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Comparison of Economic Growth: Ireland and Luxembourg

Ireland’s Economic Boom 1

Comparison of Ireland’s (1987-2007) Economic Growth to that of Luxembourg (1985-2001).

1.1 Abstract

Ireland’s economic transformation from a mere third world agricultural economy to a world-class hi-tech economy remains an issue worth analyzing. As compared to the economic growth of its counterparts in the European Union -for instance Luxembourg in this case- there is a need to analyze a number of factors so as to understand their impact as well as how they engineered economic growth. This thesis employed the library-based method to analyze the economic development of Ireland specifically in the 1990s as compared to Luxembourg. Reason being that although their economies were driven by different industrial fields, the performance trends shared much in common. The thesis also discusses the inter-dynamism between economic development and social change. This analysis is then used to evaluate and predict future prospects of the Irish economy following the year 2008’s economic decline due to global economic recession. The findings of this thesis may serve as a reference study for underdeveloped economies to borrow a leaf from. However, the Ireland economic scenario may not duplicate itself if such policies are adopted, but it depicts necessary paradigm shifts in policy-making.

1.2 Introduction

Ireland’s economic growth in the 1990s has been the most outstanding among the European league countries. From an entirely agricultural and traditional based economy in the eighteenth century, Ireland transformed courtesy of favorable government policies coupled with a culture of commitment to attain one of the highest Growth Domestic Product in Europe[1]. This transformation was characterized by modern high-tech industries and globally competitive services sector based economy. Many factors came into play over this period to deliver economic recovery success such that by 2007, Ireland’s GDP had doubled while its output had increased accounting for approximately 2.1 % of total output within the Euro area.[2] This growth was much higher than Luxembourg’s which had clicked an estimated 5%GDP in the period between mid-1980s and 2000.[3] However, Ireland’s unprecedented growth stalled in 2008 following the global economic recession unlike Luxembourg which experienced a similar down turn in the 1990s.

Despite this decline in economic growth, Ireland’s extensive infrastructure investment, intensified research, innumerable multinational corporations, favorable government policies, political stability, and good human resource from its education institutions guaranteed steadfast economic performance. On the other hand, Luxembourg -a founder member of the European Union- has a moderately growing high-income economy based majorly on the service sector: insurance, banking, a declining steel industry and to some extent agriculture. Luxembourg recorded a budgetary crisis in the 2005/2006 fiscal year at time when Ireland’s economic growth was at peak.

1.3 Executive Summary

Ireland’s economic success from 1987 to 2007 and the subsequent decline in 2008 have attracted a lot of attention from among both the third-world and developed economies.[4] Just like Luxembourg, Ireland has since the 20th century been on a path towards economic transformation. On the other hand, Luxembourg had already diversified into industrial production particularly steel and wine industry as well as an established banking and insurance industry. Ireland experienced the worst of calamities in its history in 1845: the potato blight which led to a massive crop failure and subsequent famine usually referred to as the ‘Great Hunger’.[5] Ireland has since then been on a path towards economic transformation. In the decades preceding 1845, Ireland had been overly dependent on potato as the staple crop while exporting grains such as oats and barley to other European countries for instance England. It also had labor intensive agricultural production methods before the famine as it was an agricultural economy.

The ‘Great Hunger’ awakened the economic consciousness and agricultural dependency of the Irish state. While Ireland was reliant on an agriculture-based economy, Luxembourg was one the first European country to invest in industrial manufacturing. Successive governments in Ireland since 1845 were committed to policy change in a bid to transform the economy and head the country towards a successful economic growth. Subsequently, in mid 20th century, Ireland experienced a high rate of emigration while Luxembourg on the other hand had enjoyed about 18% of foreigners in its workforce which of late rose to 37% in 2001. Based on sector commitment combined with a competent pool of young expertise, Ireland attracted a good deal of large Multinational Corporations (MCNs) in the 1990s.[6]

Before long, Ireland was enjoying an economic boom. [7] Ireland joins Luxembourg as having the best GDP growth in the entire European Union. Compared to Luxembourg which was before the 1st World War enjoying a sustained growth based on an already established industrial sector, Ireland was having a hard time balancing between emigration and economic growth. Having had the best economic growth second to Ireland in the last two decades, Luxembourg has a lot to learn from Ireland with respect to different policies and strategies.[8] Ireland was enjoying an economic boom dependent on the business activities of the MCNs, favorable government policies, good educational institutions, globalization, Organization for Economic Co-operation and Development (OECD) activity, EU membership, Research and Development, Industrial Development Authority (IDA) and the International Finance Service Centre (IFSC). Irrespective of the decline in economic growth, there is hope for Ireland to sustain its position as being the first economy in the European league.

