In a guest blog, Frank Barry, Professor of International Business & Development at Trinity College Dublin, looks at the history of the Republic of Ireland’s economic policy and lessons for an independent Scotland.
Ireland’s separation from the United Kingdom in 1922 was achieved under very different circumstances from those prevailing today. Westminster had refused to accept the wishes of the Irish electorate as expressed in the 1918 General Election because of the consequences that the British government thought this would have had for the future of the Empire.
This increased Irish nationalist suspicions still further that Britain wanted to maintain the existing United Kingdom for its own selfish interests and strengthened the nationalist commitment to the achievement of full fiscal sovereignty (which had not been on offer under Home Rule). The ensuing war resulted in the partition of Ireland and the effective independence of what would later become the Republic of Ireland.
The economic performance of independent Ireland is reviewed in a study just published in the Oxford Review of Economic Policy entitled ‘Diversifying external linkages: the exercise of Irish economic sovereignty in long-term perspective’. The paper addresses how Irish fiscal autonomy has been exercised with respect to trade, industrial, and regional policy, and studies exchange-rate and migration arrangements between Ireland and the UK and the history of the national debt agreement reached between the two in 1921.
Ireland at independence in 1922 was a relatively poor, peripheral, predominantly agricultural region of the former UK, with an income level of around 55 percent of the British average. The nationalist drive to industrialise the economy behind high tariff barriers ran into the sand in the mid-1950s, by which time very little convergence on UK income levels had been achieved.
Export-oriented foreign direct investment provided the means out of the protectionist quagmire. The origins of Ireland’s low corporation tax regime date back to 1956. EEC membership triggered further US foreign direction investment (FDI) inflows, as did the Single European Market programme of the early 1990s, and changes in US tax administration in the late 1990s that facilitated ‘aggressive tax planning’ practices on the part of US Multinational corporations (MNCs).
The ‘Celtic Tiger’ era of the 1990s raised Irish income levels above those of the UK (even when foreign MNC profits are excluded from Irish national income). The recent collapse of the banking and construction sectors have shifted the ratio down towards around 90 percent.
For most of the period since independence, Ireland operated a currency board arrangement with the UK whereby total gold and foreign exchange reserves of the Irish Central Bank always comfortably exceeded the note issue so that sterling circulated freely in a 1-to-1 relationship with the Irish pound.
From 1979 the UK diverged from most of the rest of Western Europe on exchange-rate policy, and the Republic of 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. Migration policy issues between the two states on the other hand have been surprisingly unproblematic.
In a talk delivered to the annual conference of the Academy of International Business at York last April, I added a few further points to the material contained in the Oxford Review paper.
Independence would mean that Scotland would become a small open economy in a way that the UK is not. Fiscal policy would be much less effective in a Keynesian sense, making supply-side policies (or what we call industrial policy in the Republic of Ireland) more important. As a smaller, more peripheral economy than the existing UK – and one that is not (apparently) hugely successful in spinning off successful businesses – the optimal corporation tax rate would be lower than for the rest of the UK.
Scotland might not be able to replicate fully Ireland’s success in attracting US FDI, however, as the ‘aggressive tax planning’ practices of US MNCs referred to above rely on a feature of Irish tax law that was inherited from the UK but that the UK subsequently changed (in 1988). International pressures would likely prevent Scotland from reversing this 1988 UK decision.