Diversifying external linkages: the exercise of Irish economic sovereignty in long-term perspective

Oxford Review of Economic Policy, Volume 30, Number 2, 2014, pp. 208 222 Diversifying external linkages: the exercise of Irish economic sovereignty in long-term perspective Frank Barry* Abstract Political independence is usually associated with an attempt to reduce economic dependency on the former dominant or colonial power. For most of the early period since Irish independence the attempt to reduce exposure to the UK was implemented through tariff protection and restrictions on foreign ownership. Inward orientation eventually ran out of steam, culminating in sustained emigration and deep recession in the 1950s. The genesis in the mid-1950s of Ireland s low corporation tax regime facilitated later trade liberalization and diversified the economy away from the UK. These developments facilitated the full convergence on UK and broader Western European living standards that was eventually achieved in the 1990s. From 1979 the UK would diverge from most of the rest of Western Europe on exchange-rate policy, and Ireland was forced to choose between the two. The resulting difficulties can be ascribed to design flaws in the European monetary project and Ireland s failure to recognize the constraints that the new regime imposed. Key words: Ireland, economic history, economic development, European integration, foreign direct investment, protectionism, single currency JEL classification: F5, O52, N94 I. Introduction Political independence for most newly established states is associated with an attempt to reduce economic dependency on the former dominant or colonial power. Ireland at independence in 1922 was a relatively poor, peripheral, predominantly agricultural region of what had been since 1801 the United Kingdom of Great Britain and Ireland. Traditional Irish nationalism of both the constitutional and militant varieties had blamed the decline of Irish industry in the nineteenth century on the loss of the semiindependent and partly protectionist Irish parliament, though modern economic historians disagree (e.g. Ó Gráda, 1994). For much of the first 40 years of independence, therefore, the attempt to reduce exposure to the UK was implemented through trade protection and restrictions on the foreign ownership of industry. A similar post-colonial stance would later be adopted across the entire developing world. * Trinity College Dublin, e-mail: barryfg@tcd.ie doi:10.1093/oxrep/gru011 The Author 2014. Published by Oxford University Press. For permissions please e-mail: journals.permissions@oup.com

The exercise of Irish economic sovereignty in long-term perspective 209 Inward orientation eventually ran out of steam, culminating in the deep recession and sustained emigration of the mid-1950s. The 1958 document, Economic Development, produced by a civil service team under the leadership of the Secretary of the Department of Finance, T. K. Whitaker, is widely heralded as a key turning point in the debate on outward-orientation. As Whitaker later wrote, something had to be done or the achievement of national independence would prove to have been a futility. Irish national income per capita is estimated to have been around 55 per cent of the UK level in the late 1920s (Ó Gráda, 1994, p. 382). By 1960, as seen in Figure 1, it had still reached only 60 per cent of the UK level. 1 Among the culprits identified by Ó Gráda and O Rourke (1996) for the lack of convergence were the trade-protectionist policy stance combined with a failure to raise educational throughput until industrialization began in earnest in the 1960s. A few short years before the publication of Economic Development, Ireland had stumbled on the policy of export profits tax relief, the origin of the low corporation tax regime that remains a cornerstone of Irish policy to this day. Though initially envisaged as an incentive to indigenous exporters, by the time it was introduced it was realized that it could prove an effective magnet for export-oriented foreign firms. Though the earliest foreign firms to arrive as a result of the new policy were European to whom Ireland s largely tariff-free access to the UK and Commonwealth markets was Figure 1: Per capita gross national income (purchasing power standard): Ireland relative to the UK Source: European Commission, AMECO database. 1 Gross national income (GNI) is regarded as preferable to GDP as a measure of Irish national income, as it includes net income from abroad. For the UK and most other European countries the gap between these aggregates is insignificant. For Ireland, however, GNI is 20 per cent lower than GDP because of the large profits accruing to foreign multinational corporations (MNCs) for which Ireland serves as an export platform.

