What has already begun to evolve alongside multinational investment in high-end production is a realization that Ireland is also an excellent provider of headquarters-based activities and financial transactions. As direct foreign investment has made the Irish wealthier, one of the most important indigenous growth areas has been financial advisory services. Pfizer has imported some of its treasury operations, and Apple Computer conducts much of its billing and purchasing in Ireland. While a shakeout in many industrial sectors is occurring, the expansion of international service-based activities is more than compensating, with net job growth of 50,000 achieved in 2004 set against a workforce of 1.8 million.

London’s Satellite, Luxembourg’s Rival
The New York Mercantile Exchange opened a trading floor for Brent crude oil contracts in Dublin in November 2004, and has successfully exploited the gap that opened when the London International Petroleum Exchange (IPE) reduced its open-floor trading hours in favor of more electronic trading.

The Irish, in their tendency to overlook their own cultural advantages, have barely noticed that they have all the makings of an economy modeled more after Luxembourg than the export-led manufacturing centers of the world.

As an easily accessible satellite of London’s financial industry, Dublin has a nimble regulatory climate and a great deal of room to grow. But beyond a certain amount of opposition from London IPE traders, another serious perception must be dashed if Dublin is to continue to thrive: The general public is still reeling from a spate of local banking scandals throughout the past decade. The Irish financial services regulator investigated its biggest bank, AIB, for awarding preferential client-share allocations to its senior executives. A local news investigation in 1998 found that the National Irish Bank, recently purchased by Danske, was not only charging customers hidden interest rates and fees, but helping some of them evade taxes by inviting them to invest in a life insurance scheme. The banks have since issued refunds for overages, but the sentiment remains that dodgy practices may represent business as usual in the banking industry. One of the drivers behind the idea that the future depends on R&D is a pervasive feeling that banks are corrupt, while science is pure.

New legislative initiatives call for a number of reforms, while the financial services sector at large continues on its merry way and has created a highly profitable industry that actually employs more workers than the multinational manufacturing sector. The International Financial Services Centre, launched 18 years ago in what was then the poverty-ridden inner city area of Dublin’s Docklands, has become an entrepôt for asset management that has helped the city overtake Luxembourg as Europe’s largest listing location for investment funds. Dublin is now the second-largest funds administrator (behind Luxembourg) and a growing center for hedge funds. The city’s financiers manage 60 percent of all European-domiciled hedge funds and, having captured approximately 30 percent of the global hedge fund business, are becoming powerful rivals to the Cayman Islands and other Caribbean jurisdictions.

The Irish are also innovating on other fronts. Ryanair, created with the no-frills model of Southwest Airlines, is Europe’s largest and most profitable low-fare airline. The construction conglomerate CRH has a significant hold on the U.S. highway construction sector. Conversely, building and construction in Ireland provide significant opportunities for foreign investors. The growth in private housing construction has probably already peaked, but the government is rolling out a huge National Development Plan that seeks public-private partnerships for roads, tunnels, airports, schools, telecommunications and other infrastructure programs. While the plan’s rollout is progressing very slowly as the economy grapples with the scale involved, expenditures are projected to reach $60 billion.

With a domestic market of only 4 million people, Ireland’s economic success depends upon its ability to be an effective export platform. Being small means, however, that the county’s economic winds can shift with only a slight breeze. Ireland’s entire workforce totals 1.8 million, not much larger than the total number of people employed by General Electric around the world. In the 1990s, when the European Union gave cohesion funds to member states with GDPs of less than 75 percent of the EU average, Ireland spent the bulk of the influx boosting education. The hazard of investing in education—as opposed to infrastructure projects, as other poorer EU members did—is that it is a highly mobile asset, especially among people accustomed to believing that their destiny lies elsewhere.

But Ireland has not suffered a serious brain drain in recent years. In fact, migration flows have turned inward in this decade for the first time since the 1970s. The future hangs by a thread, however, for the educated youth who have so far elected to work on home turf. Their luck depends on whether Ireland focuses on offering evermore advanced expertise for multinational investors or cultivating markets for its own cultural cachet. 

Danny McCoy is a senior economist with the Economic and Social
Research Institute in Dublin.