Poor To Celtic Tiger Economics Essay

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Ireland is the third largest island in Europe and twentieth largest in the world. Ireland had emigrants coming in 1950s and 1980s. There was a substantial growth of economy in 1990. This was the era when the country was named as "Celtic tiger" (Coined by Morgan Stanley in August 1994), as there was a economic boom in the country.

In January 1988, a survey was published in "The Economist" in which the title was 'Poorest of the Rich'. Less than ten years later the Economist published on their front page with the title 'Europe's shining light' about Ireland, They had published saying,

"Just yesterday, it seems, Ireland was one of the Europe's poorest countries. Today it is about as prosperous as the European average and getting richer all time". (The Economist, May 17, 1007, 15)

During this period it was very impressive, very high sustained growth in economy, inflation was very low, a current account balance of surplus, low unemployment ratio, budget surplus was growing and net immigration. Also during these times its per capita Gross Domestic Production exceeded that of United Kingdom's. The Irish economy, had a great impact until 2005, the reason for their growth during this period was mainly due to multi- nationals, who were looking for globalization in turn looking to bridge the gap between United States and European Union. Here, we need to consider the fact that 40 million US citizens are of Irish extraction. Let's have a brief introduction towards Ireland's Political, Economical, Social and Technological Environments,

Effects of Globalisation:

The republic of Ireland has a stable government. As the system is one parliament. The state head is elected once in seven years and can only be reelected once. People of Ireland have got used to the coalition governments since 1989.Globalisation helped Ireland to move from poor European country towards the new global economy. During this period Ireland was the second largest exporter of packaged computer software in the globe. Apart from this, there traditional exports were Guinness and Irish whiskey. Ireland had become a major player for the United States multinational companies in European Union market, giving rise to a new economy called the Euro-US economy. This reduced the communication costs between the United States and European Union markets.

The Economist's in 1987 were true, although they were harsh but they were realistic. They had a poor economy, but had gradual growth in economy which was averaged 0.2% over the five years during the time there were 3 years of negative economy growth. Unemployment was 18% and national debt of 125% of GNP. This all changed after 1987, when there was introduction of Fiscal retrenchment. The forces of changes were global rather domestic.

Brief History of Ireland's Growth towards International Market:

In order look at Ireland, how a pre-industrial country became a high-tech country an again a sudden dip in the country's growth, lets look at the brief history of the country:

1922-32 :- First decade of independence, after which the previous policies were carry forwarded. In 1927 the Irish currency was established.

1932-38:- Era of protectionism, economic war with UK. An attempt to build small scale industries which had high tariffs. A new act was introduced called " the control of manufacturers acts", which prohibited ownership of industries by foreigners.

1939-45:- Ireland remain neutral during the world war 2.

1946-57:- Ireland had a econmic downfall due to immigration from other european countries which were affected by the war.

1957:- The Act of Control of Manufacturers was removed.

1977-81:- The fail of creating balance of payments which pushed the public sector debt upto 120% in an act to create full employment in Ireland. During this periodthey joined the European Union.

1979:- As they joined the EU, the Irish pound one to one with sterling was broked in march 1979.

1981-86:- Tries at fiscal retrenchment largely not considered by the partners of the coalition govt.

1987:- Tax amnest, which helped to reduce the budget deficit.

1992:- Ireland signed the first phase of European Monetory Union at Maastricht. "Abolition of exchange control regulations".

1992-93:- Crisis on exchange rates. Devaluation of the currency(January 1993) and move towards wider exchange rate bands(115% plus or minus).

1999:- Ireland compltely under European Monetory Union.

2007-2010:- Economic downfall in the country, which was trigerred by the global economic downfall.

Liberal Irish Economy

Ireland is a small liberal economy, it had a Gross Domestic Product of about 1% of the European Union's Gross Domestic Product. After independence it had free trading relationship with United Kingdom for the first 10 years. Labourers moved freely from Ireland to United kingdom as well as United States and capital also moved freely between United Kingdom and Ireland. In 1932, the openness of the economy was sharply reduced, both in commodities and capital. Economic war with United Kingdom ensured that the commodity openness with the United Kingdom was reduced and importance was given to the small scale industries, but had high tax rates.The control of the manufactures Act was introduced in the above mentioned year, which stipulates that the Irish people should have a control of more than 51% shares in the Irish manufacturing companies. This ensured that the Foreign Direct Investment would not enter the economy of Ireland. The Act was finally removed in 1957. Ironically, there was a free movement for Irish capital to move out of the country. During 1940s and 50s the Irish capital was primarily invested in British Govt. securities.