210 Frank Barry important American firms seeking access to the European market began to dominate when Ireland joined the European Economic Community (EEC) in 1973. Under protectionism, the legal impediments to foreign ownership notwithstanding, the vast bulk of inward foreign direct investment (FDI) had been of the tariff-jumping variety and was almost exclusively British. Fiscal autonomy did eventually help, therefore, in diversifying Irish export markets and FDI sources. Diversification of external links remains an ongoing priority in Irish long-term policy, as evidenced by a recent official statement of the broad principles underlying Irish foreign economic policy: One of the central thrusts of Irish economic policy... has been to reduce the country s trade dependence on the UK. Policy initiatives with this aim in mind have included EU entry in 1973, the break with sterling in 1979 and subsequent entry of the Irish pound into the European Monetary System, support for the establishment of the Single European Market in 1992, and adoption of the euro in 1999. (Forfás, 2003) 2 While fiscal autonomy in the trade sphere has always been exercised with a degree of radicalism with tariff protection eventually replaced by export and FDI incentives monetary/exchange-rate policy was exercised much more guardedly for a long period of time. The paper is organized as follows. The next section provides a largely chronological account of the exercise of fiscal autonomy as it pertains to trade, industrial, and regional policy. The following section provides an account of monetary and exchangerate policy. Here, too, as the Forfás statement makes clear, the overriding concern has been to rebuild Ireland as a region of the EU rather than of the UK economy to replace the Act of Union of 1800 with Economic and Monetary Union (EMU) within Europe. The penultimate section discusses Irish migration and migration policy throughout the period since independence. The paper concludes with some comments on the current economic crisis. II. Fiscal autonomy and trade, industrial, and regional policy Though a large majority of the Irish population voted for the separatist Sinn Féin party in the 1918 UK general election, independence would be achieved 4 years later only after a period of guerrilla warfare and harsh military reprisals. An indication of the nationalist perception of British economic interests in Ireland is provided by the following quotation from Seán MacBride (Lawlor, 2005), a one-time paramilitary leader and later government minister and Nobel peace prize winner: Ireland provided most of the British soldiers very cheaply, and by maintaining unemployment here, Britain could recruit numbers of men in Ireland for her army and for her industrial and agricultural requirements. Therefore it suited 2 Forfás is the policy advisory board for enterprise, trade, science, technology, and innovation.

The exercise of Irish economic sovereignty in long-term perspective 211 Britain to keep depressed conditions here, to have this cheap labour pool at its disposal. It was also a labour pool that could be dispensed with and shoved back to Ireland whenever they wanted to. Moreover, British policy had been one of preventing industrial development in Ireland, so as to avoid competition with home development, in order that Ireland would remain a market for British industrial goods (and) so that it would provide food for Britain. This perspective kept fiscal autonomy to the forefront of policy consciousness as the Sinn Féin plenipotentiaries negotiated the terms of the Anglo-Irish Treaty that led to the establishment of the Irish Free State in 1922. The Home Rule Act of 1914 had promised a degree of self-government but had been suspended for the period of the First World War. Westminster was to retain control of taxation and of trade and monetary policy, however, and the imposition of protective duties on Irish-British trade was explicitly precluded. Fiscal autonomy was granted by the British only at the very end of the Treaty negotiations. 3 Article 5 of the Treaty committed the new Irish state to pay imperial war pensions and a share of the imperial debt, the amount of such sums being determined in default of agreement by the arbitration of one or more independent persons being citizens of the British Empire. The treaty also provided for the establishment of a Boundary Commission to decide on the delineation of the border between the Free State and Northern Ireland. Under the terms of an intergovernmental agreement concluded in 1925, the border was to remain unchanged and Britain would write off this debt obligation. The Cumann na ngaedheal government that ruled the new state for the first 10 years of its existence was an alliance of free-traders and protectionists born solely of acceptance of the Treaty. The former accorded priority to agriculture, which accounted for more than half of total employment at the time. As Meenan (1967) puts it: farmers could be prosperous only if they were able to export. But precisely because the British market was open to the world, the Irish farmer could compete only if his products were of good quality and capable of being sold at a competitive price. Tariffs, rates and taxes had to be kept as low as possible. The new government nevertheless introduced a policy of selective protection, which expanded in scale as elsewhere across the world as the Great Depression took hold. From its beginnings in 1926, Fianna Fáil, which came to power in 1932 and has been the dominant party of government since then, was ideologically committed not just to protection but to as high a degree of self-sufficiency as possible. 4 Under Fianna Fáil, policy shifted from selective to full-scale protection. The new policy undoubtedly generated some increase in manufacturing employment, though the full extent of this is difficult to gauge as the coverage of national industrial statistics improved over time. On agriculture the party was influenced by a strand of nineteenth century thought that had blamed the depopulation of the country on the expansion of 3 Trade with Britain would be carried on within the framework of the system of Imperial Preferences, which offered Commonwealth countries preferential access to the UK market in return for preferences to British imports. 4 Fianna Fáil was founded in 1926 following a split within the defeated civil-war camp.

