The Economy of Ireland

National and Sectoral Policy Issues

John W. O'Hagan, Carol Newman, John W. O'Hagan, Carol Newman

• Publisher: Gill Books
• Year: 2014
• ISBN:
  9780717166640
• Topic: Economia
• Subtopic: Storia economica

An essential book for students of economics as well as economists and policymakers. The twelfth edition of this enduring and popular book surveys all major changes in the Irish economy in the past fifteen years, with particular emphasis on the last five years. In this new edition, the authors examine:

• The broad historical context to a study of the Irish economy.
• Ireland's hard landing, recovery and prospects for economic growth and employment in the years ahead.
• The changing role of the state in policy making and the increasing importance of euro-zone governance and institutions, especially in the monetary area.
• Taxation in all its dimensions, including the issue of national debt.
• The importance of competitiveness as a major policy objective.
• The changing emphasis on quality-of-life indicators and distribution as objectives of policy.
• The role of regulation in various areas of the economy and society.
• Energy and the environment, in particular the issue of security of supply.
• Employment, unemployment and migration challenges facing Ireland.
• Evidence on and policy issues relating to income and wealth.
• The internationally traded sectors of manufacturing and services.
• The importance of the health and education sectors, the rationale for state intervention and measures of effectiveness.
• The importance of the agri-food sector in terms of production, distribution, and food safety.

Through twelve editions, The Economy of Ireland holds an integral place in the literature on Ireland's economy.

CHAPTER 1

Historical Background

Jonathan Haughton

1 WHY ECONOMIC HISTORY?

Why take the trouble to study history, and particularly the economic history of a minor European island? Six good reasons spring to mind.

History tests theory. The propositions of economics are often best tested by exposing them to historical evidence. Was Malthus right when he argued that population growth would inevitably outstrip food supply? Irish experience, even during the Great Famine, suggests not. Do farmers respond to changes in the prices they face? Evidence from late nineteenth-century Ireland confirms that they do. Does emigration serve to equalise wages between Ireland and Britain? Data for this century indicate that, broadly speaking, it does. Cicero took this view of history, writing that ‘the causes of events are even more interesting than the events themselves’ – surely a view espoused by most academic economists!

History gives perspective. Standard economics textbooks typically provide a short-run and partial approach to economic problems. While this may be appropriate for tracing the immediate effects of a shift in demand, or a monetary expansion, it provides fewer insights into the fundamental determinants of economic growth or of income distribution, since these may only be observed over long periods of time. The historian Joe Lee has made the point forcibly, writing that ‘while contemporary Irish economics can be impressive in accounting for short-term movements, it has contributed relatively little to understanding the long-term development of the Irish economy’. He argues that most economists are ‘blind to either long-term perspective or lateral linkage’ and that ‘with the exception of a handful of superior intelligences, Irish economists are far more impressive as technicians than as thinkers’.

An important lesson from economic history is that it provides a sense of the fragility of economic growth, and of its intermittent nature. For instance, many look back to the 1960s as a golden era of Irish economic growth. Yet Kennedy, Giblin and McHugh, in their interesting study of Irish economic development in the twentieth century, argue that ‘a sense of historical perspective would have encouraged greater modesty about the achievements of the 1960s by recognising that they depended heavily on a combination of uniquely favourable external and internal circumstances’. Yet not everyone is convinced that history is good at giving perspective: in the view of Aristotle, ‘poetry tends to express the universal, history the particular.’

History fascinates. While the study of any subject may be justified on the grounds of its intrinsic worth, economic history is particularly interesting. The visible remains of the past are everywhere – ports, houses, crooked streets, abandoned fields and ruined cottages. It is natural to wonder about their origins. Less visibly, our view of history informs our view of who we are, and what our culture stands for. These roots merit exploration. History also has its share of intellectual puzzles: Why was economic growth in the 1950s so anaemic? How did per capita incomes rise faster in Ireland between 1850 and 1920 than anywhere else in Europe? Was the tariff regime of the 1930s a failure?

History debunks. Ideologues of all stripes invoke history to bolster their claims. When John Mitchel argued that ‘The Almighty, indeed, sent the potato blight, but the English created the famine’ he was revisiting history to support his nationalist position. Marxists turn to the land question as evidence of class conflict. An appreciation of history is essential if one is to make an informed judgement about the solidity of such ideas. Once again, Lee states it well, arguing that ‘the modern Irish, contrary to popular impression, have little sense of history. What they have is a sense of grievance, which they choose to dignify by christening it history.’ He concludes, ‘it is central to my argument that the Irish of the late twentieth century have still to learn how to learn from their recent history.’ Although written only a few years ago, this view may already be outdated, prey to what F.S.L. Lyons refers to as the dilemma of the contemporary historian – recent events may still be too close in time to allow for enough historical perspective. On the other hand, there is no such thing as a single correct historical perspective, which is surely the idea behind Oscar Wilde’s quip that ‘the one duty we owe to history is to rewrite it.’

