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Modernizing Ireland’s Economy

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
March 1965
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Patrick Perry

THE 1950’s were a time of economic stagnation for Ireland. Population was falling, and if output was increasing it was at a rate of only 1 per cent a year. Forty per cent of the working force was in agriculture, and in a period when agricultural workers throughout Western Europe were leaving the land in order to enter industry, Irish industry proved unable to accept such recruits. Unemployment grew; young people emigrated; the proportion of children and pensioners in the population rose. In a Europe that was economically on the move, Ireland was standing still.

Irish industry operated for the most part behind protective barriers and suffered from small and diverse production runs that led to high costs, which in turn helped to prevent the growth of an export trade in manufactures. Most capital goods and raw materials had to be imported, so that expansion of production for the home market tended to cause balance of payments difficulties which brought any expansion to a halt.

Yet in view of the world market position of agricultural products it was in industries and services that extra employment had to be found if the decline in the population, with all its implications, were to be arrested. If Ireland were to achieve a sustained expansion, unchecked by balance of payments trouble, the stimulus to growth had to come mainly from exports, in particular industrial exports.

New Departures

The First Program for Economic Expansion (1959-63) was accordingly a much needed attempt to stimulate the growth of industrial and agricultural exports, reinvigorate the economy, and reverse the decline in employment and population. The Program, drawn up principally in the Department of Finance, was approved by the Government and published in November 1958. The measures taken were expected to achieve a growth rate of 2 per cent a year, about twice the rate achieved on average in previous years. The attempt was successful. Achievement actually outran the planning; Ireland’s gross national product (GNP) rose between 1959 and 1963 at an average annual rate of nearly 4½ per cent in real terms. By 1963 the rate of expansion in non-agricultural employment was sufficient to absorb the exodus from agriculture, so that the decline in the labor force was checked. Unemployment was reduced and emigration fell to a level lower than the natural rate of growth in the population, so that the population increased. Exports in 1963 were over 50 per cent higher than in 1958, industrial exports being over 90 per cent higher. Prices were reasonably stable, and although the balance of payments in 1962 and 1963 showed a deficit on current account, reserves continued to increase since an inflow of capital more than offset the current deficit. The Irish economy in short had ceased to stagnate; it was moving freely and vigorously. A “dynamic of progress” — as its sponsors described it — had been released.

Mr. Perry joined the Fund after graduating from Oxford in 1961. He worked as an economist in the European Department until January 1965.

Incentives for Industry

How were such results achieved? Much, certainly, was due to the incentives that were introduced to encourage industry and agriculture to increase output, efficiency, and exports, and which were revised and amplified as the requirements of the economy changed. These incentives were impressive. Cash grants were made available up to half the cost of fixed assets, and in the development areas up to two thirds of the cost, for the establishment of industries whether by Irish or foreign firms, with the proviso that if a similar industry was already supplying the market, output had to be mainly for export. Grants were also made available to cover the cost of training workers. Profits earned on new exports were exempted completely from income tax or corporation profits tax for ten years, and partially exempted for a further five years. Local government taxes on new buildings were reduced by two thirds for the first seven years after construction. Depreciation allowances were liberalized. Grants were made available to cover half the cost of hiring management consultants and of training management and supervisory personnel. Measures were taken to encourage research and development and to ensure that Irish firms were aware of technical advances in other countries.

Incentives for Agriculture

The stimulation of industrial expansion and modernization on this scale was a new departure. Yet clearly agriculture would continue to hold a central place in the economy; Ireland could not prosper as a land of modern factories and out-of-date farms. The problems of Irish agriculture were accordingly tackled by a comprehensive series of measures designed to increase efficiency, to lower production costs, and to expand market outlets. Efforts were concentrated on those agricultural products for which market prospects were best.

