No. 1945June 23, 2006

This paper, in its entirety, can be found at: www.heritage.org/research/worldwidefreedom/bg1945.cfm

The Economic Freedom Project

Produced by the Center for International Trade and Economics (CITE)

Published by The Heritage Foundation214 Massachusetts Avenue, NEWashington, DC 20002–4999(202) 546-4400 • heritage.org

Nothing written here is to be construed as necessarily reflecting the views of The Heritage Foundation or as an attempt to aid or

hinder the passage of any bill before Congress.

How Ireland Became the Celtic TigerSean Dorgan

In just over a generation, Ireland has evolvedfrom one of the poorest countries in WesternEurope to one of the most successful. It hasreversed the persistent emigration of its best andbrightest and achieved an enviable reputation as athriving, knowledge-driven economy.

As a result of sustained efforts over many years, thepast of declining population, poor living standards,and economic stagnation has been left behind. Ire-land now has the second highest gross domesticproduct (GDP) per capita within the European Union(after Luxembourg), one-third higher than the EU-25average, and has achieved exceptional growth.

One of the biggest successes of the Irish economyhas been new job creation. From 1990 to 2005,employment soared from 1.1 million to 1.9 million.Economic growth, more jobs, and rising living stan-dards meant the resolution of the emigration prob-lem, which had bedeviled Ireland for generations.

The population increased by almost 15 percentfrom 1996 to 2005 in a striking reversal of previoustrends. In one year alone (July 2004–June 2005),employment increased by 5 percent. Ireland is nowseen as the land of opportunity by many workersfrom the 10 newest EU member states. Its unemploy-ment rate of 4.4 percent is less than half the EU aver-age. Public budgets are in balance, and foreign invest-ment was equivalent to 17 percent of GDP in 2003.

Good Sense and Pragmatism. Ireland achievedsuccess through a combination of sensible policies

and pragmatism. At the heart of these policies wasa belief in economic openness to global markets,low tax rates, and investment in education. Whileeconomic success over the past 15 years can beascribed to a range of domestic and internationalfactors, it was not a fluke. Ireland has long had, andintends to sustain, low tax rates to attract invest-ment. Its current 12.5 percent corporate tax rateevolved from the zero rate on export sales in the1950s and the 10 percent rate on manufacturingand some internationally traded services intro-duced in 1980.

Investment in education has held a central posi-tion since the 1960s and has produced a high out-put of graduates, particularly in science,engineering, and business studies. The creation ofan international financial services center in Dublininvolved the cooperation between business inter-ests and all parts of the state system that is so char-acteristic of Ireland. The promotion of com-petition and good economic management have alsobeen features of public policy in the past twodecades. Foreign investment has been universally

No. 1945 June 23, 2006

welcomed and supported by benign policy. Intan-gible factors, such as creativity and agility, also playa positive role.

Ireland’s transformation was national in scope,with individuals, businesses, institutions, andgovernment sharing the same ambition. Itinvolved parents deciding that their childrenwould have choices that they did not have andwould not be forced to leave their home commu-nities because of economic necessity. Politicaldecisions were driven and sustained by the publicwill for success. There were some deviations fromsensible policies at times, but through the manydifficult years, the threads of consistent develop-ment can be seen.

Future Challenges. Recent success gives noassurance for the future, and Ireland does notintend to rest on its laurels. The global forces thatIreland has tamed and turned to its advantage inthe past decade continue to drive changes in glo-bal businesses. Business models and structures arechanging. Ireland has experienced these changesthrough the leading-edge companies with whichit has worked, but each year new companies—some of them virtual—threaten to undermineestablished activities. As businesses have to rein-vent themselves at an accelerating rate, so docountries.

Ireland faces the future with considerable con-fidence, based on its recent success and the coher-ence and responsiveness that it has displayed inmeeting the needs of international business. Itremains ambitious, and it wants to move to ever-higher levels of expertise and performance; hence

its rapidly growing and focused investments inresearch activities.

Conclusion. According to the Organisation forEconomic Co-operation and Development (OECD),Ireland has outperformed all other industrializedeconomies over the past decade, with an averageannual growth two to three times that of EU andOECD countries. Independent commentatorsproject that this growth over the next few years willcontinue to exceed that of other OECD countries,maintaining Ireland’s position as one of the world’sgrowth leaders.

Ireland is a trading nation with a global perspec-tive. The Globalization Index study, compiled byinternational consultants from A. T. Kearney,named Ireland as the most globalized country inthe world from 2002 to 2004 and commented thatit has the highest degree of economic integrationamong the developed economies.

This economic openness, combined with lowtaxes, pragmatism and ambition, further invest-ment in education, and a continuing eye to thefuture, will be critical to maintaining the momen-tum for success. Ireland’s experience shows thathard work and good policy can bring rewards.

—Sean Dorgan has been Chief Executive of IDA Ire-land since January 1999. Before joining the IDA, he wasSecretary General of Ireland’s Department of Industryand Commerce and Department of Tourism and Trade,as well as Chief Executive of the Institute of CharteredAccountants in Ireland. He is also Chairman of the Gov-erning Body of Dublin Institute of Technology and amember of several other government-appointed boards.