History instructs policy. Ireland has tried laissez faire (1815–45); import substitution (1930–58); export promotion with foreign direct investment (1958– 80). It has had budgetary discipline and chronic deficits, fixed exchange rates and floating, price controls, incomes policies, free trade zones, and public and private enterprise. Out of this varied experience there are lessons. While, in Santayana’s famous words, ‘those who ignore history are condemned to repeat it’, the study of history is not merely to avoid making mistakes, but also to learn what works well and merits copying.

An interesting example of the relevance of history for policy is the 2011 book by Reinhart and Rogoff entitled This Time is Different: Eight Centuries of Financial Folly. Their exhaustive review of financial collapses in scores of countries over many decades shows that time and again governments, bankers and others simply ignored the lessons of the past, rationalising their actions with the thought that no two situations are the same, things had changed, and this time was different. The Irish housing bubble that began in 2000 and collapsed in 2008, bringing down the country’s entire banking system, is a case in point.

The Irish case has served as a positive role model too. Ireland’s torrid economic growth in the late 1990s interested many in less developed countries, which too are typically small open economies with a colonial past. Ireland in the twentieth century was a tardy bloomer, and a major theme of this chapter, indeed of this book, is to try to understand why.

History can be misused. Interpretations of history can have real consequences, for good or for bad, because they help form the world view of subsequent generations. George Orwell famously wrote, ‘who controls the past controls the future: who controls the present controls the past.’ The different versions of history taught in Protestant and Catholic schools in Northern Ireland, for instance, have contributed to an enduring communitarian divide. Nazi teachings on racial purity contributed to the horrors of the Holocaust, but Hitler wrote, ‘the victor will never be asked if he told the truth.’ The antidote to the misuse of history is to inform oneself, to apply an enquiring mind even to received wisdom, in short to develop some knowledge of history.

The main focus of this chapter is on how Ireland has developed economically. Crotty defines such development as ‘a situation where (a) more people are better off than formerly and (b) fewer people are as badly off’. By this yardstick it is necessary to look at population growth, since an economy whose development is accompanied by massive emigration has in some sense failed. This parallels the suggestion of the 1948 Emigration Commission, which proposed that ‘a steadily increasing population should occupy a high place among the criteria by which the success of national policy should be judged.’

Economic development also requires that incomes rise (growth), including, or especially, those of the least well off (equality), and this is presumably facilitated by an efficient use of resources (notably full employment).

The starting point, arbitrarily chosen, is 1690, with the consolidation of the Protestant ascendancy. The subsequent years are divided into sub-periods: growth and early industrialisation during 1690 and 1815; rural crisis between 1815 and 1850; the population decline that accompanied increasing prosperity from 1850 to 1921; and the intermittent economic development between independence and about 1960, when the story of modern Irish economic growth begins – as discussed in more detail in Chapter 6.

2 FROM THE BATTLE OF THE BOYNE TO 1815

The Eighteenth Century

At the time of the Battle of the Boyne the Irish economy was predominantly rural, although it was no longer a woodland society. Population stood at a little under two million, roughly double the level of a century before, and was growing at an historically high rate of at least half a per cent per year. With the spread of population the forest cover was rapidly disappearing, giving way to both grazing and tillage. The largest town, Dublin, had about 60,000 inhabitants.

The country was an important exporter, especially of grain, beef, butter, wool and, to a lesser extent, linen. Presaging the situation of three centuries later, almost half of all exports went to continental Europe, notably to France. Earnings from these exports were spent on items such as coal and tobacco, and a surplus on current account amounting to perhaps 10 per cent of exports allowed for the remittance of rents to absentee landlords. Petty, visiting the country in 1672, commented on the large number of people who rode horses, and the high standard of clothing relative to France and most of Europe. He also noted the shabbiness of the houses, of which he reckoned only a fifth had chimneys. The implication was that Ireland was not significantly poorer, and was possibly better off, than most of continental Europe at that time, although less affluent than most of England.

Income was distributed unevenly. Land was owned by perhaps 10,000 landlords, and six-sevenths of the land was held by Protestants. Much of this was let out to farmers, who in turn frequently sublet small plots to cottiers, or hired casual labour. By one estimate, a little over half of the population constituted a rural proletariat, with minimal access to land and close to the margin of subsistence. The potato had been introduced early in the seventeenth century, but was only an important part of the diet of the poor, although its spread allowed for rapid population growth throughout the eighteenth century.

Growth and Structural Change

The essential features of economic growth during the period 1690 to 1815 were: a rapid recovery from the war; a period of relative stagnation (1700–20); 25 years of crisis that included two famines (1720–45); and a long wave of sustained and relatively rapid economic growth (1745–1815). The evidence for these is indirect, since few economic statistics were collected at the time, but trade data show a steady increase in exports, with relatively rapid growth between 1740 (£1.2 million) and 1816 (£7.08 million). The structure of exports changed, as shipments of cattle and sheep gave way to beef, butter, grain and linen.

These changes were driven in part by policy. In 1667 the Cattle Act excluded Irish cattle, sheep, beef and pork from England. The country responded by exporting wool rather than sheep, and by searching for new markets for meat, notably the important provision trade serving transatlantic ships and the West Indies, and the extensive French market. It also shifted resources from dry cattle to dairying, and butter exports grew rapidly. This process was speeded by the Woollen Acts, passed in 1699, which prohibited the export of wool from Ireland or England to other countries, and imposed a stiff duty on Irish wool entering England. More positively, the granting of duty-free access to England for linen helped that industry.