Ireland’s most important single export is cattle and most of these are sold to the United Kingdom. Under the Anglo-Irish Trade Agreement cattle free of tuberculosis exported to Britain and fattened for not less than three months on British farms qualify for payments under the British fatstock guarantee. Therefore a program to eliminate tuberculosis in cattle was put into effect, involving substantial government expenditure. Grants were given toward the cost of winter housing for cattle, and of silos and silage-making machinery and other equipment, and special attention was paid to farmers’ credit requirements.

Grass is Ireland’s most important natural resource, but much of the pasture has suffered because of underfertilization. The use of fertilizers was therefore encouraged by subsidies. Educational, research, advisory, and technical services for farmers were expanded. Marketing organizations were set up to improve the quality and to expand sales of butter, bacon, pork, and other products. In addition, farm incomes were sustained by tax relief and a number of price supports.

Other Measures

In addition to specific incentives, direct tax rates were lowered: the standard rate of income tax was reduced from 7s. 6d. in the pound (37.5 per cent) to 6s. 4d. in the pound (31.7 per cent) and other concessions included an increase in earned income relief, the raising of the starting point for liability to surtax from £1,500 per annum to £2,500, and the extension of the income tax personal allowances to surtax. Corporation profit tax was, however, increased from 10 per cent to 15 per cent in 1963-64.

The tax reliefs and similar measures proved attractive to foreign investors. During the period of the First Program, 133 new undertakings with foreign participation were established, involving a capital investment of about £38 million. Their employment potential is estimated at 20,000 (employment in manufacturing in 1963 averaged about 190,000). Almost all of these concerns export their entire output.

While most of the growth in production and exports in 1959-63 came from the private sector of the Irish economy, the public sector played a vital role in encouraging and facilitating this progress. The incentives and assistance outlined above were not the end of the public sector contribution. At least as important were the investment policies of the central and local governments, and of the state-sponsored bodies (firms and industries wholly or partly controlled by the Government), and the fiscal and monetary policies of the authorities. Capital expenditure was to some extent diverted from “social” infrastructure toward “productive” investment in industry, agriculture, power, transport, and communications. Public capital expenditure (including that of local authorities and state-sponsored bodies) grew rapidly between 1959 and 1963, and this both stimulated demand and provided the economy with the facilities that it needed for a smooth expansion of production.

This expenditure was met mainly from long-term borrowing from the public (not from the banks); on current account, the Government continued to aim at meeting all expenditure from current revenue. Banking policy was also firmly directed to support the growth of the economy in a context of monetary stability.

The Program had envisaged the establishment of some sort of economic community in Europe, and this became of great importance to Ireland when, the European Economic Community (EEC) being in fact established, Britain proposed to join it. Ireland in consequence proposed doing the same. How would protected Irish industry stand up to European competition? In order to find answers to this question a complete review was undertaken of the problems and potentialities of Irish industry. It was recognized that joining the EEC would involve important alterations in the structure of Irish industry, and it was considered desirable to tackle the problems that would be posed by freer trade as early as possible.

The incentives already in operation were amplified by the provision of special grants and loans to existing industries for readaptation to freer trade. This assistance is designed to make an enterprise fully competitive under free trading conditions. To stimulate industry into making the fullest use of it to meet foreign competition, adaptation councils were set up with government encouragement to supervise reorganization, to stimulate individual firms to cope with free trade competition, and to develop cooperative action where this would help. In addition, tariffs protecting industrial goods were reduced by 10 per cent in January 1963 and by a further 10 per cent in January 1964. Quotas restricting industrial imports were relaxed. A third round of tariff reductions was originally planned for this year, but in the situation caused by the U.K. surcharges on manufactured imports, the Government decided to postpone this reduction. It also decided to pay to Irish exporters half the cost of the surcharges.

The Second Program

When negotiations between the United Kingdom and the EEC were broken off in 1963, the prospect of Ireland’s entry also receded. The value of the industrial survey and of the new incentives, however, was not diminished, although they were now related to other plans, contained in the Second Program for Economic Expansion.