• Ireland has become one of Europe’s mostremarkable success stories, evolving fromone of the poorest countries in WesternEurope to one of the most successful.

• By the mid-1950s, Ireland’s policy of eco-nomic nationalism was clearly failing, pro-ducing economic stagnation and emigrationthat were in stark contrast to other, fast-recovering economies of postwar Europe.

• Over the past decade, Ireland has outper-formed all industrialized economies with anaverage annual growth two to three timesthat of the EU and OECD, has solved its emi-gration problem, has reduced unemploy-ment to 4.4 percent, and has balanced thebudget.

• Ireland achieved this success through sensi-ble policies and pragmatism. At the heart ofthese policies was a belief in economicopenness to global markets, low tax rates,and investment in education.

This paper, in its entirety, can be found at: www.heritage.org/research/worldwidefreedom/bg1945.cfm

The Economic Freedom Project

Produced by the Center for International Trade and Economics (CITE)

Published by The Heritage Foundation214 Massachusetts Avenue, NEWashington, DC 20002–4999(202) 546-4400 • heritage.org

Nothing written here is to be construed as necessarily reflect-ing the views of The Heritage Foundation or as an attempt to

aid or hinder the passage of any bill before Congress.

No. 1945June 23, 2006

Talking Points

How Ireland Became the Celtic TigerSean Dorgan

In just over a generation, Ireland has evolved fromone of the poorest countries in Western Europe to oneof the most successful. It has reversed the persistentemigration of its best and brightest and achieved anenviable reputation as a thriving, knowledge-driveneconomy.

As a result of sustained efforts over many years, thepast of declining population, poor living standards, andeconomic stagnation has been left behind. Ireland nowhas the second highest gross domestic product (GDP)per capita within the European Union (after Luxem-bourg), one-third higher than the EU-251 average, andhas achieved exceptional growth. (See Chart 1.)

One of the biggest successes of the Irish economyhas been new job creation. From 1990 to 2005,employment soared from 1.1 million to 1.9 million.(See Chart 2.) Economic growth, more jobs, and risingliving standards meant the resolution of the emigrationproblem, which had bedeviled Ireland for generations.

The population increased by almost 15 percentfrom 1996 to 2005 in a striking reversal of previoustrends. In one year alone (July 2004–June 2005),employment increased by 5 percent. Ireland is nowseen as the land of opportunity by many workers fromthe 10 newest EU member states. Its unemploymentrate of 4.4 percent is less than half the EU average.Public budgets are in balance, and foreign investmentwas equivalent to 17 percent of GDP in 2003.

Ireland achieved this success through a combina-tion of sensible policies and pragmatism. At the heart

June 23, 2006No. 1945

page 2

of these policies was a belief ineconomic openness to global mar-kets, low tax rates, and investmentin education. While economicsuccess over the past 15 years canbe ascribed to a range of domesticand international factors, it wasnot a fluke. Ireland has long had,and intends to sustain, low taxrates to attract investment. Its cur-rent 12.5 percent corporate taxrate evolved from the zero rate onexport sales in the 1950s and the10 percent rate on manufacturingand some internationally tradedservices introduced in 1980.1

Ireland’s transformation wasnational in scope, with individu-als, businesses, institutions, andgovernment sharing the sameambition. It involved parentsdeciding that their children wouldhave choices that they did nothave and would not be forced toleave their home communities because of eco-nomic necessity. Political decisions were driven andsustained by the public will for success. There weresome deviations from sensible policies at times, butthrough the many difficult years, the threads ofconsistent development can be seen. This paperexplains how the transformation occurred.

Economic NationalismFor a generation after achieving independence

from the United Kingdom in 1922, Ireland soughtto be economically self-sufficient. It relied on small-scale agriculture, exporting primary produce to theU.K. market and manufacturing mainly for thehome market of less than 3 million people. Tradebarriers such as high tariffs and a policy of importsubstitution sought to make this reliance on eco-nomic nationalism successful. Inevitably, it failed.

Ireland’s population was just short of 3 millionpeople when the new state was established in 1922.It fell marginally each decade thereafter until the

1950s, when 400,000 people (one-seventh of thepopulation) emigrated in a single decade. (SeeChart 3.) There could be no clearer evidence of thefailure of economic policies and opportunities andof the inadequate fulfillment of national aspirations.

By the mid-1950s, it was clear that economicnationalism was not sustainable. The stagnation andemigration, and the despondency they caused, werein stark contrast to other, fast-recovering economiesof postwar Europe. As a result, radical policy changewas introduced, and the previous protectionismwas abandoned in favor of openness, driven by theneed for progress from an intolerable position thatoffered few prospects for economic success.