2.1 .1 Facts on Economic transformation

Having evolved in barely more than a generation, Ireland’s economic performance has been one of the most outstanding in Western Europe. The economic boom in Ireland was real contrary to some claims that it was just a mere mind figment. Investing in a combination of pragmatism and effective policies, Ireland has been able to nationally transform its economic and social status to being one of the most successful economies doubling its GDP in the period between 1989 and 2007.[9] Thus Ireland joined Luxembourg as having the best GDP growth in the entire European Union. According to Rory, Ireland has successfully transformed its economic and social structures to achieve an exceptional growth and thus a GDP that ranks at one-third above the average of the twenty-five EU member states.[10] Until the 1990s, Ireland was faced by a great emigration of its brightest and best workforce. Luxembourg was in the early 20th century experiencing a great immigration due to available employment opportunities in the Industrial sector -in particular steel industry. This and other situations have since been transformed following the 1990s economic evolution which led Ireland to be referred to as the ‘Celtic Tiger’.[11] Through a modern knowledge based approach to economic growth, Ireland has been able to change its focus from mainly agriculture to a high-tech technology-led economy.

2.1.2 The socio-economic situation of Ireland until 1990 The Agricultural Industry

Before the onset of the unprecedented economic growth in the 1990s, Ireland’s economy had been over-reliant on agricultural production with barely any effort addressed to adoption of modern industrial technology approaches. Ireland is credited due to its biodiversity in agriculture. Though it later reformed, there were subsidies effected under the Common Agricultural Policy to protect hedge grow environments by promoting practices that would ensure protection of these environments for agriculture. According to Mitchell, close to a half of Irelands population was engaged in agriculture. Agriculture was through the 20th century a major economic activity such that the country was at some point referred to as the ‘European village’.[12] The agricultural sector contributed to about 30 % of the GDP. Whilst Luxembourg focused on industry, Ireland was focused on production of wheat, barley and potato. According to Helen, agricultural production in Ireland in the 19th century was higher compared to that of Luxembourg.[13] Unlike Luxembourg, Ireland had middlemen in the place of intermediary agents in landlordism.[14] Ireland bears a closer comparison to Luxembourg’s economic profile than any other country in the European league. While potatoes were for subsistence, cereals served as the major Irish cash crops. Production was through the cottiers, conacres and laborers tenants system. The Great Famine

Around June 1845, the potato blight struck Ireland. Ireland suffered the greatest impact following the blight since susceptible varieties of potato and on bad crops was cultivated. According to Kenneth, a combination of events specific to Ireland took place: failed crops succession, and the consumption reliance on a system of monoculture which was not applied elsewhere to the same scale.[15] Ireland fate was specific due to the fact that dependency on potato was not as prevalent in the rest of the European countries such as Luxembourg as it was in Ireland. However, following the aftermath of the famine, the potato crop lost its importance as a staple crop. By the 1870s, the aftermath of the famine had considerably reduced the total acreage put under agricultural production as well as the total yield.[16] The famine in Ireland led to the decline in the country’s population from about eight to six million as a result of deaths and emigration.[17] Social welfare movements and individuals stepped up to reclaim the dignity of Ireland through their ‘fair share of Ireland’ belief against Britain calling for both national and agrarian revolution.[18] This has worked a lot in changing the social perspective which has contributed a lot to the economic development in the years after the famine. Young emigrants formed the cradle of intellectuals who became, the foundation of subsequent social and political movements advocating for Ireland’s independence. The Irish Free State