212 Frank Barry cattle at the expense of tillage. 5 Subsidies were introduced to encourage the growing of wheat and sugar beet, though this merely led to the displacement of other crops. Total acreage under tillage did not expand until the Second World War. Superimposed on the effects of protection and the Great Depression over the 1930s was the tariff war with Britain that was triggered by the new government s stance on the controversial land annuities. Agrarian unrest in the late nineteenth century had induced the British government to provide loanable funds to Irish tenants in a massive land redistribution programme. The incoming Fianna Fáil administration refused to forward the annuities to London, retaining them instead for the Irish Exchequer. In an attempt to recoup their value, Britain retaliated with substantial tariffs on Irish agricultural exports. The dispute, though it declined in intensity after a number of years, was comprehensively settled only in 1938 on terms that were very favourable to Ireland as Britain sought to tie up such loose ends with the slide towards war in Europe. Another plank in Fianna Fáil s protectionist platform was the control of foreign ownership of industry, as legislated for by the Control of Manufactures Acts of 1932 and 1934. These acts were never strictly policed however. The onus was on the government to prove non-compliance, and no prosecutions were ever pursued under the legislation. Many foreign firms managed to set up in Ireland by adopting a shareholding structure that complied with legislative requirements but with merely nominal capital size. The official tolerance of evasion was indicative of a recognition of the value to the Irish economy of the employment generated and of the access to foreign capital and skills that it allowed (Neary and Ó Gráda, 1991). By the late protectionist period a substantial proportion of the manufacturing workforce was employed in foreign largely British tariff-jumping firms. Industrial protection made little difference during the Second World War, of course, but by the 1950s the policy had run out of steam. The decade was characterized by low growth, recurring balance of payments crises, high unemployment, and massive emigration. Conventional wisdom ascribes the turn-around in policy to two key figures: Seán Lemass and T. K. Whitaker. Lemass had been the architect of protectionism as Minister for Industry and Commerce in most Fianna Fáil governments since 1932. As Taoiseach (Prime Minister) from 1959 to 1966, however, he took on board the new policy recommendations of T. K. Whitaker, Secretary of the Department of Finance from 1956 to 1969. The conventional account, however, downplays the importance of the intensified electoral competition of the time and undervalues the achievements of the two non-fianna Fáil ( Inter-Party or coalition) governments of 1948 51 and 1954 7. The move to outward-orientation was, in fact, a tale of two liberalizations (Barry, 2011; Barry and Ó Fathartaigh, 2012). The earlier liberalization was initiated by the Inter-Party governments, the first of which established the Industrial Development Authority (IDA) in 1949. This body would later be recognized to be perhaps the most powerful governmental agency in Ireland. The second Inter-Party government introduced a nationwide system of industrial grants and export-profits tax relief. This was the forerunner of Ireland s low corporation tax regime that remains in place to this day and that Padraic White, long-serving Managing Director of the IDA, refers to as the unique and essential foundation stone of Ireland s foreign investment boom (MacSharry and White, 2000, p. 250). 5 Again, modern economic historians disagree (e.g. O Rourke, 1991).

The exercise of Irish economic sovereignty in long-term perspective 213 The second liberalization the trade liberalization heralded by the signing of the Anglo-Irish Free Trade Area Agreement of 1965 and Ireland s subsequent accession to the EEC in 1973 is correctly associated with the names of Whitaker and Lemass. The two initiatives were temporally and logically distinct. The Inter-Party government that came to power in 1948 was, as the first governments of the 1920s had been, a coalition of protectionists and free-traders. It was clear, however, that, with conditions exacerbated by the dollar shortage, some new initiative was required to stimulate exports. This was one of the functions of the new IDA, which was established under a non-civil service board. The IDA was located outside the civil service because the Department of Industry and Commerce, which might have been seen as its natural home, remained strongly wedded to protectionism. Already by 1950, however, the Department itself recognized that the proposed export profits tax relief, which had initially been thought of as a stimulus to indigenous exports and was strongly opposed by the Department of Finance and the Revenue Commissioners, might serve to attract export-oriented foreign industry. This perception was strengthened when a Marshall Aid-funded study by a team of New York consultants drew attention to the success achieved by Puerto Rico with a similar initiative. Puerto Rico s status bore similarities to Ireland s: as a US protectorate it had tariff-free access to the US market (as Ireland had succeeded in negotiating with the UK for its small volumes of manufactured exports), while retaining full control of its tax regime. Even before the measure was finally introduced, the IDA had run several missions to continental Europe to advertise Ireland s attractions as an export platform and had achieved some success in attracting German firms. By 1956 the IDA had a special representative in the US and was actively seeking to attract US FDI. 6 Fianna Fáil was facilitated in overcoming its traditional hostility to foreign ownership at this juncture because it appeared that the policies might be targeted primarily at US rather than UK firms. Draft notes for the announcement of the measure recently recovered from the archives, however, state that: I would visualise that many English manufacturing concerns would find it worth their while to open... trading companies in Ireland... (so that their exports would be made here) to benefit from the favourable rate (Barry, 2011). This reference to British companies did not appear in the speech. The first ten foreign companies to set up in Ireland through the offices of the IDA, however, included six British companies alongside three German and one Dutch company. Very many of the early IDA-sponsored companies were British and very few were American. The logjam on foreign ownership had been breached, however. A few years later Fianna Fáil, upon returning to government, introduced its own initiative to develop an export-processing zone at Shannon Airport. The Finance Act of 1958 offered a 25-year exemption on export profits for qualifying companies establishing at the airport, at a time when the general tax remission was for 10 years. Interestingly, this idea also came from Latin America, based on the success of the Colón Free Zone in Panama. The majority of large companies attracted by this initiative were American. Regional policy had been conducted over most of the protectionist era by exerting political pressure on new firms over their location decisions and occasionally by offering 6 By 2010 it would have six offices in the US, four in Europe, nine in the Asia-Pacific region, and one in Brazil.