The significance of English laws for Irish economic growth is a matter of controversy. Writers in the nationalist vein have stressed the ways in which English law handicapped Irish growth, for instance by hampering the development of the woollen industry. However, Cullen has argued that the negative effects were minimal, as producers shifted rapidly and effectively into new lines of production.

The changes in the structure of production during the eighteenth century also occurred in response to an increase in the relative price of agricultural commodities, especially grain. Increasing urbanisation in Britain raised the demand for food, and Ireland was favoured as a source of supply during the Napoleonic wars. The most important effect of this improvement in Ireland’s terms of trade (price of exports relative to imports) was to raise the incomes of farmers. Ireland continued to export grain until the late 1860s, when the falling costs of shipping, coupled with the opening up of the American midwest, brought cheaper grain to Europe.

Agricultural structure was also influenced by the diffusion of the potato. An acre of potatoes could support twice as many people as an acre of grain. Moreover, potato cultivation does not reduce soil fertility, and potatoes contain substantial amounts of protein and essential minerals. Cullen argues that as the eighteenth century progressed, cottiers increasingly ate potatoes instead of butter or oats, and sold these instead, using their earnings to buy other goods; thus the shift towards the potato is seen as ‘related to commercialisation and the urge to increase cash incomes … for luxuries’.

The expansion of potato cultivation contributed to the dramatic expansion of Ireland’s population, from a little more than a million people in 1600 to over eight million by 1841. It was checked briefly by a severe famine in 1740–1, which was caused by a cold summer and led to as many as a quarter of a million deaths. But population growth accelerated after 1750: better nutrition reduced the death rate, and the availability of conacre may have contributed to a reduction in the marriage age. The population rose despite substantial emigration from the northeast, which began early in the eighteenth century and became self-sustaining, and may have been as high as 12,000 annually in the difficult years of the 1770s.

Industry

Industrial change was dominated by the rise of the linen industry, which Cullen calls ‘perhaps the most remarkable instance in Europe of an export-based advance in the eighteenth century’. From a low base in the 1690s linen exports rose rapidly, accounting for a quarter of all exports by 1731. The first linen weavers were mainly skilled immigrants, especially Huguenots who had fled France after 1685. Duty-free access to the English market helped, and in 1711 the Irish Parliament set up the Linen Board to regulate the industry, spread information and subsidise projects. Based solidly in the rural areas, an elaborate network of merchants bought the raw linen and undertook the more capital-intensive activities of bleaching and finishing. By the early nineteenth century linen was increasingly spun and woven under the ‘putting-out’ system; cottiers would be provided with raw materials, and paid in cash for the amount they spun or wove.

Even as late as 1841 an astonishing one person in five stated their occupation as being in textiles, and most of these lived in rural areas. Fully a third of all counties reported in 1821 that more individuals were occupied in ‘manufacture, trade and handicrafts’ than in agriculture. It has been argued that this type of ‘proto-industrialisation’ is usually a prelude to full (i.e. factory-based) industrialisation, fostering as it does entrepreneurial skills, monetisation of the economy, and commercial links. In the Irish case no such evolution occurred, although it is not clear why.

Other industries also expanded and modernised, notably those based on the processing of agricultural products, such as brewing, flour milling, and distilling. After 1800 the cotton industry flourished, albeit relatively briefly.

It is important to realise that the Industrial Revolution did in fact come to Ireland, initially. The organisation of many industries was radically changed, with the establishment of breweries, textile factories and glass works large enough to reap economies of scale. At first these factories were located where water power was available, but steam power was introduced early too. In the eighteenth century the road network was greatly improved and expanded, at first by private turnpikes and later by local government (the ‘Grand Juries’). The first canals were built.

By 1785 Pitt and others saw Ireland as a viable competitor to English industry. But by 1800 this was not the view in Ireland, and it is ironic that the areas that most favoured union were Cork and the south, with their strong agricultural base; opposition was strongest in Dublin and the north.

Distribution of Income and Wealth

The benefits of economic growth in the late eighteenth century were not spread equally. The most evident rift was that between landowners and the large rural proletariat. Rents of a third of the gross output were probably normal. In 1687 Petty estimated rent payments at £1.2 million, of which £0.1 million was remitted to absentee landlords abroad. Rents thus came to approximately double the level of exports, or almost as much as a quarter of national income. It was this surplus, and tithes paid to the Church of Ireland, that financed the magnificent country houses, churches, Dublin squares, university buildings, paintings and follies that stand as monuments to the eighteenth century.

Most farmers were tenants of large landlords, and in turn rented out land to cottiers. Frequently such plots were confined to conacre (potato land), whose quality improved as they were planted in potatoes. Cottiers also performed work for the farmers to which they were attached. Labourers did not have even the security implied by access to a plot of land. The position of these groups did not improve in the 50 years prior to 1745. There then appears to have been a period of rising real wages, which pro...