The policy changes were drawn together in Eco-nomic Development, an official paper published in1958 that overturned much previous policy think-ing by advocating free trade, foreign investment,productive (rather than mainly social) investment,and growth rather than fiscal restraint as the primeobjective of economic management.2 In 1956, to

1. The current 25 member states of the European Union.

B 1945 Chart 1

2

4

6

8

10%

1970–1979 1980–1987 1988–1993 1994–2004

Average Annual Rate of Real GDP Growth

EU U.S. Ireland

Ireland’s Economic Growth, 1970–2004

Source: Ireland Central Statistics Offi ce and Organisation for Economic Co-operation and Development, Economic Outlook.

page 3

No. 1945 June 23, 2006

spur business development, taxrelief on profits from export salesfrom Ireland was offered for thefirst time. In 1958, all controls onforeign ownership of businesseswere lifted.

In the early 1960s, Ireland uni-laterally lowered its import tariffsand started to negotiate a free tradeagreement with the U.K. Thisagreement was concluded in 1965,and Ireland joined the GeneralAgreement on Tariffs and Trade in1967. In 1961, Ireland expressedits ambition to join the EuropeanEconomic Community (EEC),which had been founded by the sixmember states in the previousdecade. The U.K. had the sameambition, but this was thwarted bya French veto for some years, andIreland’s application did not pro-ceed. The U.K., Ireland, and Den-mark finally joined the EEC in 1973.

These policy changes were facilitated by a transi-tion from the generation that had won indepen-dence (although Sean Lemass, the political leaderwho made the most changes in a few years, was him-self part of that generation) and by Ken Whitaker,the young and forward-looking head of the civil ser-vice, who led the Department of Finance from 1956to 1969. Whitaker was the primary author of Eco-nomic Development.

The Transition to OpennessMore open markets spurred improved economic

performance in the 1960s, compared to the previ-ous decade. Annual average growth in nationalincome—both GDP and gross national product(GNP)—was 4.2 percent. The Industrial Develop-ment Authority (IDA) sought out new modernindustry overseas, which benefited from the attrac-tions of abundant English-speaking and low-costlabor and the exemption from corporation tax of allprofits from exports. Pfizer, which established its

first plant in 1969, was one of over 350 overseascompanies that set up in Ireland by 1970.

However, this progress did not initially spuremployment or stop emigration. In fact it came ata price: Many companies that had been set up inearlier years to serve the small closed nationalmarket were uncompetitive in the face of freetrade. Moreover, Ireland still depended heavily onagriculture, which had low output and incomelevels, and the migration of people from the landwas greater than job creation in new businesses.As a result, there was no net increase in employ-ment in the 1960s, and net emigration from thecountry continued, although at a lower rate thanin the 1950s.

The role of the state also increased during the1960s. Public expenditure grew from 32 percent ofGNP in 1960 to 42 percent in 1973. Social servicesand education, in particular, expanded with thestate. The Organisation for Economic Co-operationand Development (OECD) sponsored an influential

2. T. K. Whitaker, Economic Development (Dublin: Stationery Office, 1958).

B 1945 Chart 2

Employment by Sector and Unemployment, 1973–2003

Source: Ireland Central Statistics Offi ce.

500

1,000

1,500

2,000

1973 1978 1983 1988 1993 1998 2003

Thousands of Jobs

Agriculture Industry Services Unemployed

June 23, 2006No. 1945

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report on education in Ireland,Investment in Education, which waspublished in 1965. This reportemphasized that education waskey to the future of Ireland’s societyand economy. Although not direct-ly recommended in the report,beginning in 1967, the state paidfor all secondary schooling andtransportation to school. This mea-sure resulted in a rapid rise in thelevel of education attained by theyounger population.

Attempts were made to adjust tothe new openness. The NationalIndustrial and Economic Council,comprising government, business,and other interests, discussed thechallenges of restructuring indus-try now faced with free-trade com-petition. Underlying the extensiveprocesses of consultation andengagement was a clear commit-ment to change, even if that changehad inevitable problems and costs.

With hindsight, the path toopenness was irreversible, althoughit may not always have seemed so atthe time. The establishment of thefirst (state-owned) television ser-vice in 1960 quickly facilitateddebate on, and sometimes a ques-tioning of, long-established societalnorms and values. The country,which had been introspective andhighly sensitized by its history, nowbegan to see the possibilities thatothers enjoyed.

Joining Europe and Going Forward

When Ireland joined the EEC in 1973, its confi-dence and sense of its own status grew. Now itcould deal with large and successful states as a part-ner, no longer burdened by its colonial history.Business now had free access to a much larger mar-ket, and exports could be diversified away from

dependence on the U.K. Moreover, through theEEC’s Common Agricultural Policy, agriculturegained from access to wider markets at good prices.An improvement in Ireland’s living standards andprospects lifted spirits.

B 1945 Chart 3

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1951 1961 1971 1981 1991 2001

Total at Census Date

Natural Increase

Change in Population

2005 (est.)

Net Migration

Millions of People

Population of Ireland, 1951–2005

Source: Ireland Central Statistics Offi ce.

page 5

No. 1945 June 23, 2006

B 1945 Chart 4

2

4

6

8

10

12

14

16

18

20

1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005

Unemployment Rate

Unemployment Rate, 1961–2005

Source: Ireland Central Statistics Offi ce and U.N. International Labour Organization.