214 Frank Barry them monopoly positions if they agreed to establish in particular areas (Barry and Ó Fathartaigh, 2012). Under the new dispensation, differential grant payments were used for this purpose. The Buchanan Report of 1968 proposed a policy of promoting a small number of growth centres on the basis that growth would be self-sustaining only in centres above a critical size, but after a heated debate that largely pitched economists against Catholic social theorists these proposals were eventually rejected by government. The growth in foreign industry from 1956 contributed to a diversification of Irish exports away from the UK, even before Ireland joined the EEC. Manufactures as a share of total exports grew from 60 per cent in 1960 to 74 per cent in 1971. While the UK had taken 73 per cent of total exports in the earlier year, by 1971 it was down to 66 per cent. It fell even further, from 74 to 62 per cent, as a destination for manufactured exports. The new strategy also clearly diversified the sources of inward FDI. The vast bulk of foreign investment in Ireland under protectionism was by UK firms. New European firms began to enter from the mid-1950s and there was a substantial inward migration of US firms particularly upon EEC entry. Today the US is by far the most important source of export-oriented inward FDI, while the UK is relatively insignificant, as seen in Table 1. EU membership contributed massively to the further diversification of Irish export markets. Irish agricultural interests had favoured EU accession with or without the UK as a way of escaping from under Britain s traditional cheap food policy. When the UK first applied for membership in 1961, the Taoiseach, Seán Lemass, communicated as follows to the EEC Council of Ministers: Because of the close inter-relationship of the economy of Ireland and that of the United Kingdom, and the vital interest of Ireland in agricultural trade, the Irish government would wish to have the discussions for the admission of Ireland to the Community completed at the same time as those for the United Kingdom. The Fianna Fáil government was assisted in implementing this dramatic U-turn on economic strategy by the publication in 1958 of Whitaker s report on Economic Development. Uniquely, the report was published as a civil service document under Whitaker s name. It may be surmised, Lee (1989, p. 352) writes: that Lemass had little ambition to inflict on his backbenchers, or on de Valera [the Taoiseach of the time], the enlightenment that would be willingly proffered from the opposition benches about the manner in which Fianna Fáil had at last seen the light, and was now reneging on its earlier self. The de-politicization of planning was too useful an asset to be wantonly surrendered to the capricious vagaries of Dáil [parliamentary] debates. Table 1: FDI source-country diversification (%) UK Rest of Europe US Rest of world FDI liabilities, 1950 100 FDI liabilities, 2001 3 24 14 54 8 Source: Lane and Ruane (2006) for most recent data.