As the removal of the Control of Manufacturers acts in 1957 signalled the beginning and welcoming of Foreign Direct Investment's in Ireland. Dr. TK Whittaker, in 1958 from the dept. of finance gave a report "Economic development" which emphasised on Foreign Direct Investment and tax reductions and other new changes moving towards free trade. Which initiated the signing of " Anglo-Irish free trade Agreement" in 1965 and Ireland joining the European Union in 1973. As Ireland joined the European Union, this ensured the reduction of links between United Kingdom and Ireland. This also streghtened by the Ireland joining the European Monetay System in 1978, this trigerred the breaking of one to one parity of Irish currency with British pound in 1979. Ireland also signed up the Maastricht Agreement in 1992 and January 1999 they fully joined the EMU.

The process of joining the European Union led towards capital movements. In 1979, the Central Bank introduced exchange control regulations, however the commitment towards the European Monetory Union led towards the removal of exchangecontrols in 1992. By now the Irish economy inclined towards free trade for commodities, labour and also capital.

Independent and liberal policies

The lack of knowledge of the importance of the liberalization of economy towards the international economy inclined towards local policy failures. The first policy failure as mentioned above was Control of manufacturers Act until 1957, which resulted in lack of foreign investment in domestic market which hampers economic growth. The second policy failure was during 1977-81, where there was emphasis towards the growth of domestic economy without considering the balance of payments. Wherein Govt. was looking more towards tax cuts and expenditure in public sectors, where govt. thought that it would lead towards full employment. This crisis was not addressed immediately as during this time there was a coalition govt. 1987 was the important year in the Ireland economic history. The new govt. committed towards fiscal retrenchment.

The importance of Europeanisation in the Irish Economy

Important dates in Ireland's path towards Europeanisation,

1973 - Ireland became a member of EEC

1978 - Ireland became a member of EMS

1979 - Due to there commitments with EMS had to break the one to one parity of there currency with the British pound.

1987 - Fiscal retrenchment

1990 - Removal of exchange control regulations.

1992 - Part of Single EU market.

1992/93 - Break down narrow band ERM of the EMS.

1999 - Full member of European Monetary Union.

European Union has been the key organization in transforming the Irish economy. The benefits enjoyed by Ireland as they joined the European Economic Community are various. In the agricultural sector due to the policy of Common Agricultural Policy (CAP) helped farmers with guaranteed prices. Ireland also encouraged inflows of European structural and cohesion funds.

Role of Europeanisation and Globalisation Benefit the Economy of Ireland.

Globalisation helped Ireland's Economy tom improve significantly, there was a technological evolution in Ireland. The tools of the technology and good telecommunication facilities, for example the internet has reduced the distance. In the new world, wherein the world was becoming a global village or market multinational companies were looking at Ireland as a base to sell their commodities to the Europe union market as the entire Europe had turned into a single market after the Maastricht treaty in 1992. The first reason for the multinationals to look at Ireland was because of the introduction of Industrial Development Authority which was targeting the high technical sectors like software, computer peripherals, pharmaceuticals and chemicals in 1990's. The multi-nationals were also attracted due to the factor that there was very low corporate tax. Secondly, Ireland also attracted Multinationals companies because of the fact that the English speaking ability was far better than the other European Union countries except for the United Kingdom, but United Kingdom has never accepted the Maastricht agreement. All these reason counted and attracted large number of Multinational companies to the Irish economy. In 1997 Ireland ranked 5th fo`r the Foreign Direct Investments from the United States.