The 1970s reversed past trends. For the firsttime since independence, the populationincreased, rising by 15 percent for the decade.National income increased at a sustained annualrate of about 4 percent. Unlike previous decades,employment increased by about 1 percent peryear, although a large part of this increase was inthe state sector, contributing to financing prob-lems in subsequent years.

The IDA played a central role in the new drivefor success. While still funded by the state, theIDA was established in 1970 with its own board,staff, and operating freedoms, separate from theDepartment of Industry and Commerce of whichit had been a part. It was the first dedicated state

agency in the world to undertake a massive andsustained campaign to establish a modern manu-facturing base by attracting large-scale foreigninvestment.

The IDA adopted pragmatic, business-like,focused marketing methods. The key decision wasto focus on companies that represented thefuture—high technology, high output, and highskills. The main targets included the computerindustry, pharmaceuticals, and medical technology,followed by international services. Soon invest-ments were won from leading companies, includ-ing Amdahl, Baxter Travenol, Digital, MerckSharpe, Wang, and Warner Lambert. All of thesecompanies were persuaded of the value of using

June 23, 2006No. 1945

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Ireland as an export platform to serve Europe andother markets. By 1975, more than 450 foreign-owned industrial projects, covering a wide range ofmanufacturing sectors, accounted for two-thirds ofIreland’s total industrial output.

While the new multinational companies broughtsuccess, many older indigenous businesses hadconsiderable difficulty in adjusting to the new opentrading conditions. An apparent dichotomy in theperformance of new and old, foreign and Irishcompanies would be the subject of debate andsome policy reassessment in the following years.

The 1970s also saw a rapid expansion in public(state) expenditure on social welfare, health andeducation, housing, telecommunications and otherinfrastructure, and administrative services. Public-sector employment represented a third of the totalworkforce by 1980, partly because jobs were cre-ated to deal with rising unemployment, whichstood at 9 percent of the workforce in 1977.

All of this happened against a backdrop of highinflation, which averaged 13.6 percent per yearfrom 1971 to 1980 and was driven partly by inter-national factors such as oil crises and partly bydomestic demand and an expansionary fiscal policy.Public budget deficits and high public borrowingwere features of the latter years of the decade, creat-ing the basis for the crises that erupted in the 1980s.

Crises AccumulateUnsolved, the underlying economic problems of

the 1970s rolled over into the 1980s, producingdisappointment. The causes were the return of highunemployment, emigration, steady worsening ofthe public finances, and the seeming inability ofany government to manage the nation’s affairs andfind a solution to the worsening situation. Theatmosphere of the 1980s was more redolent of thedark years of the 1950s than of the optimism thathad permeated the two decades in between.

The feeling of failure was exacerbated by thewaves of emigration of young people, just as in ageneration earlier. Whole classes of university grad-uates would frequently leave the country. There

was a disheartening drain of human capital. A net200,000 people left from 1981 to 1990. In theworst years, more than 1 percent of the country’spopulation fled. This was not what the policies ofthe previous 25 years had been designed toachieve. What had gone wrong?

A number of internal and external factors wereconspiring to slow down progress and undermineconfidence. Global conditions were weaker afterthe oil shocks of the 1970s. The momentum fromEEC entry had faded. Persistent inflation averagedclose to 11 percent per year between 1981 and1986. Jobs created by new foreign investment,while substantial, were inadequate to employ thegrowing workforce and counter the failure rate ofolder businesses.

Attempts at government intervention proved tobe no better. Continued increases in public spend-ing, tax increases, and deficit financing throughborrowing soured the investment climate andfailed to raise employment while increasing thedrag on the underperforming economy.

Between 1980 and 1986, total governmentexpenditure grew from 54 percent to 62 percent ofGNP, and public debt increased from 87 percent to120 percent of GNP while annual budget deficitsexceeded 10 percent of GNP. Over one-third of alltax revenue (over 90 percent of income tax reve-nue) was being used to service this debt. Mean-while, the economic dependency ratio rose to 2.3persons per person employed in 1985, and unem-ployment stood at 15 percent.

While the IDA continued to attract foreign inves-tors (IBM, Lotus, Microsoft, and Bausch & Lomb,among many others) into the 1980s, some high-profile failures of recent investments raised ques-tions about this strategy. In particular, a speciallycommissioned investigation by Telesis on behalf ofthe National Economic and Social Council (NESC)raised some troubling issues.3

Telesis found that the value of inward invest-ments tended to be overstated—employment pros-pects were too often exaggerated at a time of highunemployment—and that promised linkages to the

3. National Economic and Social Council (Dublin), Telesis: A Review of Industrial Policy, 1982.

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No. 1945 June 23, 2006

domestic economy were frequently weak. It alsocriticized what it saw as an excessive attention tooverseas companies relative to indigenous busi-nesses. While initially stung, the IDA respondedwell to the report and increased its attention toIrish-owned industry.

