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03/09/2012

AN ASSESSMENT OF MEDIUM TERM PROSPECTS FOR THE IRISH ECONOMY, 2004 – 2007


AN ASSESSMENT OF MEDIUM TERM PROSPECTS FOR THE IRISH ECONOMY, 2004 – 2007

 

Ireland joined the European Union (EU) in 1973 as a peripheral and relatively poor state with an average per capita income that was 62% of the EU average. Ireland's disadvantaged position was recognised in 1988 when all of Ireland was designated as an 'Objective One' region, which meant that average incomes were at or below 75% of the EU average. In addition, since 1992 Ireland was one of four Member States to receive Cohesion Fund monies.

Ireland has thus enjoyed priority status in the EU for the purposes of regional transfers. Since 1988, Ireland has prepared two National Development Plans, the first from 1988 to 1993 and the second from 1994 to the end of 1999. The National Development Plan (1994-1999) and the accompanying Community Support Framework (CSF) identified four priority areas for expenditure in Ireland (European Commission Representation in Ireland, 2003):

·                     Support for productive investment

·                     Infrastructure

·                     The development of human resources

·                     Harnessing the potential of local initiatives

These priorities were implemented as Operational Programmes covering such diverse areas as industrial development, tourism, transports, rural development and environmental services.

All structural funds are channelled through government departments. The Department of Finance has overall responsibility for the CSF. Management of individual Operational Programmes is the responsibility of the relevant Government Department e.g. the Department of Marine and Natural Resources are responsible for the Fisheries Operational Programme. Activities supported by the various Operational Programmes are undertaken by the relevant state body.

A separate Monitoring Committee was established for the CSF and each Operational Programme. Membership of Monitoring Committees is taken from the responsible Government Department, Social Partners, Implementing Agencies, Regional Authorities and the European Commission. Monitoring Committees are responsible for reviewing progress and may decide to shift resources or change priorities within their Operational Programmes, The CSF Monitoring Committee may make such decisions across Operational Programmes.

            Under the Cohesion Fund, Ireland received € 1.5 billion between 1993 and 1999. For the present period, Ireland's allocation until the end of 2003 is € 580 million. At that point, Ireland's eligibility for the Cohesion Fund will almost certainly cease, as the country will have exceeded the eligibility ceiling of 90 % of EU average GNP. Cohesion Fund expenditure in Ireland has closely followed the recommended 50:50 split between transport and environmental projects.  ((European Commission Representation in Ireland, 2003)

In the period 1989-2001, Ireland's GDP per capita has increased from 70 % to 119 % of the EU average. Today, Ireland's GDP per capita is the second highest in the EU, after Luxembourg, while its unemployment rate is among the lowest. While many factors have contributed to this economic success, the support of the Structural Funds has certainly played a significant role.

            Foreign direct investment (FDI) has also played a crucial role in the overall development of the Irish economy over the past three decades, as Ireland has pursued an industrial strategy characterised by (i) promoting export-led-growth in Irish manufacturing through various financial supports and fiscal incentives, and (ii) encouraging foreign companies to establish manufacturing plants in Ireland, producing specifically for export markets. The significance of FDI for the Irish economy is now reflected in, the significant gap between GNP and GDP in 1994,

GNP was roughly 88 per cent of GDP in Ireland (Ruane and Gorg, 1997).

As regards the manufacturing sector, the high shares of output and employment in foreign-owned companies in Ireland also indicate the importance of foreign firms. Foreign companies produced roughly 69 per cent of total net output and accounted for 45 per cent of employment in Irish manufacturing industries in 1993 (Ruane and Gorg, 1997).

Employment in US companies accounted for more than half of the employment in foreign-owned firms in Ireland in 1995, having more than trebled since 1975. Thus the policy of attracting FDI projects from the US may be considered to have been very successful over the last twenty years, a success which is also evident in Ireland's having increased its "market share" of US investment in manufacturing industries (measured in terms of capital expenditures by US affiliates) in the EU from 2.6 per cent in 1983 to 7.3 per cent in 1993 and its market share in financial services from 0.2 per cent to 5.6 per cent over the same period (Ruane and Gorg, 1996a). The growing significance of US firms in Ireland is not surprising given the fact that they use Ireland as a base to serve the EU market. The EU has become an increasingly attractive product market for US companies, because of its rapid growth through enlargement and its increasing integration following the introduction of the Single European Market (Aristotelous, K. and S. Fountas, 1996).

