100 years of Irish economic independence

These articles originally appeared at Econlib in December, 2022

1922 – 1988

At the Irish Free State’s birth in 1922, hopes were high that independence from Britain – what the 18th century nationalist Theobald Wolfe Tone called “the unfailing source of all our ills” – would lead to greater prosperity. Free State leader Michael Collins said the Irish “were so crushed during the British occupation that they were described as being ‘without the comforts of an English sow’” but “What we hope for in the new Ireland is to have such material welfare as will give the Irish spirit that freedom” to “once more to reach out to the higher things in which the spirit finds its satisfaction.”

But for several decades after independence such hopes went unfulfilled. In 1922, Irish per capita GDP was 56% that of the United Kingdom. By 1943, this had fallen to just 39%, not regaining that relative level until 1969. In 1988, with the ratio 64%, The Economist ran an article on Ireland titled ‘The poorest of the rich’. Why did Ireland stay so poor for so long?

Economic conservatism

Independence came during a civil war between supporters and opponents of the treaty with Britain, but Ireland avoided the kind of economic collapse that occurred in many of the other countries which emerged after World War One, such as Hungary. This was largely due to the economic conservatism of the new government, composed of the treaty’s supporters, victors in the Civil War (and a powerful, formerly colonizing neighbor anxious for the country to succeed). The economic historian Cormac Ó Gráda wrote:

In what even some of their own supporters deemed a series of U-turns for economic nationalists, the Cumann na nGaedheal government led by Willian T. Cosgrave (1880-1965) rejected industrialization through import substitution and monetary experimentation, and placed its main hopes on a dynamic agricultural sector specializing in livestock and dairying. Partly because of its determination to minimize the debt burden of repairing the physical damage done by the civil war, it ran a very tight fiscal ship.

The result, historian David Fitzpatrick wrote, was that:

Under Cosgrave the Free State had achieved marked improvement in real income per capita despite its unadventurous strategy of balancing the budget, avoiding heavy borrowing, limiting state intervention, and merely dabbling in protective measures against British imports.

Despite or because of?

Economic nationalism

The global depression after 1929 hit Ireland and in 1932’s election Cumann na nGaedheal was defeated by Éamon de Valera’s Fianna Fáil, descendants of the Civil War’s anti-treaty side. Importantly, they handed power over peacefully.

Ó Gráda writes:

In economic policy Fianna Fáil aimed at greater self-sufficiency through the creation of an indigenous manufacturing sector and the switch of agricultural output from livestock towards tillage. For the followers of ‘Dev’ there was no conflict between economic nationalism and job creation: tariff protection would generate much-needed factory jobs and encouraging tilling would tilt the balance away from the ‘grazier’ and towards the smaller farmer and the farm laborer.

Such policies were widespread in the 1930s, but Ireland also launched an ‘economic war’ with Britain when de Valera’s government withheld payments due under the 1922 treaty. The British government retaliated with duties of 20% on Irish agricultural imports, which constituted 90% of all Ireland’s exports, and the Irish economy suffered badly. However, with war looming, the British concluded an agreement ending the ‘war’ in 1938 which permitted de Valera to claim victory.

Though neutral, Ireland’s economy was badly affected by World War Two. A post-war boom was short lived and, Ó Gráda notes, “Real national income virtually stagnated between 1950 and 1958.” “A corrosive pessimism took over,” he writes:

The July 1956 issue of the satirical monthly, Dublin Opinion, bore a cartoon on its cover showing a map of Ireland, with the caption ‘Shortly Available Underdeveloped Country…Owners Going Abroad’…There was an awareness that Irish economic growth was slower than anywhere else in Western Europe.

The primacy of domestic policy

Ireland’s first decade of independence gave it a firmer foundation for prosperity than almost any other country born in the 20th century. True, depression and world war presented a difficult environment for any country, but domestic Irish policy choices after 1932 motivated by what Ó Gráda calls “a nationalist and radical populism” exacerbated this. Compare Fitzpatrick’s description of policy under Cumann na nGaedheal above with economist Brendan Walsh’s of the subsequent period:

If an index of the state’s ‘capacity’ based on its use of [protectionist] instruments as well as on the share of GDP it controlled were developed, there is little doubt that Ireland would come out near the top of the international league table (non-socialist division).

Yet the hopes of the country’s founders went unfulfilled and Ireland’s economy stagnated despite this: or because of?

