The Skill of the Irish

by Brad Peck

I was forwarded the below piece, which was sent out Monday by Keith Hennessey, Assistant to the President for Economic Policy and Director, National Economic Council.  It is a good summary of the "Celtic Tiger" turnaround in Ireland, and some lessons the U.S. could learn. Mr. Hennessey was kind enough to let me post it. 

Hennessey wrote:

On this day when every American is an Irishman, we should toast not the luck of the Irish, but their skill in promoting economic growth. Ireland is a shining example of a successful, flexible, and free economy.

For much of the last 150 years, the Irish left Ireland, with 400,000 out of a population of three million leaving during the period 1950 to 1961.  Early on, many of these emigrants were poor and low-skilled, but by the 1980s, Ireland was losing its educated, higher-skilled workers.  Now low taxes, a productive and growing economy with good jobs, and education reforms have helped reverse the long-standing trend of emigration from Ireland.  In 2005, 188,000 people entered Ireland.

For the average Irish worker, personal income taxes are now among the lowest of the advanced industrial countries.  Foreign investment has spurred capital formation and more productive workers, resulting in per capita income growth of more than eight percent per year for more than two decades.  Ireland ranks sixth among all advanced industrial economies in income per person, which was nearly five times greater in 2006 than in 1985.

Ireland began reforming its educational system in the 1960s to provide greater access and flexibility, creating a new system of regional technical colleges to provide expanded vocational education.  Education reforms can take a generation to have an effect, and Ireland is now seeing the benefits of their earlier foresight.  Participation in secondary and tertiary education surged and continues to grow, and today's 25 to 34-year olds have far more education than those in the prior generation.  In a survey of US firms that have invested in Ireland, respondents cited the quality of the labor force as one of the reasons for their Irish presence.

There are lessons here for American policymakers.  Increased capital investment leads to more productive workers and higher wages.  Education is a first-tier economic issue, and while reforms can take years to have an effect, they are worth the effort.  Legal immigration can contribute to economic growth.  Most importantly, low individual taxes are good for workers.

Ireland's policies attract capital investment.  The Irish removed barriers to foreign ownership of businesses and eliminated profits taxes on export sales in the 1950s, cut taxes on manufacturing to 10 percent in 1980, and in 2003 lowered their corporate tax rate to 12.5 percent, the lowest among advanced industrialized countries.  Irish reforms also reached into product markets to foster competition.  At least three different agencies promoted foreign investment, and policies allowed easy remittance of profits and repatriation of capital.

As a result, foreign direct investment jumped from $38 billion in 1990 to $179 billion today.  Major U.S. technology firms such as Intel, Dell, Pfizer and Yahoo responded to this favorable business environment and invested in Ireland and Irish workers.  US direct investment in Ireland totaled $84 billion in 2006, up from only $7 billion in 1994.

President Bush has lowered capital taxes on dividends and capital gains, but we can learn still more from the Irish - US corporate income tax rates are still higher than the developed country average.  The President has reaffirmed that "a free and open international investment regime is vital for a stable and growing economy," but some in America complain about foreign investment.

Some in the US Congress need to be reminded of the Irish lesson, that in a world that is competing for foreign capital, low business taxation and an open investment policy are needed to build new factories in America and raise the productivity and wages of American workers.  Foreign investment is good for an open economy - just ask the Irish.

Free trade policies have helped make Ireland one of the world's great exporting economies.  EU membership means open access to a much larger European market.  Exports grew from 57 percent of GDP in 1990, to more than 83 percent in 2004.  Most of this expansion was in services, based partly on the attraction of software companies investing in Ireland, as well as the success of the International Financial Services Center.  Insurance service exports have grown at nearly 50 percent per year since 2000.  Imports have surged to more than two-thirds of GDP.  In contrast to many in the US, the Irish recognize that strong import markets give Irish-based producers access to a world of cost-effective, quality inputs, and they give Irish consumers a greater choice of affordable goods and services.

The US Congress can learn from the Irish about the benefits of free trade.  Having already approved a free trade agreement for Peru, the second test of 2008 is for Congress to approve promptly the Colombia Free Trade Agreement, which President Bush has made clear is a top priority.  After that, they should approve similar agreements with Panama and South Korea, and extend Trade Promotion Authority so that the United States will be in a strong position to conclude by the end of the year an ambitious agreement in the Doha Round.  A successful global trade agreement can promote the interests of American farmers and firms that want to lower foreign barriers to exporting their goods and services.  Ireland's success demonstrates why US policymakers should welcome free trade and the long-term strength it adds to a national economy.

On St. Patrick's Day, many Americans wish they were Irish.  Every day I wish the US could learn from the economic policies of the Emerald Isle.