and Padraic A. White. The Making of the Celtic Tiger: The Inside Story of Ireland's Boom Economy. 2000.
Ó Gráda, Cormac. Ireland: A New Economic History. 1994. Sweeney, Paul. The Celtic Tiger. 1998.