            Ireland's recent success in winning large-scale FDI projects from the US, contributing to its "Celtic Tiger" acclamation has generated concern in some quarters that the country is becoming too dependent on FDI. The fact that indigenous companies appear to be prospering at present with increasing employment and profits rates has reduced concerns about 'crowding out', so that the attitude to FDI is not hostile in any way but simply marks a concern with dependency per se - the "what would happen if FDI globally declined" scenario. Clearly if Ireland were to suffer a massive outflow of FDI it would be a disaster, given its importance in the economy. Of perhaps more significant concern is the dependency on the US market, as the portfolio of investment sources has concentrated dramatically over the years. That concern is somewhat counteracted by recognition of the real attractiveness of Ireland as a base for US investment in Europe and the scale and dynamism of the US economy at present. Also of concern is the increasing geographical concentration of foreign investment projects in Ireland, which have led to new grant maxima being set for towns outside the major centres for high-tech industries. Effectively, these grants are available for investments outside Dublin, Cork, Limerick and Galway (Ruane and Gorg, 1996).

            Although Ireland has been experiencing great economic growth, it has not forgotten its people. The administrators have been giving free training to unemployed people through its Vocational Training Opportunities Scheme (VTOS). The training given hopes to ensure employability of the trainees. It also provides childcare support for lone parents undergoing training.

            Ireland’s National Development Plan (NDP) is the largest and most ambitious investment plan ever drawn up for Ireland. It involves an investment of over EUR 52 billion of Public, Private and EU funds (in 1999 prices) over the period 2000-2006. The Plan involves significant investment in health services, social housing, education, roads, public transport, rural development, industry, water and waste services, childcare and local development (National Development Plan, 2003).

            Implementation of NDP aims to ensure sustainable economic and employment growth, to consolidate and improve competitiveness, foster balanced regional development and to promote social inclusion (NDP, 2003). Investment proposals under the NDP will have a positive effect on employment prospects thereby assisting in the fight against poverty. Both men and women will benefit from the investment in all the Operational Programmes. Particular potential exists under the education and training measures in the Employment and Human Resources Development OP through mainstreaming of equal opportunities to assist men and women to compete on the same lines for the same types of employment. The increased investment in economic and social infrastructure such as water and waste management will facilitate compliance with EU Environmental Directives and Policy. Administrative procedures will be introduced for all Government Departments to ensure that policy makers are aware of the likely impact of all NDP proposals on rural communities. The operation of these procedures will contribute significantly to integrating the strategy for the economic and social development of rural areas with the objectives and principles of other policy initiatives and, in particular, of the National Anti Poverty Strategy (NDP, 2003).

In relation to the National Anti Poverty Strategy, this strategy is also included as an objective for the Programme for Prosperity and Fairness. The programme aims to keep the Irish economy competitive in a rapidly changing world, to provide a strong basis for further economic prosperity, improve the quality of life and living standards for all, and to bring about a fairer and more inclusive Ireland (Department of Taoiseach, 2000).

According to EU Business (2001), the risk of Ireland's economy overheating is not as great as others had thought, Ireland's Finance Minister, Charlie McCreevy, has told the Economic and Monetary Affairs Committee of the European Parliament. Consequently, by implication, the reprimand issued by the Council of Ministers for breaching the Broad Economic Policy Guidelines has been overtaken by events. Recent changes in the macro-economic environment have reduced somewhat the relevance of concerns that Ireland's last budget was too pro-cyclical, McCreevy claimed.

In particular a significant drop in Ireland's rate of inflation, a fall Ireland had predicted, but about which many observers had been sceptical - has taken some of the heat out of and off the Irish economy. And current growth projections are lower than they were when the Stability Programme for which Ireland came under fire was drawn up. McCreevy in no way conceded any ground to the Council of Ministers, but stressed that the risk of overheating is abating (and would abate still further if there were to be a significant outbreak of foot and mouth disease in Ireland). Ireland will also be hit by the slowdown in the United States.

            Replying to questions, McCreevy added that he did not feel "bullied" by the other Member States and indeed took the view that the cornerstone of common economic policy-making under the single currency remained the Stability and Growth Pact. At the same time, he suggested that a single approach to the Broad Economic Policy Guidelines might not fit all. Ireland's economy is different from the economies of mainland Europe, he argued, in the sense that it is separated from its markets by the sea, very open and closely connected to the global economy. "The Irish economy does not fit the textbook economic model."

And while not singling out any other country in particular, he did suggest that the Commission might not have been one hundred per cent even-handed in the degree of criticism it meted out to the various Member States for the extent to which they failed to comply with the Broad Economic Policy Guidelines. He appeared to feel that it was particularly paradoxical that such a successful economy should have come under the most fire. Better to have the problems Ireland has now, he pointed out, than those it had in the eighties when it was borrowing world-wide.

As Ireland is reprimanded by EU nations, EMU will have the effect of creating a very large currency area with an economic weight similar to that of the United States and with a single, deep and large financial market. These characteristics will promote the development of the euro as an international currency. These structural changes are likely to have an effect on the exchange rate of the euro. And this gives way to discussing other topics including EU developments and membership to the European Union.

