The luck of the Irish

SURELY no other country in the rich world has seen its image change so fast. Fifteen years ago Ireland was deemed an economic failure, a country that after years of mismanagement was suffering from an awful cocktail of high unemployment, slow growth, high inflation, heavy taxation and towering public debts. Yet within a few years it had become the “Celtic Tiger”, a rare example of a developed country with a growth record to match East Asia's, as well as enviably low unemployment and inflation, a low tax burden and a tiny public debt.

The Economist proved no better than anyone else at predicting this turnaround. Our most recent previous survey of Ireland, “The poorest of the rich”, published in 1988, concluded that the country was heading for catastrophe, mainly because it had tried to erect a welfare state on continental European lines in an economy that was too poor to support one. Yet only nine years later, in 1997, Ireland featured on The Economist's cover as “Europe's shining light” (see article). It goes to show how remarkable has been the transformation of a sleepy European backwater into a vibrant economy that in some years grew by as much as 10%.

That transformation has made the Irish republic, with just over 4m people, a place of great interest around the globe. Many rich countries, not least Ireland's sclerotic neighbours in western Europe, would love to achieve a similar change of image. The eight central European countries that joined the European Union in May seem fascinated by Ireland. Civil servants and businessmen in Dublin talk wearily of a procession of visitors from such places as Vilnius and Bratislava, anxious to emulate Ireland's leap from one of the EU's poorest members in the 1980s into one of its richest (see chart 1). They all promise that they will make good use of EU money, as Ireland did, and avoid the fate of Greece, which in the 1980s was not far behind Ireland but has since been left standing.

Punching above its weight

The world's interest in Ireland is not confined to its rags-to-riches story. Thanks partly to the Irish diaspora, created by a century and a half of emigration, the country has far more clout than its small population might suggest. It had a notable stint on the United Nations Security Council in 2001-02. And Europeans were impressed by the Irish presidency of the European Union in the first half of this year, which took in not only the eastward expansion of the EU and the choice of a new commission president, but also a deal on a new EU constitutional treaty, brokered by the Irish taoiseach (prime minister), Bertie Ahern. On a less elevated level, the main streets of cities the world over feature “Irish pubs” serving draught Guinness.

Over the border, Northern Ireland, which has a population of 1.7m, offers a valuable case-study in how to resolve an entrenched terrorist problem. The peace process in the province remains partial, bumpy and incomplete (only last month British, Irish and Northern Irish leaders failed yet again to agree on a precise formula for the revival of devolved government in Belfast). Yet ten years of painstaking diplomacy, by both the British and the Irish governments and by politicians and paramilitary leaders on both sides of the sectarian divide in the north, have largely put an end to the violence that for two decades disfigured Northern Ireland. Other countries with intractable terrorist problems might take note.

Peace in Northern Ireland has helped to boost the economy of the whole island. A visitor to Dublin, so lively and cosmopolitan today, would find it hard to believe that only a few decades ago it was gloomy and depressed. In the 1960s Ireland's heavily agricultural economy, almost wholly dependent on exports to Britain, was only just emerging from the misguided protectionism that since the 1930s had been the main plank of Eamon De Valera's ill-advised economic policy. Ireland had missed out almost entirely on Europe's post-war boom; living standards were stagnating and emigration was in full flow. In 1960 the republic's population was down to around 2.8m, the lowest in two centuries and a pale shadow of the 8m (for the whole island) in 1840, when this was one of the most densely populated countries in Europe. Many wondered if Ireland had a future.

In fact, the 1960s proved something of a turning-point. Corporate tax on foreign multinational companies investing in Ireland was cut to zero in 1957. Belatedly, the country embraced free trade with Britain and, by joining the European Economic Community in 1973, with much of the rest of Europe. The combination of zero corporate taxes, a low-wage economy inside the EEC and a shared language proved a strong lure for American manufacturers. Ireland's long love affair with foreign direct investment (FDI) began in the 1960s. Free secondary education for all arrived in 1967, and after 1973 Irish farmers benefited from Europe's munificent farm subsidies.

This promising start, however, was kyboshed by the two oil shocks of the 1970s, and even more by a knuckle-headed policy response. Successive Irish governments sought to offset the cut in living standards imposed by higher oil prices through fiscal and monetary expansion. The result, ultimately, was the high inflation, high unemployment, slow growth and even electoral instability that marred the 1980s. Emigration, especially of graduates, hit new highs. At the start of the third Haughey government in 1987, a grim joke made the rounds: would the last Irishman to leave please turn out the lights? Yet only a few years later the Irish miracle had arrived. What caused it? Can it be replicated? And can it last?