Following independence from the UK in 1922, Ireland was now a free state who through the influence of the already established social welfare movements embarked on a mission to promote socio-economic development through economic nationalism.[19] In a bid to abandon the failed protectionism, the Irish government introduced new policies for free trade, growth, foreign and productive investment. In the1960s, the state assumed more roles in economic growth which resulted into a 32 % GNP growth in that decade and 42% in the following decade.[20] The Openness Policy

As was anticipated, the openness policies established in the early1950s led to a better economic performance in the 1960s as compared to the years preceding this decade. In the spirit of openness, the now free state invested in modern industries through the Industrial Development Authority (IDA). Openness was aimed at increasing both the GNP and the GDP from 4.2 %. [21]This philosophy of openness attracted 350 foreign investors such as Pfizer which started its activities in 1970. However, the openness driven economic growth came at a cost as most of the companies established in Ireland were not competitive in the free trade environment of the 60s and 70s. [22] While Ireland had openness in terms of labor mobility such that its expertise would work in other countries, Luxembourg imported labor to meet its rising demand for industrial labor. After the 1960s Ireland adopted other new strategies of openness. This involved the collaboration of the government, national industrial and economic council, business and other stakeholders.

3.1 The Economic Transformation

Driven by the urge to improve its economic status, Ireland became a member of the EEC in the year 1973. This opened up the Irelands export market to more countries and provided a good opportunity to diversify it markets. EEC’s Common Agricultural Policy came in handy to transform the agricultural sector by offering standard prices of product. In the 1970s, the population of Ireland increased by 15% while the country’s national income increased at 4 %( sustainable annual rates). Unemployment was also reducing during the time. Having its own board, the state funded IDA -established in 1970- which became influential in driving Ireland to success.[23] This strategy was successful as the state was able to bring on board multinational companies such as Microsoft, Baxter Travenol, Wang, Digital, Warner Lambert, Amdahl, and Merk Shape. Ireland attracted these companies on the basis that it was a potential base for exporting to the wider European market. Notably, by 1975, there were more than 450 industrial establishments owned by foreigners of which most were manufacturing based. [24] With support from other sectors, the government was able to restore industrial peace and break the inflationary wage increases through the 3-years’ National Recovery program.[25] During the time, business investment developed whereas public expenditure reduced gradually. By the 1990s, the government had established a platform that offered one of the most comprehensive and advanced digital network in the European continent.

The improved educating system provided a competitive cadre of Irish engineers who, coupled with a high credibility with regards to advanced manufacturing, attracted large MCNs for instance Dell, Microsoft, IBM and Hewlett-Packard. On the dawn of 1990s, Ireland was already on a path towards economic recovery which was enhanced by external factors -technological advancement and globalization. With the 1990s economic success, came in a new level of ambition and global orientation. Experts note that Ireland in the 1990s represented the fastest growing economy in the world. In the period spanning from 1987 to the end of the 20th century, Ireland had achieved a GNP of about 5% rising to 10% in some years. Between 1987 and 2003, unemployment rate significantly reduced from 17 to 4% compared to 20% reduction in the 1990s.[26]

4.1 Economic development and social reforms; strategies

The beginning of economic transformation in Ireland and Luxembourg were initiated through policies that were formulated and developed by both their governments in collaboration with the social sector. In Ireland for instance, National Economic and Social Council (NESC) was entrusted in offering advisory services (particularly in economic matters) and consisted of employers, industrialists, trade unions, civil servants, and farmers. On the other hand, Luxembourg sought both institutional and social-economic based services -for instance Extraordinary Works of General Interest and Anti-Crisis Division. Such institutions were mandated to analyze the status quo of the economy, formulate policies, and implement them.[27].The 19th century and the better part of 20th century -up to 1950s, was witnessed by economic crisis characterized increased rate of unemployment and de-industrialization. The sole goal of NESC was to liberalize the Ireland protectionism and import substitution policies. Even though up to the 1960s, protectionism had seen an increase in employment of labor, it did not foster the necessary development resources in the macroeconomic sector. The import substitution policy adopted by Ireland led to unfavorable balance of payments and conditions were worsened core by the 1950s emigration and the world economic recession of the early 1930s and 1970s. These factors incited the paradigm shift to an outward-focused policy aiming at achieving an export economy through modernizing the domestic industries and attracting foreign multinational investors. The outward industrial policy encompassed both the fiscal and financial perspectives that were provided to both domestic and foreign investors. This new outward economic strategy realized four significant successes in the 1960s, 1970s, and late 1980s: Ireland accomplished comparatively strong economic development and demographic growth; significant paradigm shift of the economy -for instance, whereas in the 1960s the agriculture accounted for approximately 37% of labor employment, it decreased remarkably in 1987 to 14%. This indicated an increased rate of production growth in the agricultural sector; in the late 1960s, the living standards improved; finally, from the late 1980s and the subsequent years -1990s-, consumer goods improved in terms of quality and besides, industries increased their wage rates. Most of the income and wage rates paid by the industrial sector were proportional to what was being offered in the larger UK industries.[28]