Come May 2004, EU will have 10 new members: Cyprus, Malta, Czech Republic, Slovakia, Hungary, Poland, Slovenia, Estonia, Latvia, and Lithuania. It will be EU’s biggest enlargement. All previous enlargements have significantly impacted on the regional focus of the EU's external policies. UK membership was instrumental in introducing the Lome framework agreement and EU ties with Latin America were considerably strengthened by the accession of Spain and Portugal. There is little doubt therefore that the 2004 enlargement will influence, and has the potential to radically change, EU aid policies and regional focus (Davidson, 2003).

With the enlargement of EU come new talks about geo-politics. New policies will surely to be taken up as it is expected that economic migration and asylum-seekers will soon emerge. These problems are not new. It was once a topic as immigration rose when enlargements happened before.

Not all EU members apply or use EU laws. Ireland for instance, still follows its own fiscal policies, especially those concerning agreements with foreign investors. The economic boom that Ireland experienced during the past decade allowed it to provide its people with programmes that aides them in their daily living, thus improving their quality of life.

Another factor that affects the economy of Ireland, of course is the euro. Recently, the European Central Bank slashed its interest rate to 2% (BBC News, 2003). This is due to a risk of deflation as economists see it. But soon after the announcement the euro strengthened against the dollar. The fast strengthening of euro against the market is good, but it is not always good news especially for entrepreneurs. If the euro strengthens against the dollar investments will not be cheap.

With the effects of dollar against the euro, the same will be seen with oil prices. A change in rates between euro and dollar also comes a varied price of oil. Also, there are countries or region that can influence the price of oil. The two primary markets which influence the price of refined oil in the UK are North America (NYMEX) and Amsterdam Rotterdam Area/North West Europe (IPE). The latter tends to operate Monday to Friday from 9am to 5.30pm, whilst the former (in UK time) opens at 3pm (Southern Counties Fuels, 2002).

While in the short-term the outlook is very uncertain, the Irish economy remains fundamentally healthy. In the medium term it has the potential to grow at 5 per cent a year. Any under-performance in the next two years is likely to be matched by a subsequent spurt of activity, returning the economy to its trend growth path from 2005. The market services sector will play a gradually increasing role in raising output and employment. In the medium-term, less output and employment growth will come from the manufacturing sector.

The building sector will not grow significantly, with some fall in output likely later in the decade. A failure to maintain Ireland’s external competitiveness and a failure to deliver the necessary improvement in infrastructure could seriously affect growth in the medium term. A further substantial appreciation of the euro could also pose serious problems for the Euro area and the Irish economy.

However, there remains the possibility that the actual out turn would be better than forecast, fuelled by skilled immigration and further infrastructural investment. Tackling the infrastructural constraint on growth remains urgent. Development policy needs to adjust to take account of the changing roles of manufacturing and services.

The current very substantial investment in infrastructure, funded out of taxation, will benefit future generations. Investment in financial assets in the national pension fund is probably better undertaken when the infrastructural deficit has been dealt with some time in the next decade (Bergin, A. et al. 2003).

The Irish success story of the last decade has been built on the basis of EU membership and the completion of the single market. Enlargement of the EU will provide an important opportunity for Ireland to expand into new markets. Within the EU there will be a need to rethink its strategy and priorities. By the end of the decade, as one of the wealthiest members of the EU, Ireland will have new responsibilities and changing needs (Duffy et al, 2001. p. xiii).

            The economic boom has brought major benefits to the Irish people and serious wealth to a substantial minority. Inevitably, some have done better than others and a small minority may not have seen much improvement in their living standards. In many ways, the economic boom is a case study of the good consequences that follow from adopting policies built around the three pillars of macroeconomic stability, globalisation and competition in the market system to which the European Commission strongly subscribes. The challenge now is to convince the electorate in Ireland and throughout the Union -- that the benefits from European integration are not past tense, but continue into the future, while changing in form and substance as integration itself intensifies.

As we face into a sharp reduction in growth in 2002, the durability of the last decade’s gains will be put to the test. Economic history shows that countries that become prosperous tend to stay prosperous. Enough physical and human capital has been accumulated in the good times to enable these countries to survive the stresses of recession. This is encouraging for Ireland. Maintaining social consensus and reasonable pay increases is proving difficult. The education system needs continuous upgrading. There is need for ongoing focus on long run policy issues: traffic congestion, housing supply, and provision for pensions but these problems are partly the result of prosperity and they seem more soluble from our present position than they did a decade ago (McAleese, 2001).