The exercise of Irish economic sovereignty in long-term perspective 215 From 1961, EU entry became a strategic foreign policy objective for Ireland. 7 Some Commission officials had suggested at the time that associate membership might be more appropriate for Ireland as an underdeveloped economy. Associate membership, however, would not have guaranteed full participation in EEC agricultural arrangements or eligibility for the various sources of financial assistance available. A free trade agreement with the UK was hence sought as a way for Ireland to demonstrate its willingness to compete on a level playing field. The Anglo-Irish Free Trade Area Agreement was duly signed in 1965. As FitzGerald (2000, p. 176) puts it, Ireland had to go one step backwards (in terms of economic dependence) in order to go two steps forward towards diversification. Trade liberalization drew attention to the importance of education in climbing the ladder of comparative advantage (National Industrial Economic Council, 1964). An important survey of the education system undertaken with the assistance of the Organization for Economic Cooperation and Development (OECD) was published in 1965. It reported that over half of Irish children left school at or before the age of 13. This generated newspaper headlines and presaged the introduction of free secondlevel education and free access to special transport networks for all second-level school pupils in 1967. These reforms had a substantial impact on the participation rates of those from less well-off backgrounds. The proportions completing the full cycle and going on to third-level education increased dramatically in consequence. Since EU accession in 1973, EU regional aid had been the focus of considerable Irish attention. McAleese (2000) lists Ireland s contribution to the development of EU regional policy as one of its few original contributions to strategic policy formulation in Europe, while its productive use of Structural Funds impressed many European economists by showing how financial assistance can spur economic performance. Ireland s rapid export-led convergence on Western European living standards over the 1990s was preceded, however, by fiscal crisis and convergence failure in the 1980s. In a bout of naïve Keynesianism, the government in 1977 instituted a major pro-cyclical fiscal expansion, which it described as a self-financing fiscal boost. As a later Finance Minister (from the same political party) would astutely observe: Tax cuts were delivered in anticipation of pay moderation rather than in response to it. It was all carrot and no stick. With the rise in world interest rates in the wake of the second oil shock, the deficit spiralled out of control. Governments from the early 1980s responded by raising taxes, with Ireland exhibiting the fastest growing tax burden in the OECD. This proved problematic, given the decentralized nature of the Irish trade union movement of the time. The tax burden raised wage demands and exacerbated unemployment, making the fiscal targets more difficult to achieve, in a process well described by Daveri and Tabellini (2000). Unemployment hit a high of 17 per cent and the debt-to-gdp ratio stood at 120 per cent in the mid-to-late 1980s, before a series of policy reforms and fortuitous shocks ushered in the so-called Celtic Tiger era. As summarized by Barry (2004): the beneficial shocks included a change in fiscal strategy in 1987 which finally resolved the long-running crisis in the country s public finances. This allowed 7 The new employment generated by the post-1956 FDI inflows served as a counter-balance to the protectionist-era manufacturing jobs that would inevitably be wiped out (McAleese, 1975).

216 Frank Barry Table 2: Export market diversification (%) UK Rest of Europe North America Rest of world Share of manufactured exports, 2011 12 38 30 (USA) 20 of which: -foreign-owned firms 8 38 34 (USA) 20 -Irish-owned firms 40 38 7 (USA) 15 Share of services exports, 2011 18 45 9 28 Note: The fact that the same figure appears three times in the column pertaining to the rest of Europe is purely coincidental. Source: Central Statistics Office. room for future tax reductions, which, in combination with the country s newly developed social partnership model of wage determination, bolstered competitiveness. The doubling of the EU Structural Funds in 1989 made it possible to implement the badly-needed infrastructural projects that had been put on hold as part of the change in fiscal strategy (while) the lead-up to the Single Market saw a huge increase in FDI flows both into and within Europe, of which Ireland captured a sharply increased share. The abolition of restrictive public procurement policies as part of the Single Market process particularly advantaged smaller FDI-oriented states such as Ireland. 8 Foreign affiliates as a consequence of Ireland s long-term strategy combined with EU membership and the Single Market now account for higher shares of Irish employment and value added in both manufacturing and services than is the case for the 20 or so (of 34) member states reported on by the OECD (2010). As seen in Table 2, these firms are much less oriented towards the UK than are Irish indigenous manufacturing firms. (This breakdown is not available for services exports, which today almost match manufactured exports, but the pattern is likely to be similar.) Notwithstanding these developments, export-led growth gave way over the new millennium to an unsustainable construction boom, driven as analysed in the next section by EMU membership and the Irish government s failure to realize the implications of the new policy environment. The crisis-ridden economy of today can be usefully thought of as a high-powered engine dragging a massive anchor. The engine is comprised of the economy s export sectors, the vast bulk of which are FDI-intensive (Barry and Bergin, 2012). The anchor is, of course, the private debt that developed over the bubble period and the public debt that accumulated as a consequence of the crash and the banking bail-out. III. Monetary and exchange rate policy The government in 1927 established an ad hoc commission under the chairmanship of H. Parker Willis of Columbia University to advise on future currency arrangements. 8 As Hynes (2014) puts it, the benefits of independence can be leveraged to greater advantage in an FDIplentiful world.