Nevertheless, uncertainties came into view because of the success of non-agricultural based industries to generate employment opportunities as some critics argued that, foreign investors posed a stiff competition to the ailing domestic industry. This was in contrast to the NSEC outward oriented strategy to foreign investment and that Ireland was not favored by its location to attract multinational with the focus to expand in Europe. For instance, it was interesting for the case of Transnational Corporations (TNCs) which retained its key business activities at its headquarters compared to the few it initiated in Ireland. Lack of full deployment of business by some industries in Ireland delinked the foreign multinationals enterprises and the domestic industries. Hence, their coherent role in development was weakened. Other alleged fears laid upon the interest of the foreign investors as well what real benefits Ireland as a country would have reaped. Was it only the off-set of unfavorable balance of payments and offer employment opportunities to the surplus labor force? Such fears seemed to turn real after the rate of employment began to decline in a number of years after the entry of multinationals.[29]

The years between 1945 and 1975 the economies of both Ireland and Luxembourg flourished in what was being referred to as “Les trente glorieuses” -baby boom. This increased economic growth led to rise in demand for social needs, labor supply, and stiff competition among political elite. The application of Keynesian’s theory -increased borrowing and public spending- facilitated Ireland to maneuver out of the 1974 to 1975 economic recession and recovery fully. However, in the early 1980s, problems arose in the besieged domestic industries and further replicated in the political economy. This was largely caused by unforeseen level of competition paused by the multinational companies[30].

Though both the countries faced such problems, they successfully managed to take advantage their membership in European Economic Community and fully apply its aid -structural funds towards economic development projects. The probable causes of the temporal problems were may be lack of coherence between the society and the macro sector economy, aggravated by differences between: the domestic and international investments; private and public sectors; and national economy and political class. Moreover, by then, there were no institutions to formulate strategic policies that would have solved the problems[31]


5.1.1 Good Exterior Factors Entry of Hi-tech Multinational companies

Irish government targeted multinational companies especially in the Information and Technology as well as chemicals/pharmaceutical sectors and in comparison Luxembourg was fully dependant on its steel industry. In the early 1970s, industrialization was based on ‘industrialization by invitation’ policy in Ireland. Though, it was selective invitation, whereby only international companies with emerging advanced technology were targeted, it seemed to work on Irish case to form a hi-technologically driven economy. The policy focused entirely on creating an environment which would have ensured a win-win business environment. IT industry had four segments for investment; micro processing, computer products, printers, and software.

Digital Equipment Corporation – a manufacturing company- pioneered establishing a mini-computer company in Ireland. Consequently, other computer manufacturers followed investing in Ireland and consisted of Amdahl in 1978, and both Apple and Wang 1980. Apart from a few companies, most of them were not completely assembling their products in Ireland but instead, they used to export the sub-assembled products to overseas markets and/or to other company branches. O’Donnell (1998) quoting O’Malley 1981 concedes the perspectives of these industries by writing that Ireland was favored by such business activities because price was and still is an important factor to consider as a product nears maturity. [32] This is further supported by Helleiner who stated that while identifying a location for export-oriented enterprise, look upon closeness to the final market, financial incentives, tax waive, and other subsidies. Such incentive goes a long way in reducing the production costs and maximizing the profit margin. Another school of thought, applicable to Ireland, was the plenty of labor it offered, thus the companies took the advantage of lower labor costs. However, in the late 1980s, some of the industries closed down upon expiring of the grant they had been allocated. This prompted the NESC to seek the services of U.S.A.-based consulting group, Telesis, in assessing the effectiveness of Ireland’s industrial strategy. O’Donnell quotes NESC in its report that the study revealed, “Foreign-owned industrial operations in Ireland with few exceptions do not embody the key competitive activities of the businesses in which they participate; do not employ significant numbers of skilled workers; and are not significantly integrated into traded and skilled sub-supply industries in Ireland.”[33] The revelations favored the multinational companies by arguing that the companies had to sub-contract outside companies because the domestic companies lacked the necessary expertise.

