Can Ireland's recent prosperity-path enliven the South African economy?

Ireland and South Africa border the Atlantic and banned thin plastic bags. That is about it for similarities. It has fewer people - 3m against SA’s 22m in 1970, 4m against 45m in 2002. The Irish have longer lifespans – 71years compared to our 53 years in 1970, 77 versus 46 years in 2002. Lower unemployment - 4% against 40% in 2002. Also higher average GDP per capita incomes in constant 1995 dollars - $7,908 compared to SA’s $4,100 in 1970, $30,551 ($4,020) in 2002. During those three decades the Irish prospered by 283% (even more in purchasing power parity terms) while South Africans stood still. Why?

Articles about the 'Celtic tiger' often praise or disparage factors that suit the writer's ideology, and critics may perceive growth factors more clearly than capitalism's enthusiasts do. In a Business Report article in 2000, Ann Crotty credited favourable international trends in the early 1990s. She disapprovingly mentioned a four-year national agreement between business, the government and labour for employees to accept nominal pay rises in exchange for tax concessions and the hope of more jobs. The economy took off and corporate profits rose 120% during 1994-1999 while wages rose 49%. To be sure, more jobs appeared, but a 'hard core' of low and unskilled unemployment remained.

In 2002 Irish GDP grew 10.0% while SA grew 3.5%. Finance minister Charlie McCreevy budgeted for further indirect tax cuts and direct tax relief. Claiming that excess demand would boost inflation and deficits, the European Commission urged him to tear up the tax-cutting policies that Bloomberg reported 'had brought about its success' as Ireland 'transformed low taxes and EU development aid into 8.9% growth in the latter half of the 1990s.' Nice developmental-transformation if you can get it!

Ann Crotty then wrote that 'GDP and gross national product figures are extremely crude' and exclude 'any measurement of the costs associated with so-called growth'. Costs such as 'deepening disparities in income and wealth distribution, the need to have two income earners to keep pace with the cost of living, pollution, and the working hours lost in traffic congestion.' GDP per capita had risen during 1993-2001 from two-thirds of the EU average to equal it. Numbers at work rose 45%, pushing unemployment from 17% in the 1980s to below 4% in 2001. 'The stated reasons for the spectacular growth of the 1990s include low corporate tax rates, an elastic supply of good quality and relatively inexpensive labour, flexible labour market practices and a weak exchange rate against the dollar and sterling. The US boom and Ireland's EU membership were of overriding importance. In 1997 foreign firms generated 69% of Irish manufacturing output and 86% of manufacturing exports.'

In 2004 Kevin Wakeford listed tax reduction, debt redemption, educational spending in the information technology (IT) sector, skills development aligned with market requirements, wage freezes and, 'in a sense', voluntary private-sector price controls without interfering with market forces. He said 'civil society' had supported the Prosperity Plan including promoting tertiary education, hard work, consumer savings, and debt reduction. Ireland now imports about 50 000 new skilled people yearly.

In what the OECD terms a 'remarkable development', Ireland has now joined its small group of 'high-income' nations with the US, Norway, Switzerland and Luxembourg. The corporate tax rate is 12.5%, individual income taxes are European-average with a top rate of 42%, and government spent 35% of GDP in 2003. The Heritage Foundation ranked Ireland the world's fifth-freest country in 2004, and the Economist ranked it the world's happiest. SA ranked 53rd and 84th in the same rankings.

In Business Day of 12 May 2005 National Union of Metalworkers education co-ordinator Dinga Sikwebu made yet another highly critical contribution to the debate on growth components. "Unfortunately (he wrote) it would seem that there is no 'silver bullet' – no single overriding policy that could be singled out as responsible for Ireland's success." Here is his list:

late-1950s tax breaks to encourage manufacturing exports

EU structural funds since 1973 for a region considered a backwater

very open economy in 2000, with foreign firms producing 78.2% of manufactured output & 90.8% of exports

second-lowest (of 69 countries) corporate tax rate at 12.5% (EU 31,3% avg, OECD 30% avg)

state spends below EU’s 45% average of GDP and OECD’s 37%

Ireland is an outlier among rich EU nations, with high degree of income inequality

the growth "social dividend" was not shared equally

real wages lagged behind productivity growth during 1985-1998

over two decades, Ireland has become less friendly to trade unions

in 1992-1999, 40% of surveyed private sector respondents reported no union presence

in 1987-1997, 65% of new greenfield firms did not recognise unions

85% of US firms that moved to Ireland denied unions recognition

the Irish Development Agency's location packages no longer request union recognition
Sikwebu's list alone suggests that low tax-spend and Thatcherite union policies did the trick for Ireland. That would surely help the SA economy too and may well be essential for faster growth to take hold. But really fast growth such as Ireland's and China's 9% - the 7% GDP per capita growth that doubles real incomes each decade - will surely need more. As a Dublin economic researcher says, 'you have to open up - the Irish economy really liberalised, and there was a lot of encouragement for foreigners to come in.'

But open up and liberalise what? In the Fraser Institute's annual composite index of economic freedom, Ireland outranks SA in 15 of 21 measured components. In addition, we can all speculate about unmeasured factors such as Aids, Zim, crime and BEE that may harm a country's image, risk profile and economic prospects.

It's also true that among the world's fastest growing countries some are always doing any one thing really badly that liberalisation-advocates would prefer done really well. And there's no single policy factor or 'silver bullet' yet known to be essential for fast growth. Many factors, however, are cited as harmful to investor-perceptions and growth. It's impossible to know beforehand which local-favourite bad policy can be retained without it single-handedly stifling growth. So it's as well to go for growth by a thoroughly liberal change of heart and opening-up, rather than by piecemeal hopeful trial-and-error 'cherry-picking'.

Author: Dr Jim Harris is a freelance researcher and writer. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Free Market Foundation.

FMF Feature Article \24 May 2005