Kate Nicholls: Luck of the Irish may not rub off

Opinion

Politicians have a habit of holding up other nations' economic and social development strategies as models. A current example is John Key, National's economic spokesperson, this week saying New Zealand might mimic the Celtic Tiger by adopting lower corporate tax rates to promote foreign investment.

Indeed, the Irish economy has been one of the most successful of the late 20th century, turning around a history of dependence and poverty by embracing an outward-looking, investment-oriented strategy and we should look at the policies underlying this success.

However, warning bells should go off whenever politicians start talking about models.

First and most obviously, despite our similar population size and the fact we both speak English, just about everything about New Zealand and Ireland is different. Second and more importantly, politicians tend to be highly selective about which elements of a successful development strategy they focus on.

So let's take the Irish taxation regime in relation to some of the other most important elements of the country's recent economic and social development programme.

In terms of taxation in general, it is true Irish governments did cut income taxes during the mid to late 1990s, but this was after the economic boom had already taken off.

The logic behind this was that the Irish people had contributed to this growth by doing a lot of belt-tightening between 1987 and 1993, agreeing to wage restraint to help get inflation levels under control and that they deserved a reward of some kind. (New Zealand's Government might want to think about that one a little more given the disappointment following this year's budget, even if they don't agree that tax cuts are the best way of dishing out such rewards.)

The logic was certainly not of the outdated, vague and unproven "stimulate the economy through tax cuts" kind that tends to dominate centre-right politics in this country.

With regard to the more central issue of corporate tax concessions, rates and incentives, it has been noted that a swag of corporations invested in Ireland in the early 1990s.

This is true, but the investment-led strategy and many of its associated tax incentives had been in place since 1958, when the Irish Government signalled an abandonment of protectionism.

So if it took at least 30 years for this strategy to start paying off, there must have been other things favouring increased foreign investment during the 1990s.

Students of the Irish case generally agree centralised wage agreements played an important role in the recovery by providing a stable industrial relations environment resulting from greater trust between labour, business, and the state.

Until 1987, year zero in terms of recent Irish economic (and political and cultural) history, Ireland had a highly decentralised system of wage bargaining, meaning little formal role for the state in terms of regulating industrial disputes that regularly broke out between several large public and private sector unions and local businesses.

After 1987, a much more co-operative approach was taken.

Not only were wage agreements modest, centralised, and generally adhered to by the social partners, but the formal, three-yearly, social partnership agreements have been expanded to include consultation and policy development on a wide range of economic and social policy issues. It is extremely difficult to see such a system working in New Zealand, where mistrust between labour, business, and the state has been fostered first by the arbitration system and then by its abandonment in the form of the Employment Contracts Act.

Apart from extremely clear differences between the Irish situation and our own, including membership of the European Union and the huge pool of resources transferred directly to Ireland for specific infrastructural and regional development projects, Ireland's specific labour market dynamics have also played a large part in its economic miracle.

Employment growth during the early 1990s was fuelled not only by overseas investment, but by the fact that Ireland had a reserve and well-educated army of workers ready to take up newly created jobs. Unemployment was around 16 per cent in 1987, but the new positions were taken up not only by a proportion of these formerly unemployed workers, but also women (especially married women) who had previously been at home, along with relatively young return migrants who had fled the country during the economic misery of the 1980s.

Our labour market dynamics are different, even if the brain drain and the need to get our graduates to come home is something we share.

Without such a large untapped pool of women who previously have not participated in paid work, New Zealand has relied and will rely much more on immigration to fuel employment growth. Ironically, Ireland's immigration policy is a fragmented mess which makes ours look relatively coherent, to the point that a recent discussion document produced by the Irish government looks at the New Zealand immigration policy model as one which the country might follow.

Continuing the labour market theme, Ireland has had some success in encouraging the long-term unemployed into paid work, including solo parents. This has been achieved by making it worth a beneficiary's while to take up a job.

Instead of immediately clawing back social welfare benefits once a recipient works a few extra hours per week, much more generous allowances are permitted and additional payments in the form of back to work and back to education allowances are guaranteed.

When we talk about policy models, we also need to be aware of the downside of success, because this inevitably exists.

Not only has the Irish concern for social justice built into the partnership agreements failed to prevent a widening gap between rich and poor, reflected in the persistence of what the Irish euphemistically refer to as deprived areas of cities where not only poverty but also organised crime reigns, the model still remains wedded to foreign direct investment.

For a small, open economy, such investment is needed and welcome, but the Irish are currently extremely concerned that not enough attention has been paid to developing indigenous industries.

As wages have slowly risen, since an additional attraction for investors during the 1990s was that Irish wages were comparatively low, policy-makers increasingly see China, India, and the new eastern members of the European Union as competitors for investment and as threats to the success of the model.

Finally, returning to taxation, many of the additional tax concessions for local business designed to stimulate certain sectors of the economy from the late 1980s have quickly outlived their usefulness.

The Irish Government is currently reviewing a raft of tax incentives awarded to the construction industry, as Irish citizens have begun to wonder why tax breaks put in place to direct investment towards low-cost inner city housing and commercial centres are now subsidising the construction of luxury holiday homes on the part of a new Irish elite.

* Kate Nicholls is completing a PhD thesis on economic development strategies in Ireland, Portugal and Greece, at the University of Notre Dame in the United States.