Although from 1982 to 1985 the IT industry in Ireland faced many challenges, other multinationals specializing in software products made their entry into Ireland.[34] Renowned companies specializing in software products included; IBM in 1983, Lotus in 1984, Microsoft in 1985, Oracle in 1987, Claris in 1988, Corel in 1989, and Symantec in 199. Besides, EDS which specialized in computing services entered in 1989, Dell and Gateway 2000 were PC producers as well as direct sellers who made entry in 1990 and 1993 respectively. The IT industry received a further major boost when Intel identified Ireland as its central manufacturing area in Europe. Intel is reported to have chosen Ireland due to its geographical location in the European Union, infrastructure -good airports, water and road network meant reduced transport costs, financial incentives provided by Irish government, and the available human resource. According to O’Donnell, Intel had invested over $2.5 billion in Ireland.[35]

On the other hand, the economy of Luxembourg between 1950s and 1970s was characterized by slow growth up to 1960s. A recovery from 1970s economic recession was realized in the period between1985-2001, and a steady economic growth has been witnessed until the late 1990s. Luxembourg’s economy was totally dominated by the steel and iron industry in the early 1970s. Due to economic imbalances that the steel industry posed, the country was forced to diversify its policy in the 1950s into other sectors of economy; textiles, rubber, plastics and chemicals. Moreover, the country experienced instability in its economy growth mostly because of the fact that it was a small economy which was subject to many exterior factors[36]. Social Partnership

In spite of the initial remarkable successes that the open policy brought, coupled with other factors such as joining the European Union, socio-economic and political problems emerged in the 1980s. This led to enactment of a policy to brought the country’s macroeconomic and European policies together. O’Donnell in his work states that ‘from within this traumatic, but dynamic, experience, there emerged a new perspective on Ireland’s position in European integration and a globalizing economy. This was embodied in the social partnership approach to economic and social management, innovative approaches in several policy areas, a resurgent enterprise sector, attuned to the radical changes in international business, and a new cultural confidence to adopt and adapt international influences.[37]

In the mid 1980s, amid the socio-economic problems, stakeholders in the social sector brokered a strategic policy to emancipate the country from the economic meltdown in liaison with the National Economic and Social Council. In 1986, NESC formulated Strategy for Development which formed the foundation upon which the government and the stakeholders in the social sector negotiated a program for National Recovery which run from 1987 to 1990 (NESC, 1986). This became the pioneer strategy of that brought about negotiated social-economic governance in Ireland. Consequently, this strategy for development set out the framework upon which NESC considered the ideologies of social partners in future while formulating new programs – their limits (NESC, 1990). For instance, from 1987 to 1990, a Program for National Recovery (PNR) formulated by NESC brought together employers, trade unions, farmers, and the government in building a consensus on the wage rates in both the public and private sectors. This was a three years’ program.[38]

To survive the international competition at the time, gradual growth rate was essential factor in controlling public finances although future economic recovery programs demanded more than setting out wage levels at certain limits. Successive programs encompassed harmonizing socio-economic policies for instance; liberalization of tax policy and welfare payments. In the macroeconomic perspective, players in the field agreed not to involve in activities which could cause devaluation and not to go for devaluation in case of unfavorable externalities. Furthermore, the Program for National Recovery came up with a Central Review Committee which was entrusted with monitoring its implementation and ensuring continual dialogue between stakeholders in the social sector and government on key socio-economic policies.[39]