The political parties were not successfullyaddressing the gathering gloom. Fianna Fail, theopposition party since 1982, won the general elec-tion in 1987. When in government in the late1970s, Fianna Fail had been largely responsible forthe excessive and misguided public spending. Thistime, however, the party tried a different path. Onelection to government in 1987, they surprisedmany, including their own supporters, with a pro-gram of severe cuts in expenditure accompanied bysome novel consensus-building and developmentalmeasures. Within a few years, these steps began toshow dividends, helped by a coincidence of otherfactors.4

Recovery and SuccessSmaller government became part of the road to

success. There was surprise with the first moves tocut spending severely across a range of programsand abolish a number of government agencies.These steps were strongly criticized initially, espe-cially when they seemed to affect (state-provided)health and social services, but the depth of the bud-getary crisis allowed the momentum to be sus-tained. The government was assisted by aconsensus that had been built in the NESC, com-prising business, farming, trade union, and socialinterest groups. The main opposition party, whoseleader had been minister for finance before theelection, also supported any measures that restoredfiscal discipline.

A second element of the new government’saction plan was moderate wage increases in returnfor modest reductions in direct income taxes, ineffect allowing take-home pay to increase morethan the pay raise granted by employers. Thisthree-year Program for National Recoveryinvolved government itself, employers, unions,

and farmers. This helped to break the spiral ofinflationary wage increases and ensured industrialpeace. The program also served to create agree-ment on the nature of the crisis facing the state andon steps needed to deal with it. The wider benefitsof consensus on development priorities and theshared efforts involved to achieve national goalsproved to be of lasting value, and similar nationalpartnership agreements have been put in placerepeatedly up to 2005.

While cutting back on spending, the govern-ment took steps to promote business investment. Anotable example was the adoption of a proposal tocreate the International Financial Services Centre(IFSC) in the old Docklands area of Dublin. Thesuccessful development of the IFSC shows thestrength of cooperation between business interestsand all parts of the state system that is such a strongcharacteristic of Ireland.

Development steps in financial services andother sectors were assisted by a series of invest-ments in telecommunications from the 1980sonward, although the sector remained largely state-owned until the late 1990s. Late entry to heavyinvestment in this sector ultimately served Irelandwell in that it provided the most advanced andcomprehensive digital network in Europe (much asthe relevance of the education system was alsogreater as a result of its late expansion).

The promotion of competition also gave animpetus to development. Ryanair, a low-cost air-line similar to Southwest Airlines in the UnitedStates, gained access in 1985 to the Dublin–Lon-don air route, which had been controlled by theduopoly of Aer Lingus and British Airways, both ofthem state-owned airlines. The new competitordrastically cut fares and expanded the market by65 percent in two years. Within a few years, touristnumbers and revenue grew, and the obvious bene-fits of competition were extended to other previ-ously regulated activities and sectors. Ryanairtoday is still run from Ireland and continues itsrapid growth throughout Europe. Using the low-

4. For a detailed account, see Ray MacSharry and Padraic White, The Making of the Celtic Tiger: The Inside Story of Ireland’s Boom Economy (Dublin: Mercier Press, 2000).

June 23, 2006No. 1945

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cost, low-fares model, it has the largest passengernumbers of all European airlines.

Improved economic management and the morefavorable economic conditions generally created asuitable backdrop for attracting further foreigninvestment to Ireland. In 1989, Intel Corporationdecided to build its first European manufacturingcenter in Ireland after years of courtship by theIDA. The available strong cadre of Irish engineeringtalent, most of them dispersed globally amongleading electronics companies but traced by theIDA, was a key factor in winning the decision. Theinvestment was notable for its size, the leading-edge technology involved, and the credibility that itgave Ireland in advanced manufacturing.

When the 1990s dawned, Ireland had created anenvironment for growth and benefited from a num-ber of external factors. Globalization and rapidtechnological advances spurred the industries inwhich Ireland was strong and could offer furthercompetitive advantages. The U.S. economy surged,and U.S. businesses in high-growth sectors—including Microsoft, Dell, Hewlett-Packard, andIBM—saw Ireland as an attractive location for serv-ing the increasingly integrated European market.

These developments and others were assisted bya holistic view of industrial policy proposed by anofficial review entitled A Time for Change (known as“Culliton” after the name of the review chairman)that was published in 1992.5 This review stressedthe importance of education, technical skills, infra-structure, and the general business environment—rather than direct agency interventions alone—tobusiness success and economic development. Cul-liton also proposed establishing a new agency, sep-arate from the IDA, to support the development ofindigenous Irish business.

Success in the 1990s highlighted another ingre-dient: the management skills, ambition, and globalorientation of Irish managers in multinational cor-porations. Their performance in fulfilling theirmandates gave them opportunities to win new stra-

tegic responsibilities. This strategic deepening wasespecially valuable when many information tech-nology businesses stalled in 2001, sparing manyIrish subsidiaries from retrenchment because oftheir performance and strategic importance.

Some external observers are inclined to ascribe alarge part of Ireland’s success in the 1990s to EUeconomic transfers, but their role can be over-stated. EU membership has been very positive forIreland, providing market access, enhancing Ire-land’s national status, and contributing to the bud-get. While net receipts from the EU averaged 4percent of GDP over an extended period, studieshave shown that these contributions added about0.5 percent per year to the growth rate, while thegrowth has averaged over 6.5 percent per yearsince 1987.6 Comparable transfers were made toother poorer EU states, such as Greece, Portugal,and Spain, but none of these countries achievedsimilar growth.

