TCS Daily

The Celtic Tiger

By Ben Powell - September 10, 2002 12:00 AM

Unlike most international summits involving Ireland, growth, not guns, was the topic of last week's meeting of US and Irish representatives. A reliance on market forces and rebuffing of restrictive EU policies has, in ten years, catapulted Ireland from Europe's economic backwater to the forefront of European economies.

The lessons of Ireland's ten year growth should have dictated a continuation of laissez faire economic policies. However, a specter of government interference hung over the conference.

In 1987 the Irish Republic's per capita income hovered at 63 percent of the United Kingdom's. From 1990-1995 Ireland's economy grew at more than five percent per year and from 1996-2000 positively raced at more than nine percent a year. Today, Ireland's $25,500 per capita income bests the United Kingdom's per capita average by $3,200.

The country's astounding ten year economic history has lead some to dub Ireland the Celtic Tiger.

The Celtic Tiger provides an excellent example of how real economic growth occurs - by utilizing market forces to free a flagging economy. After a stagnant 13 year period with less than two percent growth, Ireland took a more radical course of slashing expenditures, abolishing agencies and toppling tax rates and regulations. At the same time the government made credible commitments through EU treaties not to engage in deficit spending.

Ireland's long history of free and open trade has also played a role in its recovery. However, only since freeing other aspects of its economy by lowering taxes, decreasing regulation, maintaining low inflation and providing a stable fiscal environment has Ireland been able to grow rapidly enough to surpass greater Europe's standard of living.

Ireland's progress is reflected in The 2002 Index of Economic Freedom published by the Wall Street Journal and The Heritage Foundation, which ranked Ireland the world's 4th freest economy.

The path to economic freedom and growth has not been easy, however. Recently the EU pressured Ireland to eradicate its low corporate tax rates to create parity with the EU's high corporate tax rates. Although Ireland agreed to end it's special preferential 10% tax rate extended to some corporations, they simultaneously lowered all corporate taxes from 24% to 12.5%, further attracting economic investment.

The goal of the US-Ireland Business Summit was to increase interaction between US and Irish businesses. However, networking and investment are already occurring on a massive scale. The US Department of Commerce reports US investment in Ireland stands at more than $33 billion, up from $7 billion in 1994. Nearly one-third of all international businesses operating in Ireland are US companies, accounting for more than five percent of the country's total employment.

Trade, too, flows heavily between the two countries. In 2001, 14 percent of Ireland's imports originated from the US and 17 percent of Ireland's exports shipped to the US.

Still, despite all the good economic news surrounding the conference, a danger remains.

Too often, in an effort to promote development, governments interfere with precisely the market processes that drive economic success. Unsurprisingly, at the conference, key participants Mary Harney and Sir Reg Empey, each focused solely on increased government investment in research and development to attract further private investment.

As economic history demonstrates, governments mire themselves in promoting particular businesses and industries in the name of development. But when governments create programs and subsidies to entice business and industry they distort the market and unproductively absorb resources that might promote growth in different, unconsidered, industries. Inducements also create market inefficiencies and drain productivity by creating incentives for businesses to lobby for subsidies rather than focusing on consumers.

Ireland's successful formula for development for the past 15 years has been a reliance on market forces, lowered taxes, reduced trade barriers and reduced regulatory burdens. This simple, market-driven focus has created opportunities for citizens, industries and businesses - and the market has rewarded all amply. In the span of 15 years Ireland has become one of Europe's most prosperous nations.

With the US-Ireland Business Summit drawn to a close, participants would be wise to recognize the driving factors in Ireland's economic growth. Low taxes, open boarders and expanded economic freedoms have been the keystone to the country's success. Ireland proves, once again, prosperity can replace poverty through a free and open market. If the Irish government forgets that lesson, they may again find themselves the European backwater.

Benjamin Powell is a Social Change Fellow at the Mercatus Center.

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