The trade unions supported modification of public finances in the Program for National Recovery and on the other hand the government agreed to maintain the value of social welfare payments. The Irish government implemented income tax reforms for the benefit of trade union members, amended the labor laws, and maintained the minimum wage rates. These changes were ratified by all the trade union members. Future partnership programs were almost similar and included; Program for Economic and Social Progress (PESP) of 1990-1993, Program for Competitiveness and Work (PCW) of 1994-1996, and Partnership 2000 of 1997-2000. These programs covered an agreed three-year period in which wages were increased bo0th in the public and the private sectors. Similar to Program for National Recovery, they also stipulated commitments in liberalizing taxation policies and recognizing social equity.[40]

The social partnership programs solved Ireland’s economic problems that had started to build up in the mid 1980s and they ensured sustenance of economic growth. For instance from the year 1986 to 1996, the Gro0wth Domestic Product grew by an average of 4.9%. In addition, whereas the rate of employment fell by 1.1% on average from 1980 to 1986, it has grown by 1.8% on average since then. The partnership programs also facilitated transformation of the country’s public finances. The GDP deficit dropped from to 2.3% in 1994 from 8.5% in 1987 whereas the debt-GDP which stood at 117% in 1986 decreased steadily up to 76% in 1996. O’Donnell quoting NESC (1989) writes that ‘Partnership provided the context in which Ireland maintained low inflation and reaped the benefits of lower interest rates and improving competitiveness.'[41]The Irish social-partnership programs in the mid 1980s molded its socio-economic governance model basically on three key elements: the perception that broad engagement of the social life, economic activities, and policy making could be interlinked; Ireland’s competitive involvement in European Union and the global economy in pursuing socio-economic goals; and consistent achievement of macroeconomic policy, incomes and structural adjustments.

The Information Technology-led industrialization of Ireland from the late 1980s marked the transformation of the country’s economy to one of the richest in Europe. In the 1990s, the annual GDP of the country averaged to an average of 6.9%. Ireland came to be referred to the Celtic Tiger due to its robust economy.[42] However, the economic success was influenced by a couple of factors, most of which were a derivative of a combination of the vital ones. The fiscal policies which involved reducing expenditure, taxation, borrowing, and the decreasing rates of interest, collectively stimulated the economic growth. Besides, currency devaluation in 1993 also played a key role. Another factor that came to play a vital role is the subsidy that was provided by the European Union. Though it amounted to less than 5%, it added an estimated 0.5% annual GDP in the 1990s and this had a significant effect on Ireland’s 6.9% annual GDP.

Nevertheless, the open access which was facilitated by single European market benefited member countries: provision of structural funds facilitated improvement of physical infrastructure -roads, rail, ports, and telecommunications- ; they co-financed the domestic industries; improved the human resource through further training; and injected capital into to aid in marketing, research & development, and design skills[43]

The good geographical location, globalization, European integration and advancement of Information Technology facilitated the economic growth in Ireland tremendously. Up to Ireland has continued to experience a high rate of economic growth, low inflation, a surplus balance of payments, reduced rate of unemployment, and net immigration rate. Thus, Morgan Stanley nicknamed Ireland as the Celtic Tiger due to its lucrative economy in 1994. Questions that have puzzled many people is the ability of the Irish economy to grow significantly in a few decades out from a sluggish economy. The selective investment policy that was adopted by the Irish government has for long been accredited for transforming the Irish economy, but besides its geographical location is worth noting.


In particular to consider, is its closeness to the duo economic tectonic plates of the European Union and United States. Ireland is on a peripheral location to United States and although most of its inhabitants relocated to U.S. it has managed to withstand all economic downturns that have affected U.S and Europe. Globalization has played a key role in artificially placing Ireland at the center of the global economy -most of the multinationals have some of their major manufacturing in Ireland. Of late Ireland is placed second in exportation of computer software after the United States. But this sounds ironical because most of the computer manufacturing companies have U.S.-owned. Other includes major pharmaceutical companies. Murphy states that ‘Ireland has successfully moved from the equivalent of a donkey-and-cart economy to a high-tech economy by leap-frogging over the intermediate hump of industrialization.'[44]

Ireland joined the European Economic Community (EEC) in 1973 and later European Monetary System in 1978. As e result, it experienced a break in the one-to-one parity with the sterling pound in 1979. Hence European

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