The Second Program was published in two sections: Part I, made public in August 1963, sets out the broad policies and objectives for 1964-70. Following consultation with interested bodies, both national and international (including the Fund and the World Bank), Part II was issued in July 1964. It describes in greater detail the measures to be taken and the targets to be achieved, revises some of the contents of Part I, and includes some extra material. This Program, like its predecessor, was prepared mainly within the Department of Finance, principally in the Economic Development Section. More use, however, was made of outside consultants, for instance in the Economic Research Institute.

The Second Program is a more ambitious, detailed, and comprehensive exercise in economic programing than the First. Output and employment projections are given for all sectors of the economy; these projections are also classified by categories of expenditure, including expenditure by nonresidents on Irish goods and services (i.e., exports of goods and services) and expenditure on imports.

Aims and Cost

The main output and employment targets are briefly summarized in the following table:

Ireland: Prospective Changes from 1964 to 1970 in Production, Employment, and Productivity(Average annual rate in percentages)
ProductionEmploymentProductivity
Agriculture, forestry, and fishing3.8−1.45.3
Industry7.1+ 2.94.1
Other domestic3.6+ 1.81.8
All sectors4.3+ 1.13.2
Based on: Second Program for Economic Expansion, Part II (Dublin, 1964).
Based on: Second Program for Economic Expansion, Part II (Dublin, 1964).

Estimates of the expenditure needed to meet these aims are being revised. Discussions with major industries have suggested that the original import and export forecasts may have been too low; the growth of investment may also have been underestimated. But the revisions are not expected to alter the general direction of expenditure trends. Investment and current expenditure on goods and services by public authorities are expected to grow rather faster than the GNP, so that saving and taxation are also expected to increase as a proportion of GNP. Expenditure on personal consumption will therefore need to grow relatively more slowly. The projections suggest that both exports and imports of goods and services will grow considerably more quickly than the GNP, and small deficits on the current account of the balance of payments are envisaged in the period up to 1970.

These and other estimates will continue to be revised as the situation changes. The National Industrial Economic Council (NIEC), which consists of persons nominated by the Government and by business and trade union bodies, was set up in October 1963. Its main task is to advise on how the objectives of the Program may be realized. It will review the situation constantly so that targets and policies may be modified as circumstances change.

Policies and Expectations

Outlining policies to achieve these objectives, the Second Program states that the Government will use the means open to it to maintain adequate demand as a basis for maximum economic advance, while avoiding excessive demand. The campaign to attract industry from abroad will be intensified, and industries using native raw materials are especially welcomed. To encourage enterprise and saving, indirect taxation will have preference over direct taxation. In public capital expenditure, priority will be given to capital outlay which is productive in the sense of yielding an adequate return to the community in competitive goods and services. (This does not, of course, preclude adequate expenditure on social needs.)

State-sponsored bodies will be encouraged to make use of independent consultants to undertake periodic efficiency reviews. Capital provided by the state will generally take the form of loans on which interest will be payable, thus ensuring that capital costs are taken into account in assessing proposals. This will have a moderating effect on the cost of servicing the national debt, and will encourage state-sponsored bodies to look to non-Exchequer sources of finance. If possible, the public will be brought in as shareholders of state-sponsored companies.

During the period of the First Program public capital expenditure grew rapidly, but it is not now expected to grow much more up to 1970. This standstill, however, masks significant shifts in expenditure in particular sectors: there has been some bunching of expenditure recently on fuel and power, transport, and industry, and expenditure on these is expected to be lower in 1969-70 than in 1964-65. Expenditure on housing, schools, hospitals, telephones, agriculture, and other items is expected to grow steadily.

The expansion of Ireland’s economy over the next five years will of course continue to depend on increases in exports. Limited market opportunities do not offer much prospect for further expansion of agricultural exports, and it is therefore upon industrial exports that Ireland is relying. These are expected to grow by rather over 100 per cent, in real terms, during this period. Domestic policies and practices must, therefore, keep output adjusted in price and quality to this aim. This, it is stated, is the essential condition of growth in Ireland, and must govern the whole approach to programing. In particular, considerable stress has been laid on the need to adopt an incomes policy which would establish an orderly relationship between the development of money incomes and output, so that income per capita would grow no faster than productivity. In addition to other duties, the NIEC is to survey developments in this area.