The exercise of Irish economic sovereignty in long-term perspective 217 This recommended the establishment of a new unit of account (the Irish pound) at par with sterling and the creation of a standing Currency Commission to administer the introduction of Irish legal tender currency notes against receipt of sterling. Following the report of another ad hoc Government Commission of Inquiry in the 1930s, it was decided to replace the Currency Commission by a Central Bank with expanded powers. The new Central Bank came into existence in 1943. Its activities were tightly circumscribed by the continued existence of a backing requirement for the currency, however, and by the fact that the banking system, with its large net holdings of external assets, had no need of the new Central Bank as a lender of last resort. Practice remained conservative thereafter. Total gold and foreign exchange reserves of the Central Bank always comfortably exceeded the note issue. On this evidence, Honohan (1997) concludes that the Central Bank retained many of the essential characteristics of a currency board right up to the end of the sterling link in 1979. The system s ability to withstand shocks was helped by the additional reserves held by the commercial banks, by the substantial degree of trade and financial integration between Ireland and the UK, and by the fact that the link imposed no severe discipline because of general sterling weakness. When sterling fell sharply against both the US dollar and the German Deutsche Mark (DM) in the mid-1970s, however, it became clear that the sterling link no longer provided financial stability. There was a strong perception also that Britain s relative economic decline would continue, raising the importance of diversification for Ireland still further. A more attractive type of exchange rate regime hence appeared to be on offer when France and Germany proposed a zone of monetary stability in Europe (the European Monetary System (EMS)) in April 1978 (Honohan and Murphy, 2010). Ireland successfully negotiated for cash transfers from the EU to help absorb the competitiveness losses that the country would suffer if sterling were to depreciate in the short term, as expected. The final decision to break the sterling link represented a political choice for staying in the vanguard of European integration rather than a view on the technical merits of the EMS as an exchange rate regime for Ireland (Baker et al., 1996). There was no clean break with sterling as yet, however. Irish indigenous manufacturing is much more labour intensive than the foreign-mnc sector and, as seen above, is much more dependent on the UK market. This, and the fact that Irish goods also compete primarily with sterling-denominated goods on the home market, amplifies sterling s importance relative to the UK share in Irish trade. The Irish pound was devalued three times within the EMS in 1983, 1986, and 1993 each time in response to sterling weakness. The yield curve showed that markets did not expect the new exchangerate arrangement to lead to a sharp reduction in inflation and it would, indeed, take 10 years for Irish inflation to fall to German levels. Capital flight, furthermore, which reached 6 per cent of GNP in 1986, illustrated a lack of faith in the commitment, which would of course be difficult to honour given the fiscal expansion and disequilibrating wage developments of the late 1970s discussed earlier (Leddin and Walsh, 2003). The Irish government s attempt to defend the exchange rate before ultimately capitulating in the currency crisis of 1993 has been estimated to have cost the state around 1.5 per cent of GNP. The devaluations seemed to have had long-lasting beneficial competitiveness effects. Having sterling as a nominal anchor precluded a devaluation cycle whereby