The Ireland's Economy and the Multi-National Companies:

It is evident that the high technological companies had played a major role in the growth of Ireland's Economy. The main sectors in which the Multinational companies invested in Ireland are,

Computers

Computer Software

Chemicals

Pharmaceuticals

Cola concentrates

Some of the MNCs that came to Ireland are Boston scientific, Coca Cola, dell, 3 Com, IBM, Gateway, Hewlett Packard, Macintosh, Intel, Motorola, Microsoft, Pepsi, Northern Telecom, Schering Plough, etc. The foreign companies controlled 77% of the net manufacturing of the country in 1996.

The four primary areas where the Multinational companies had an impact in influencing economy in Ireland are,

Exports

Gross Domestic Product

Employment

Taxes

The growth in exports had a positive impact on Gross Domestic Production and balance of payments which also generated balance of trade surplus.

Multinational Companies Impact:

As there is large influx of multinational companies during 1999- 2007, the role of multinationals is very important, because of which there is a considerable improvement in jobs in the service industry. As there is a growth in service sector there is an overall growth in the economy of Ireland. Although Ireland never realized the face that if the multinational companies decamp, which happened during 2007 they would face difficulties such as employment would fall drastically and also reduce in demand for service sectors. The decline of property prices, tax revenues, etc.

The rule is simple for any country, if the export levels are high there is going to be a positive impact on the balance of payments which tends towards a balance of trade surplus. The multinational companies directly influence the employment in the manufacturing sector and also indirectly boost employment in other sectors such as services. When more people are earning, they are inclined to pay tax to the government, so there is a direct increase in tax revenue.

This also leads towards the economic slump Ireland had during these recent years between 2007 - 2010 as only 18% of the employment was handled by local companies when Ireland had a booming economy. Due to global recession most of the MNCs went on job cuts and cost cuts, pulled out from not only Ireland and many other parts of the world. As most of the multinational companies are from the American region, they had sever cut on jobs during recent years because of which Ireland had huge impact as there 77% of output was coming from multinational companies and 23% from the local Irish companies.

Local Inputs into the Growth Performance

There many Irish components involved in Ireland's success story during 1992-2007. First of all government since 1960 in Ireland have encouraged foreign direct investment in the country's economy. Secondly, the approach to join the European union which encouraged Multinational Companies to look at Ireland as a base towards extending their business or globalizing on a bigger scale in the European Union market. Industrial Development Authority targeting high technological industries during 1960s. Thirdly, Human resources have shown responsibility in negotiating national pay agreements, which created a stable environment for industrial relations. Fourthly, Government investing in educational sector which has produced young labour force. Fifth, fiscal retrenchment in 1987. Sixth, substantial deregulation in transport and telecommunications sector.

Economy and Finance since 2007:

There was a deficit of 9.4 billion Euros in current account of Balance of payments in the year 2008. Ireland had an average deficit of 8.6 billion Euros for the last three years. There was also a considerable amount of lending by finance institutions to personal sector, it was reduced from 148 billion Euros to 138 billion Euros from 2007 to 2008. The Gross Domestic Production had dipped from 87.7% in 1990 to 27.7% in 2008.

External Trade since 2007:

In 2008, chemicals were reduced to 50% of their exports from the country. Imports rose from 55 billion Euros to 57 billion Euros. Imports from China have increased.

The Rise and Fall of Property Prices:

Ireland had the biggest property boom ever recorded, with average property prices propelling more than 300 percent from 1999 to 2005 due to indirect effect of globalization, but since the Multi-national companies backed out in 2007 there has been a down ward trend towards the construction sector. This sector has seen, many companies cutting down jobs and has a much broader impact on the Irish economy. During the period of boom Ireland had three times better Gross Domestic Production than the United States in this sector.

Recent actions by Irish Government:

According to the sources the Irish govt. has said that it would be receiving a bail out of 100 million Euros from European Union and the International Monetary Funds, which the amount will be utilized in restructuring the Irish banking industry and also reduce budget deficit. Ireland may also get benefits from the United Kingdom and Sweden.

Conclusion

Ireland's economic fluctuation is mainly due to the globaisation factor. Once the Multinational Companies in the United States do well and an overall increase in the global economy, then this reflects a positive note on the Irish economy.

But we do need to consider the factor that Ireland had some new policies to improve their economy by introducing low taxation on corporate and joining various organizations like the European Monetary Union. There economy would come out of this recent slump as soon as the world or the global economy improves.

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