Making ConnectionsIreland’s success over the past two decades is not

the result of any one factor, but of many. It investedin education, adopted sensible tax and fiscal poli-cies, was open to and encouraged foreign invest-ment, and achieved and sustained a nationalconsensus. It made connections between all theseaspects and used the unique and intangible creativeassets that are part of its culture to enhance the vir-tuous circle. It is worth reviewing the key aspects ina little more detail.

Education. The people of Ireland haveassiduously invested in human capital over the past40 years. Ever since the OECD publishedInvestment in Education in 1966, education has hada central position in Ireland’s development policies.How-ever, even before that, edu-cation had a highsocietal value. Parents sought to give their childrenthe best education available, regardless of their owncircumstances. The advent of free secondary (highschool) education in 1968 and higher-leveltechnical training in Regional Technical Colleges,

5. Industrial Policy Review Group, A Time for Change: Industrial Policy for the 1990s (Dublin: Stationery Office, 1992).

6. Frank Barry, John Bradley, and Aoife Hannan, “The Single Market, The Structural Funds and Ireland’s Recent Economic Growth,” Journal of Common Market Studies, Vol. 39, No. 3 (2001), pp. 537–552.

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No. 1945 June 23, 2006

beginning about the same time, significantlyboosted participation rates and was very powerfulin meeting the demands of the developingeconomy.

Ireland has an unusual demographic pattern inEuropean terms: Almost 40 percent of its populationis age 25 or under compared to 30 percent in almostevery other country in Europe. This pattern devel-oped as a result of the years of emigration and a latebaby boom. The number of births peaked in 1980,about 20 years after other developed countries. Thelater start in national education worked through the1970s and 1980s to turn out a good number of well-educated young people in the 1990s.

In the 15 years from 1965–1966 to 1980–1981,the numbers of students in both secondary andthird-level (university or equivalent) education dou-bled. The number in third-level trebled again in the

following 20 years (to 2000–2001), a more than six-fold increase in 35 years. As important as the num-bers involved was the quality of the learning and itsrelevance to economic and social development andto business. The greatest increases in higher-leveleducation were in technical and vocational subjects,largely in Regional Technical Colleges (which laterbecame Institutes of Technology), and in science,engineering, and business studies in universities.During the high-emigration years of the 1980s, con-cern was expressed that Ireland was educating itsyoung people for the benefit of other countries, butas internal policies improved, the rewards becameclear during the following decade when manymigrants returned with relevant expertise.

The binary or dual system of higher education—with universities fulfilling a primarily academicmission and with colleges and institutes providing

B 1945 Chart 5

6.85

8.66

10.04

12.29

16.26

2

4

6

8

10

12

14

16

18

4.79

Germany

6.27

USA EU-15 Japan UK Finland Ireland

Graduates per 1,000 population

Science and Engineering Graduates Age 20–34 in 2000

Source: European Commission, Third European Report on Science & Technology Indicators, 2003, March 2003, at europa.eu.int/comm/research/press/2003/pdf/indicators2003/reist_2003.pdf (February 15, 2006).

June 23, 2006No. 1945

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technical and vocational skills—has served economic and businessneeds very well. Institutes of Tech-nology in particular have beenhighly responsive to local businessand regional development needs.The combined efforts of bothtypes of institutions have givenIreland the world’s highest endow-ment of young science and engi-neering graduates: 16 graduatesper thousand population in the20–34 year age group, comparedwith less than seven per thousandin the U.S. and EU-157 and lessthan five per thousand in Ger-many. (See Chart 5.)

Since the late 1990s, with thetransformation in Ireland’s relativecompetitiveness, a new emphasishas been placed on deepening sci-ence and research expertise. A na-tional Technology Foresight exer-cise identified information andcommunications tech-nology andbiotechnology as key enablingtechnologies of the future. Basedon this, the government estab-lished Science Foundation Ireland(SFI), modeled on the NationalScience Foundation (NSF) in theU.S., to attract world-class re-search in these areas to Ireland.With considerable public funding, great progressand a welcome new reputation for research havebeen achieved. There is a wide public understand-ing of the value of this development.

Taxation. Today, Ireland is known for having thelowest standard corporate tax rate in Europe. For 50years, Ireland has benefited from low taxation, bothin absolute levels of tax and particularly in the ratesapplied to business profits. OECD statistics show thatIreland now has by far the lowest tax burden relative

to GDP of all Western European countries and isbelow the OECD average. (See Chart 6.) This burdenreflects in large part the rapid growth of the tax basethat the low tax rates have made possible.

Ireland has a history of using its tax system inno-vatively to attract and develop international busi-nesses.8 The first duty-free zone in the world wasset up in Shannon in 1947.

Interestingly, the current low corporate tax rate isIreland’s response to EEC/EU efforts to undo earlier

7. The 15 member states of the EU before the 2004 expansion.

8. See Frank Barry, “Tax Policy, FDI and the Irish Economic Boom of the 1990s,” Economic Analysis and Policy (Queensland, Australia), Vol. 33, No. 2 (2003), pp. 221–236.