218 Frank Barry the anticipation of devaluation is built into nominal wage demands, forcing a further devaluation as unemployment rises. This nominal anchor also explains why Ireland never developed a destabilizing carry trade, as Iceland and other inflation-targeting countries would later do. The Irish currency crisis was part of a broader crisis within the EMS associated with German reunification. German monetary policy tightened in the face of postreunification fiscal expansion. These policy settings were not appropriate for the rest of Europe and exchange-rate bands were ultimately widened from a margin of 2.25 per cent to 15 per cent. This period of essentially floating rates proved advantageous for Ireland in that it allowed the monetary authorities to stabilize the effective exchange rate by driving a middle course between sterling and the DM. Participation in EMU would preclude such possibilities in the future. In the mid-1990s the Economic and Social Research Institute (ESRI) was commissioned to evaluate the costs and benefits for Ireland of participating in the single currency project. The report (Baker et al., 1996) concluded that Ireland can expect to benefit modestly in terms of income and employment through membership of Economic and Monetary Union. Publication of this report triggered a massive debate among Irish economists. Critics argued that the consequences of potential sterling weakness were underestimated, that the projected lower interest rates would not necessarily be beneficial for Ireland, that the Irish business cycle was out of alignment with that of the euro zone core and hence that European Central Bank monetary policy would be inappropriate for Irish conditions, and that the European project lacked the key element of fiscal federalism that acted as an automatic stabilizer for region-specific shocks in the US. This latter point had been raised in the broader European debate, with Costa and De Grauwe (1999) warning that failure to create a European government with similar responsibilities to current national ones creates the risk of the break-up of the monetary union. De Grauwe (1998) warned furthermore of the increased risks of banking crises and contagion unless regulatory and prudential control of banking were centralized at supra-national level. The fact that these broader issues did not appear in the terms of reference for the ESRI study recalls Lee s (1984, p. 5) early observation that while the political skills of Irish representatives in negotiating positions are widely acknowledged... there seems to be no comparable criterion for assessing the calibre of conceptualization of the Irish case. As in the earlier EMS case, Ireland had already received financial transfers in this case from the EU Cohesion Fund to help it to participate in EMU. Laffan and O Mahony (2007) indeed entertain the possibility that Irish governments agreed to projects such as economic and monetary union and foreign and security policy reforms in return for increased structural funds, a strategy termed conditionally integrationist. It would have been politically difficult to opt out under these circumstances. The ESRI report concurs: Whatever other derogations Ireland may have received over the years, they are as nothing compared with failure to join the EMU. Such a result would entail risks which are hard to evaluate, but may be considerable. The history of international cooperation in monetary affairs suggests that the political advantages of membership

The exercise of Irish economic sovereignty in long-term perspective 219 in a co-operative monetary and economic area are less evident when economic conditions are good; it is in the downturn when outsiders may be penalised or at least when assistance to a non-member may be more needed and less forthcoming. IV. International migration and migration policy A Common Travel Area Agreement allowing mutual freedom of travel, residence, and employment has been in place between Ireland and the UK throughout the period since 1922, other than for a brief period during the Second World War. The primary reason has been that the two states share a land border on the island of Ireland. The existence of the common travel area has led to each state s nationals being accorded special status in the law of the other state and has entailed the enforcement by each state of the immigration policy of the other state (Ryan, 2001). The common travel area and the fact that for islands frontier controls are the least intrusive way to prevent illegal immigration meant that neither Ireland nor the UK signed up to the Schengen agreement which abolished border controls across much of the rest of Europe. Until recently, given its peripherality and its history of sustained emigration, limited employment opportunities, and lack of colonial ties to developing countries, Ireland had not had to give much consideration to a formal immigration policy. Until the Celtic Tiger era of the 1990s, every decade since the Great Famine of the 1840s (with the minor exception of the 1970s) had seen net emigration. This changed massively over the boom of the 1990s and beyond, as seen in Figure 2. Up to the year 2000 most of this inflow consisted of Irish nationals returning primarily from the UK. From 2001 other source countries surpassed the UK in importance, and from 2004 the vast bulk of inward migrants came from the new EU accession states. Ireland was one of the few Western EU countries to open its labour market immediately to the new Central and Eastern EU entrants upon accession. This may not have Figure 2: Estimated net population migration (thousands) 120 100 80 60 40 20 0-20 -40-60 Source: Central Statistics Office.

220 Frank Barry been unrelated to the introduction of a minimum wage in Ireland set at a very high fraction of median earnings by European standards several years earlier. By contrast, it chose to maintain a work-permit requirement for Romanian and Bulgarian nationals when these countries acceded to the EU in 2007 because of the severe economic downturn of the time. Since 2010 net flows have turned negative for all regional groupings for which data are reported (the UK, Western Europe, the new EU member states, the United States, and the rest of the world). Immigration laws have been tightened over recent years in two areas in particular. The first concerns work permits. Ireland has moved away from what had been a relatively liberal work permit system as most of the country s low-skilled labour needs can now be met from within the enlarged EU. The second area is citizenship. Prior to a constitutional amendment in the mid-2000s, Ireland had granted citizenship to anybody born in the country. Non-Irish parents of Irish-born children could then apply for residency based on the citizenship of their child. Following concerns that this system was being exploited, the law was changed such that a person born in Ireland to non- Irish parents is now automatically entitled to citizenship only if one of the parents was lawfully resident in Ireland for three of the four previous years (Ruhs and Quinn, 2009). Emigration was traditionally of much greater concern to Ireland than immigration. Until the 1930s, the US was the primary destination for Irish emigrants. When the US moved to restrict immigration with the passage of legislation in 1924, the Irish Free State, as part of its battle for international recognition, lobbied for an immigration quota separate from that of Britain. With the help of influential Irish Americans, and in the face of counter-lobbying by the British, a separate quota was achieved. Though it was reduced in 1929, it was sufficiently large to accommodate all those who applied. National quotas came to an end in the 1960s, but a return to heavy emigration in the 1980s raised demands for increased US visa allocations. These were only partly met by US visa programmes sponsored by Irish-American politicians. The problem of the undocumented Irish in America remains the subject of lobbying by the Irish government. Its offer of a reciprocal commitment of easier entry for a like number of Americans has been lauded by one former US congressman as a creative input into the search for a solution, even if the Irish authorities may have been relying on the unlikelihood of large numbers of Americans taking up such an offer (Morrisson, 2007). V. Concluding comments Ireland, of course, remains an Atlantic economy, though the patterns of trade, capital, and migration flows have changed substantially since independence. At the beginning of the period, the UK accounted for the vast bulk of Irish exports and imports while the US was the primary destination for Irish emigrants, other than for a few short years in the early 1920s when many who were ill-disposed to independence migrated to the UK. Most inward FDI until the shift towards outward-orientation in the 1950s came from the UK. Today, most export-oriented FDI comes from the US. American and other exportplatform firms sell mainly into continental Europe, though indigenous industry remains more focused on the UK market and is particularly vulnerable to fluctuations in sterling.