The Future of Agriculture

The policies for industry and agriculture will involve continuation and amplification of the measures which proved successful in the First Program. Additional aid to agriculture will include the expansion of services both for keeping existing farmers up to date in agricultural techniques, and for educating and training future farmers and farm workers. The advisory service, which assists farmers with managerial and technical problems, will be improved and expanded, and in agricultural research the main emphasis will be on practical questions. The quality of the animal herds will be improved by selective breeding, and programs will be started to eliminate various livestock diseases. Operational efficiency will also be aided through the encouragement of agricultural cooperation, the continued consolidation and enlargement of small holdings, and more intensive use of land. Price supports will be continued so long as the present disorganized conditions in international markets persist.

It is livestock products—cattle, dairy products, sheep, and wool—which will make up most of the increased agricultural output in 1964-70. World market prospects for meat are better than for most agricultural products, and Irish cattle and sheep are in any case given favored treatment in Britain (see p. 10). Market prospects for dairy products are not so favorable, but increased production will inevitably accompany the expansion of the breeding herd necessary to increase the output of cattle. In order to encourage expansion of the breeding herd, farmers now receive £ 15 for every heifer kept in the herd above the number in the previous year.

As may be seen from the table on p. 12, agricultural output (including forestry and fisheries) is expected to grow by 3.8 per cent a year in 1964-70, while the agricultural work force is expected to continue to decline. The expected increase in production per capita is in fact more rapid in agriculture than in industry, which will help to bring the level of agricultural incomes nearer to those in the rest of the economy. Workers leaving the farms will be helped to find other jobs; in the agricultural districts tourism and forestry may provide these. In addition, an essential part of the Second Program is the development of industry outside the main cities. The question of concentrating this development in major growth centers is at present being examined.

The decline in the agricultural work force, and changes in the structure of industry resulting from freer trade and from technological development, will mean many people changing jobs, and a committee was set up to examine the retraining and resettling of unemployed workers. It recommended that centers should be established at which trainees could rapidly become skilled workers by accelerated vocational training methods, and also that employers should be paid a grant for “on the job” training. Mobility would be encouraged by the payment of resettlement expenses (traveling, removal, and settling-in) where the new jobs meant new homes as well. These and other recommendations are at present under consideration. Steps have been taken to ensure that adequate housing is available at or near the various centers of industrial growth.

Plans for Industry

The extra assistance to industry during the Second Program will be concentrated on management and worker training, research and design, and marketing, with special reference to the requirements of exporters. The Irish Management Institute and the Irish National Productivity Committee have recently been given increased grants to enable them to extend their work. The Institute for Industrial Research and Standards has also expanded the scope of its activities, and a Council of Design was recently set up. Generally, the emphasis of policy will be placed on securing the widest and most effective use of the inducements offered by the State to firms to increase their efficiency. In order to stimulate efficiency and adaptation, protective tariffs will be further lowered, although of course account will be taken of changing conditions. More selective tariff action may be needed, the Program states, to quicken the pace of change in any industry where effective steps toward modernization have not been taken.

Reshaping the Entire Economy

The modernization of Ireland’s economy that is outlined in the Second Program covers a very wide field of activity. It includes the development of education. It is concerned with the coordination of economic with physical planning, such as the reshaping and modernization of towns and cities to meet the demands of traffic and the needs of a growing economy, the identification and development of centers of economic and social growth, and the preservation and improvement of amenities. It includes also the development of the services sector, particularly services for tourists, and the development of the fishing industry and of forestry. It is, in short, a comprehensive plan for reshaping the entire economy, calling for great willingness to abandon traditional ways of life and accept substantial changes.

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