B 1945 Chart 6

0 10 20 30 40

U.K.

Ireland

U.S.

Canada

OECD Europe

All OECD

2003 1993 1983 1973

Total Tax as a Percentage of GDP, 1973–2003

Source: Organisation for Economic Co-operation and Development, Revenue Statistics of OECD Member Countries, 1965–2004.

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beneficial tax advantages. In 1956, relief was offeredon all profits on exports from Ireland. When thisapproach was questioned under EEC rules, Irelandintroduced in 1980 a 10 percent tax rate on profitsfrom manufacturing and a defined range of interna-tional service activities. A further challenge from theEU regarding the differential nature of this low rate(non-qualifying profits were taxed at a rate as high as50 percent) led to an announcement in 1997 that amaximum rate of 12.5 percent would apply to allcorporate trading profits beginning in 2003.

In every case in which companies moved from alower preferential rate to a higher rate, a long transi-tion period was allowed. Those who benefited fromzero tax on export sales prior to 1980 were able tocontinue the benefit until 1990. Those who had the10 percent manufacturing tax prior to 1998 will notmove to the higher 12.5 percent rate until 2011. Thelong-run certainty attached to these low rates hasbeen a fundamental feature of Irish policy, which hasbeen implemented consistently by all governments.The advantage for business of the low tax rate isenhanced by a wide network of double-taxationagreements, favorable treatment of foreign divi-dends, and supportive administrative rules.

The effect of low rates is evident in the relativelyhigh proportion of all tax revenue that is receivedfrom corporate profits. Corporate income taxesaccount for 13 percent of all tax revenue in Irelandas compared to 6 percent in the U.S., 8 percent inthe U.K., 7 percent in France, 3 percent in Ger-many, and 9 percent in the OECD as a whole.9

The advantages of low taxes were not as clearlyunderstood in relation to personal taxation until the1990s. In the 1980s, governments seeking more rev-enue to achieve fiscal balance pushed personal taxrates higher. The results were perverse: Higher ratescaused more evasion and avoidance of tax and drovesome activity offshore or into the black economy,thus reducing tax revenue even further.

One of the actions of the government elected in1987 was to grant an amnesty to tax defaulters,which brought in a windfall boost in revenue andbroadened the tax base. Since then, personal taxrates have been reduced progressively from a baserate of 35 percent to 20 percent and from a toprate of 58 percent to 42 percent. Tax bands(brackets) have also been broadened so that thehigher rate now applies to higher income levelsthan before. The power of low rates was alsoshown when the 40 percent capital gains tax ratewas halved in 1999 to 20 percent and revenueincreased by 50 percent in one year and by 270percent over three years.

Foreign Investment. Through the IDA, Irelandwas a first global mover to seek foreign directinvestment and to create the open, liberal, supportivebusiness context to nurture it.10

U.S. Department of Commerce figures show that,over decades, U.S. companies in Ireland haveachieved the highest after-tax returns on their invest-ments in Europe—between 20 percent and 30 per-cent per year on average, well ahead of the returnrates in all other locations.11 This is driven by com-petitive costs combined with high productivity andsupported by low corporation tax. The U.S. has beenthe main source of foreign investment, accountingfor about two-thirds of all investment projects andover 80 percent of capital invested. Other invest-ment sources have been Germany, the U.K. andother European states, and Japan.

The operating environment is highly supportiveof international businesses. Because of the coun-try’s relatively small size, its government is open,accessible, and responsive. Ireland’s economicdependence on trade—exports are equivalent toover 85 percent of GDP—drives the public policyagenda to a considerable extent. It favors trade-enhancing measures globally, unrestricted capitalflows, and an extensive range of double-taxation

9. Organisation for Economic Co-operation and Development, Revenue Statistics, 2004.

10. See Frank Barry, “Export Platform FDI: The Irish Experience,” European Investment Bank EIB Papers, Vol. 9, No. 2 (May 28, 2004), pp. 8–37, at www.eib.eu.int/Attachments/efs/eibpapers_v09n02_en.pdf (March 14, 2006).

11. U.S. Department of Commerce, Bureau of Economic Analysis, “U.S. Direct Investment Abroad: Balance of Payments and Direct Investment Position Data,” updated March 15, 2006, at bea.gov/bea/di/di1usdbal.htm (March 21, 2006).

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agreements, which facilitate foreign earnings byprotecting income from being taxed twice. Bothcorporate and employment legislation are liberal intheir approach and flexible in operation, support-ing business development.

Ireland has tended to specialize in a few high-growth and high-productivity sectors that the IDAidentified in the 1970s as having considerable poten-tial. The IDA set out to build relationships with theleading companies in these areas, to understand theirneeds, and to match Ireland’s capabilities to them. Asa result, the leading companies in information andcommunications technology—Intel, IBM, Hewlett-Packard, and Dell—all have major activities, employ-ing 4,000 to 5,000 people each in Ireland. Intel hasinvested over $6 billion in four wafer fabricationplants on its largest site outside the U.S., which is alsoa launch site for its most advanced microprocessors.