The exercise of Irish economic sovereignty in long-term perspective 221 Overall, though, economic sovereignty has helped to achieve a strong diversification of external links. Ireland is much less a region of the UK economy than it would have been had Home Rule been accepted rather than independence. In adopting a long-term perspective the paper has had little to say on the current global crisis. This has been particularly damaging to Ireland, as seen above in Figure 1. Ireland s FDI-intensity, however, has not been problematic. The FDI-dominated export sector has performed strongly over the downturn (Barry and Bergin, 2012). Why then was Ireland so adversely affected by the global crisis? The fault arguably lies with policy-making processes. Irish fiscal policy had been unusually pro-cyclical by European standards, not just over the Celtic Tiger boom but even beforehand. The Irish political system seems poorly configured to deal with the populist pressures that arise everywhere when tax revenues are buoyant. It would have been advantageous had Irish politicians used the political cover provided by EU criticism to counteract such pressures, as advocated at the time by Barry and FitzGerald (2001). Mention was made above of the political cover provided by the civil service advice of T. K. Whitaker and the Department of Finance in implementing the U-turn on protectionism in the late 1950s and early 1960s. The usual articulation of the separation of powers between executive, legislature, and judiciary relates more to the US system than to those of Britain and Ireland, whose legislatures play a much weaker role in holding government to account. This makes the separation of powers between government and bureaucracy more important. Barry (2012/2013) argues that the reduced independence of the Irish civil service and the excessive deference of the Central Bank of Ireland over the period leading up to the crisis reduced the ability of the bureaucracy to serve as a defence against populist political pressures. References Baker, T., Fitz Gerald, J., and Honohan, P. (eds) (1996), Economic Implication for Ireland of EMU, Dublin, Economic and Social Research Institute. Barry, F. (2004), Export Platform FDI: the Irish Experience, EIB Papers, 9(2), 8 37, Luxembourg, European Investment Bank. (2011), Foreign Investment and the Politics of Export Profits Tax Relief, 1956, Irish Economic and Social History, 38, 54 73. (2012/2013), Politicians, the Bureaucracy and Economic Policymaking over Two Crises: the 1950s and Today, Symposium on Reform of Public Policymaking, Journal of the Statistical and Social Inquiry Society of Ireland, 42, 81 8. Bergin, A. (2012), Inward Investment and Irish Exports over the Recession and Beyond, World Economy, 35(10), 1291 304. FitzGerald, J. (2001), Irish Fiscal Policy in EMU and the Brussels Dublin Controversy, in Fiscal Policy in EMU: Report of the Swedish Committee on Stabilization Policy in EMU, Stockholm, Statens Offentliga Utredningar. Ó Fathartaigh, M. (2012), The Industrial Development Authority, 1949 59: Establishment, Evolution, Expansion of Influence, IIIS Discussion Paper 407, Trinity College Dublin, forthcoming in Irish Historical Studies. Costa, C., and De Grauwe, P. (1999), EMU and the Need for Further Economic Integration, in W. Meeusen (ed.), Economic Policy in the European Union, Cheltenham, Edward Elgar. Daveri, F., and Tabellini, G. (2000), Unemployment, Growth and Taxation in Industrial Countries, Economic Policy, 30, 47 104.

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