IRELAND'S ECONOMIC success depends on its ability to take advantage of its pool of entrepreneurial talent.

Dublin and its environs, home to one-third of the population, have become a basin of attractions on many fronts: home to the European headquarters of multinationals such as Microsoft, Intel, Google and MIT’s Media-Lab Europe, as well as a thriving international financial services center along its Docklands. Low-cost airfares throughout the United Kingdom and continental Europe incited a tourism boom focused on the heritage of literary greats such as Oscar Wilde and James Joyce, not to mention the general sense of craic, which means fun, especially in the company of others. Other visitors wander about hoping to catch a glimpse of U2’s Bono basking in the tax-exempt haven set up in the late 1960s as an incentive for creative artists to remain at home.

Yet the Irish themselves, easily overjoyed, easily depressed and accustomed to treating either state of mind with whiskey, have been conditioned for so long to migrate in the pursuit of somewhere better that they still earnestly want to believe there must be a more perfect place out there.

The actual recipe for Ireland’s economic success would be hard for others to duplicate, revolving as it does around a hybrid policy combining an Anglo-American market outlook mixed with European socialist tendencies—wage bargaining being the most notable. Characterized in public discourse as “a pull between Boston and Berlin,” this formula should not work, according to the rules of free-market economics. But it seems to be doing just that. Ireland’s corporate profits tax of 12.5 percent was the lowest in the European Union—much to the chagrin of the larger member states—although some of the newly acceded Eastern European nations are now undercutting it. Simultaneously, the social consensus model has helped the Irish economy find stability without disruptive labor disputes. In return for modest wage growth, the government promised to boost disposable incomes by reducing taxes. A decline in the wage share in favor of profits in the 1990s did not lead to labor unrest because the rapidly expanding economic cake allowed both employment and wages to increase significantly.

This formula includes a more intangible aspect of the unique national character, a temperament that, like St. Patrick’s Day, is embraced around the world. The runaway hit Riverdance began as an intermission act in the kitschy Eurovision music contest that once kick-started the group ABBA. But the show’s traditional Irish dance, combined with a heady dose of business savvy, has made it an international blockbuster that keeps investors’ eyes smiling.

Beijing Calling
Would-be imitators and the Irish themselves are now well aware, however, that success has ripened Ireland into a mature economy. The nation has made the transition from an agrarian-based economy to an international services-based one; it will continue to expand for another five or six years before growth will begin tapering below 4 percent. In the current setting, with an economy near full-employment levels, wage shares are no longer falling. Meanwhile, the Irish government is coming under pressure to boost social services such as health and education, but finding it increasingly difficult to balance those goals with low taxation. The resolution of this internal contradiction may be postponed for as long as another two decades because of favorable demographics: There is an enviably high ratio of working people to dependent young and old citizens. What Ireland cannot hold at bay, however, is the next stage of the value chain. Its manufacturing costs are not low enough to compete with the new EU member states to the east or, still further east, with India and China.

The majority of Irish favor a path for future growth that leads to scientific and technology research and development. But this may well be the wrong course. Those who advocate this approach are overlooking the natural proclivities of the future workforce. It appears that a reasonable majority of Irish youth would prefer to be lawyers and accountants rather than scientists. Figures from the government Central Statistics Office show that some 33 percent of university graduates in Ireland have degrees in social sciences, business and law compared with 25 percent for science and engineering.

Moreover, the high transportation costs of exporting even value-added products such as Intel chips, Dell computers and Viagra from a small island hanging on to the northern edge of Western Europe would seem prohibitive. With Eastern Europe eager to mine its own low-cost scientists and geographic advantage, Ireland is justifiably concerned about losing ground.

The Irish, with 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. The underpinnings are already in place for a future based to a large extent on the growth of the financial services sector. Ireland also boasts an undervalued pool of entrepreneurial talent that is just beginning to show the confidence to innovate. Today, cola concentrate manufactured on behalf of multinational giants constitutes Ireland’s largest food export, despite the powerful presence of indigenous food and drink brands such as Bailey’s Irish Cream, Guinness beer and Kerrygold butter. Indeed, in a global economy seemingly captivated by all things Irish, from rock bands to granny’s crocheted lace, the country harbors the potential to market more of its homegrown products around the world.

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.