Nine of the world’s top 10 pharmaceutical com-panies and 12 of the world’s top 15 medical prod-ucts companies have substantial operations inIreland serving global markets. Satisfaction isproven by continual reinvestment. Abbott Labora-tories, Johnson & Johnson, Pfizer, and Wyeth eachhave multiple locations in Ireland. Boston Scientificand Medtronic are part of a rapidly growing clusterof cardiac and vascular device companies.

In the 1980s, the IDA was early to understand thesignificance and value of internationally traded ser-vices. It sought out software companies likeMicrosoft and Oracle with the result that Ireland hasbecome in recent years the world’s largest softwareexporter. Leading banks, insurers, and fund manag-ers were persuaded of the advantages of Dublin forfinancial services. The IDA also showed internationalcompanies how pan-European shared service centerscould be operated from Ireland, taking advantage ofthe availability of bright multilingual young people,agile business conditions, and the favorable tax rate.Ireland moved quickly to become a leading Europeanhub for e-business. In recent years Google, Yahoo,eBay, and Amazon have set up significant and grow-ing centers in Ireland to serve Europe and beyond.

Michael Dell has summed up the relationshipbetween Ireland and the multinationals in thesewords:

I don’t think it’s coincidence that Irelandand Dell share the same character andconnection. Every success we’ve achievedaround the world has been due to the oldIrish recipe of big dreams, hard work andstrong relationships.12

Some Intangible Advantages. Ireland’s out-standing performance can be explained in quantita-tive economic terms, but intangible factors haveundoubtedly also contributed to recent success. Ire-land has an innate creativity, which has been mani-fested in literature and music, and a curiosity that isinterested in others and seeks to build relationships.Ireland is now open to the world, not only in tradeterms, but also in thought and attitudes. The old,enclosed, inward-looking, conservative Ireland isdead and gone. Today’s younger generation has awell-grounded confidence created by the country’snew role in Europe since 1973 and by the high-quality education that they have received.

There has been consensus on development poli-cies among all political parties—left, center, andright—all of which have been in government inrecent years. The Irish are a pragmatic people whoare intensely political, but they have little or no ide-ology. They are solution seekers who have an innateability to empathize and to influence. Internationalresearch has shown that they have a greater toler-ance of ambiguity and a greater ability to handle itthan most other peoples. This, combined with thenoted Irish creativity, may be of special value in themodern, fast-moving world in which quick,instinctive solutions are needed for new problemswhen imperfect information is available.

Future ChallengesRecent success gives no assurance for the future,

and Ireland does not intend to rest on its laurels. Theglobal forces that Ireland has tamed and turned to itsadvantage in the past decade continue to drive

12. Michael Dell, remarks at the University of Limerick, Ireland, May 29, 2002, p. 1, at www.dell.com/downloads/global/corporate/speeches/msd/2002_05_29_limerick.pdf (March 9, 2006).

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changes in global businesses. Business models andstructures are changing. Ireland has experiencedthese changes through the leading-edge companieswith which it has worked, but each year new compa-nies—some of them virtual—threaten to undermineestablished activities. As businesses have to reinventthemselves at an accelerating rate, so do countries.

Developed countries will depend on increasinglysophisticated knowledge-based activities to facili-tate the businesses of the future and sustain high-value and high-income jobs. The economic trans-formation inherent in these changes will representconsiderable challenges for all advanced countriesand give new opportunities to newly developingstates that can move quickly to offer the skillsneeded by the new global economy.

Ireland faces the challenge of anticipating andadjusting promptly to these global changes. It doesso with considerable confidence, based on its recentsuccess and the coherence and responsiveness that ithas displayed in meeting the needs of internationalbusiness. It remains ambitious, and it wants to moveto ever-higher levels of expertise and performance;hence its rapidly growing and focused investmentsin research activities.

ConclusionAccording to the OECD, Ireland has outper-

formed all industrialized economies over the past

decade, with an average annual growth two to threetimes that of EU and OECD countries. Indepen-dent commentators project that this growth overthe next few years will continue to exceed that ofother OECD countries, maintaining Ireland’s posi-tion as one of the world’s growth leaders.

Ireland is a trading nation with a global perspec-tive. The Globalization Index study, compiled byinternational consultants from A. T. Kearney,named Ireland as the most globalized country inthe world from 2002 to 2004 and commented thatit has the highest degree of economic integrationamong the developed economies.13

This economic openness, combined with lowtaxes, pragmatism and ambition, further invest-ment in education, and a continuing eye to thefuture, will be critical to maintaining the momen-tum for success. Ireland’s experience shows thathard work and good policy can bring rewards.

—Sean Dorgan has been Chief Executive of IDAIreland since January 1999. Before joining the IDA, hewas Secretary General of Ireland’s Department ofIndustry and Commerce and Department of Tourismand Trade, as well as Chief Executive of the Instituteof Chartered Accountants in Ireland. He is also Chair-man of the Governing Body of Dublin Institute ofTechnology and a member of several other govern-ment-appointed boards.

13. A. T. Kearney and Foreign Policy, Globalization Index, 2002–2004.