1988 – ?

The first decades of Irish independence would have been an economic disappointment to those who birthed the nation in 1922. Then, Irish per capita GDP was 56% that of the United Kingdom: by 1988 it had risen to just 64% and The Economist carried an article on Ireland titled ‘The poorest of the rich’.

Figure 1: Irish GDP per capita as % of United Kingdom’s

Source: Maddison Project

In 1997 Irish per capita GDP exceeded that of the United Kingdom for the first time (Figure 1) and The Economist now hailed the ‘Celtic Tiger’. Why did Ireland, so poor, suddenly become so rich?

The poorest of the rich

Ireland’s economy was badly mismanaged in the 1970s. Governments ran ever larger deficits and as a share of GDP Irish government debt rose from 40% in 1971 to 95% in 1991. This brought no economic benefit: unemployment rose from 6.6% in 1971 to 17.6% in 1987. The economist Dermot McAleese wrote that “high taxes, low confidence, high labour costs, excessive regulation and anti-competitive practices” plagued the Irish economy in the 1980s. Ireland’s accession to the European Economic Community in 1973 brought no respite from these economic woes.

The Celtic Tiger

By the end of the 1980s it was obvious that this was unsustainable. The government — with wide support — slashed spending and made credible commitments not to run deficits or inflate the currency. It deregulated and lowered tax rates. The 2002 Index of Economic Freedom ranked Ireland the world’s 4th freest economy.

Ireland’s corporate tax rate – 12.5% – is famously low, but there was more to Celtic Tiger fiscal policy than that. As economist Sean Dorgan argues, since 1987:

…personal tax rates have been reduced progressively from a base rate of 35 percent to 20 percent and from a top rate of 58 percent to 42 percent. Tax bands (brackets) have also been broadened so that the higher rate now applies to higher income levels than before. The power of low rates was also shown when the 40 percent capital gains tax rate was halved in 1999 to 20 percent and revenue increased by 50 percent in one year and by 270 percent over three years.

McAleese argues that controlling government spending was crucial:

The espousal of fiscal rectitude and new consensus economic policies was not in fact new. What was new was the decision to attack the debt by controlling public spending, rather than by increasing taxes. For a small, open economy, curbing public spending proved a far more productive way forward. It created room for tax cuts while simultaneously lowering the debt ratio. Another ploy was the introduction of a tax amnesty. Following on the high tax policy of the 1980s and the reorientation in fiscal policy, it proved hugely successful in terms of revenue generation. Domestic interest rates fell steeply as investor confidence grew, thus starting off that rare occurrence in modern economics, an expansionary fiscal contraction. Fears that strong fiscal contraction would prove deflationary were confounded, though precisely why this was so remains the subject of controversy.

The results were striking. Ireland’s economy grew at an average annual rate of 9.4 percent between 1995 and 2000. Real GDP growth outpaced that in the United Kingdom in every year from 1989 to 2003 and of the United States in every year after 1993. While Ireland’s GDP grew by 229 percent between 1987 and 2007, the figure was 161% for the United States and 152% for the United Kingdom. Government debt fell from 95% of GDP in 1991 to 25% in 2007 and unemployment fell from 17.6% in 1987 to 3.4% in 2001.

The bust

In 2008 this came to a shuddering halt. Growth collapsed and government debt and unemployment rocketed.

Some blamed Ireland’s low tax and light regulation policies. The reality was rather different, as economist Patrick Honohan explained:

Until about 2000, the growth had been on a secure export-led basis, underpinned by wage restraint. However, from about 2000 the character of the growth changed: a property price and construction bubble took hold…Among the triggers for the property bubble was the sharp fall in interest rates following euro membership. 

In short, there had been a good Celtic Tiger, based on sound money, low taxes, and light regulation, which had been replaced by a bad Celtic Tiger based on cheap credit following Ireland’s entry into the euro. True, there was much to condemn in the excesses of the boom’s later stages, but the fiscal and regulatory policies which had spurred a decade of solid growth were not among them.

The primacy of domestic policy (again)

In the century since ‘Irexit’ from the United Kingdom, Ireland’s economy has fared badly and fared well. Whether it has fared badly or well has not primarily, or even largely, been determined by its membership of the United Kingdom or even the European Union. It has been determined primarily, instead, by domestic policy decisions. So it will be with other more recent ‘exits’.