NCPA - National Center for Policy Analysis

Ireland's Two Economies

May 17, 1997

In 10 years, Ireland has gone from one of the poorest nations in Europe to one of its stars. Almost all the credit must go to foreign investment rather than Irish policies.

  • In 1987, Ireland's gross domestic product (GDP) per capita was only 63 percent of Britain's -- but has now surpassed Britain's and stands close to the average for the European Union.
  • Ireland previously was poorer than Spain and only a little richer than Greece and Portugal, but those three countries now trail far behind Ireland.
  • Ireland's economy expanded 10 percent in 1995 and 7 percent in 1996 -- with a 6 percent increase forecast for this year.
  • Yet prices in Ireland are rising at only 1.5 percent a year.

Economists remind us, however, that much industry in the country is foreign owned. So to judge by living standards, income earned by foreign assets should be added to GDP, and income paid to foreign creditors deducted in order to arrive at gross national product (GNP). By this standard, Ireland's GNP is about 12 percent lower than its GDP.

Foreign investment and ownership are the keys to Ireland's success, observers say. The country really has two economies. Ireland's own economic policies are still backward, unproductive and labor-intensive. Foreigners, however, have introduced a modern, exceptionally productive and capital intensive economy.

In two policy areas has Ireland come to its own rescue: attracting foreign investment and fiscal reform.

  • Government borrowing was so badly out of control in the 10 years leading to 1987 that public debt soared from 65 percent of national income to nearly 120 percent.
  • Today, public debt is less than 80 percent of GDP and dropping fast -- while new borrowing has fallen to almost nothing.
  • The stock of direct investment in Ireland from America alone stood at $10 billion in 1994 -- equal to $3,000 per capita.
  • Foreign-owned firms are now said to account for 30 percent of the economy and 40 percent of exports.

Here is a statistic that dramatically demonstrates the two economies of Ireland: Output by worker in foreign manufacturing firms is estimated to be nearly three time higher than in their domestically owned counterparts.

Source: "Europe's Tiger Economy,"Economist, May 17, 1997.

 

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