The Irish economy like every economy, may it be an EU member or ASEAN member, has the sovereignty to plan on what it should be to cater the needs of its people. The enlargement of the European Union does not only affect Ireland but every member of the organisation. Although, Ireland is still under Objective One, does not mean that it should forget that it still has obligations and policies to follow, may it be verbal or written, to ensure the growth of the whole region and not just of its own.

Its rapid growth this past decade, only shows that it has a great potential to help other member countries when Objective One has been fully phased-out.  Economists may show different forecasts on Ireland’s medium-term economy, but if current administrators mishandle Ireland’s current economy then the forecasts will be of no use.

Infrastructures that will help include every county to the mainstream of businesses throughout Europe, at first, will enable the country to boost even further. Thus, giving more funds for future infrastructures not only in Ireland but also to the whole EU.

With Ireland’s economic success, an internal problem arises. Most countries have poverty problems, which can not be eliminated altogether, but can be slowly treated. According to a recent study by Whelan, C. et al, for the Economic and Social Research Institute (ESRI), the study updates our picture of poverty in Ireland using results from the Living in Ireland Survey carried out in 2001. The publication is the latest in a series monitoring living standards and assessing progress towards achieving the targets of the National Anti-Poverty Strategy. It describes trends in the extent of poverty, profiles those affected, and recommends how to monitor poverty in the future as living standards change.
           Key findings are:

The proportion of persons on incomes under 50%, 60% and 70% of median income continued to increase (median income is the level below which half the population falls).

For these households, the depth of income poverty increased substantially between 1994 and 2001.

Increases in income poverty were particularly striking for older people, for the retired, those in home duties and the ill/disabled.

There was also an increase in the numbers persistently below such relative income thresholds.

However the proportion below income thresholds adjusted upwards over time only for inflation declined dramatically. This reflects the extent to which real incomes have increased over this period across the population. Despite these real increases, social welfare benefits did not rise as rapidly as income from work and property; so more social welfare recipients fell below thresholds linked to average income.

‘Consistent’ poverty – low income combined with manifest deprivation - continued to decline so that by 2001 5% of households were below 60% of mean income and experiencing basic deprivation, compared with 15% in 1994. The target of the National Anti-Poverty Strategy is now to bring the numbers of ‘consistently poor’ below 2 per cent and, if possible, eliminate it altogether.

The study also looks at whether the set of deprivation items included in the measure of “consistent poverty” is still serving its intended purpose, of capturing what would be widely seen as generalised deprivation. An alternative index incorporating indicators that were not available when the original measure was developed is presented and recommended.

Poverty monitoring over the period to 2007 should take a broad focus, with attention paid to both relative income and consistent poverty with the amended set of indicators proposed (Whelan, 2003).

            With these problems Ireland should not be too proud of its achievements in the economics yet. The administrators should try to look into other country's movements against poverty. Ireland’s VTOS is a good start to improve their people’s well being; however, not all people have the capabilities to join the project. Further expansion of the project should be looked into.

            Ireland’s achievement should not only be based on its performance in the market but also in solving internal problems. Every country’s performance should be based on that. A very good economy is of no use to lift the country’s spirit if only few people are enjoying that achievement.

References:

Aristotelous, K. and S. Fountas (1996), 'An empirical analysis of inward foreign direct investment flows in the EU with emphasis on the market enlargement hypothesis', Journal of Common Market Studies, vol. 34.

BBC News. (2003). Euro Interest Rate Slashed. 5June 2003.

Davidson, Claire et al. (2003). EU Enlargement. BOND Briefing on Enlargement.

Department of Taoiseach. (2000). Programme for Prosperity and Fairness.

EU Business. (2001). Irish economy starts to cool. 17April 2001.

Gorg, Holger & Ruane, Frances. (1997). The impact of foreign direct investment on sectoral adjustment in the Irish economy. National Institute Economic Review.

McAleese, Dermot (2001). The Irish Economy: Recent Growth, European Integration and Future Prospects. Financial Times. Prentice Hall.

National Development Plan. (2003). NDP reaches mid-term evaluation stage.

National Development Plan. (2003). Impact of NDP.

Ruane, F. and H. Gorg (1996a), International Patterns of Foreign Direct Investment - Putting Ireland in Perspective, Report, Trinity College, Dublin.

Southern Counties Fuels. (2002). ‘Why Oil Prices Move’

The Economic and Social Research Institute. (2003). Medium-Term Review 2003-2010 No. 9.  July 2003.

The European Commission Representation in Ireland. (2001). Ireland – Catching Up.

The European Commission Representation in Ireland. (2003). The European Union in Ireland.

Whelan, C. et al. (10Dec. 2003). Monitoring Poverty Trends in Ireland: Results from the 2001 Living in Ireland Survey. The Economic and Social Research Institute.

 

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