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Philipp Fink, The Free State (1922-1932) in:

Philipp Fink

Late Development in Hungary and Ireland, page 91 - 98

From Rags to Riches?

1. Edition 2009, ISBN print: 978-3-8329-4173-4, ISBN online: 978-3-8452-1720-8 https://doi.org/10.5771/9783845217208

Series: Nomos Universitätsschriften - Politik, vol. 168

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91 tural exports were prioritised. The period of state-socialism managed break this pattern, but created new constraints arose through an antiquated industrialisation process, resulting in Hungary’s continued backwardness. The level of internal autonomy was high. The insulation of the state from counter-interests was the result of the authoritarian structure of the political system, upholding the respective elite’s interests. The rising contradictions of the respective development regimes caused an erosion of the internal autonomy in all development regimes. The capacity of the respective development regimes to implement the developmental goals was repeatedly reduced by international economic repercussions, affecting the respective developmental agent. Hungary did not engage in social and economic reforms to mould its socioeconomic institutions towards the exigencies of international markets. Instead, in the event of economic crisis, the respective political elites continuously chose to reduce external economic influences by turning away from international trade in a bid to secure their socioeconomic predominance. In each case, the state resorted to increase its intervention into the economy in a bid to enlarge its developmental capacity. By refuting adjustment and adaptation to international economic developments, the malfunctioning and backward economic structure was preserved. The innate contradictions of preserving the backward economic and socioeconomic structures bred popular dissent. Consent towards the policies of the respective development regime, which guaranteed its legitimacy, was in all cases built upon varying degrees of accommodation, cooptation and suppression of dissent. However, the erosion of the state’s capacity to deliver the required goods of prosperity and rising living standards caused increasing popular dissatisfaction. This eroded the internal autonomy of the respective regime. However, popular dissent was crushed with the exception of the state-socialist development regime. 2.3 Irish Development Regimes In contrast to Hungary, the Irish development regimes preceding the current FDI-led export-oriented industrialisation regime are fewer and the time span under review is shorter. In total two development regimes preceded the current regime. Starting with the Irish Free State, the period under investigation is concerned with the era following the attainment of Irish statehood after independence from the UK in 1922. The first development regime was built upon the generation of agricultural export incomes within a constrained developmental context defined by consolidation and reconstruction in the aftermath of partition, the War of Independence and the Irish Civil War as well as the detrimental effects of international economic recessions. The following developmental period (1932-1958) was characterised by a protectionist regime, which focussed on industrialisation via import-substitution. 92 2.3.1 The Free State (1922-1932) The first phase of the development regime lasted from independence in 1922 until the change in governments from Cumann na nGaedheal to the Fianna Fáil led coalition in 1932. The Cumann na nGaedheal79 government was faced with a difficult developmental environment, which was defined by the exigencies of the War of Independence, the Irish Civil War, partition and international economic repercussions. The government had evolved from those former Sinn Féin members, who supported the terms of Irish independence as stated in the Anglo-Irish Treaty (1922). As Lee (1989: 67) shows, the ensuing Civil War between those supporting the Treaty and its dissenters was over varying degrees of nationalism and the question of the legitimacy to represent the will of the people. The dissenters, led by Eamon de Valera, refused to take the Oath of Allegiance to the British Crown and their subsequent non-recognition of the legitimacy of the Free State government and parliament, which had ratified the Treaty with a majority vote. The Civil War, ending in May 1923, had lasted 11 months and caused an estimated 4000 deaths. However, despite its small scale and short duration, its viciousness had created a far larger psychological effect. The conflict caused a schism in the Sinn Féin movement, polarising the political landscape until today (Lee 1989: 69). The Free State Development Regime Hence, the victorious pro-Treaty government had the arduous task of post-Civil War reconstruction and simultaneously building an Irish state. The focus was therefore laid upon consolidation, rather than expansion. The development regime can be classified as being free trade oriented and non-interventionist (“laissez-faire”) with only a minimal role of the state, based on the generation of agricultural exports (Breen et al. 1990: 25). The government followed an economic policy course based on the static notion of comparative advantage (Barry 1991: 86). This was seen to lie in the specialisation in agricultural pastoral exports to British markets with agrarian capital as the key development agent (Foster 1989: 523). Considering that in 1926 agriculture employed 57% of the workforce, contributed to 33% of GDP and was responsible for 89% of exports (Jacobsen 1994: 51), the emphasis on agriculture as the developmental base was not surprising. The Cumann na nGaedheal government accepted this development path and promoted agricultural exports in the anticipation that the resulting profits would be reinvested in the economy and lead to industrialisation via spill-over effects. It was envisaged that these spillover effects would lead to the establishment of a more substantial processing sector. As the main industrial export sectors at the time, brewing, distilling and biscuit-making were closely linked to the agrarian sector. 79 Meaning “League of the Gaels” 93 Hence, ranchers, commercial classes and financial interests, constituted the developmental agents of the time. Consequently, the prescribed economic policies favoured those classes, resembling the main electoral base of the ruling Cumann na nGaedheal party. The strict adherence to free trade was met with approval from agricultural interests, who feared that tariffs would increase the prices for imports, raising their production costs (Lee 1989: 113; Breen et al. 1990: 25). Key elements in this strategy were low income taxes, low state expenditures and the link of the Irish pound to the Sterling. It was presumed that low income taxes would attract foreign capital to Ireland and keep Irish capital in the country prompting investment (Lee 1989: 109). Furthermore, the tax rates were 40% lower than those in Great Britain (Jacobsen 1994: 52), which was seen as a precondition to the Anglo-Irish financial elites to invest in the Free State. They were also seen as a justification for the low level of state expenditure. Income taxes contributed only to 20% of the government’s tax take with the remainder stemming from indirect levies, additionally harming lower income groups (Lee 1989: 111). This fiscal policy supported financial elites and farmers. Low taxation was seen as the key instrument to lower agrarian production costs and thereby raising the competitiveness of pastoral exports (Lee 1989: 113). The linking of the Irish pound to the Sterling was not only seen as a necessity to secure trade links with Ireland’s main trade partner the UK, but together with low direct taxes it was also believed to be an imperative to incite industrial investment. Low taxes were envisaged to guarantee high investment returns (Lee 1989: 109).80 Restrained Capacity and Strong Autonomy The non-interventionist stance of the Irish state implied following a course of strict economic and social orthodoxy, restraining the state’s capacity. Fiscal prudence was strictly adhered to. This was not only the result of the credence of noninterventionism but also, as Lee notes (1989: 109), austerity was “a historic triumph over the old enemy. Fiscal responsibility and low taxation were supposed to impress English doubters of the Irish capacity for self-discipline”. Accordingly, the politics of austerity were painfully followed by the government, leading to under-spending in the areas of social welfare, education and housing. Social welfare benefits were exceedingly low and subjected to repeated cuts in a bid to retain stable budgets (Lee 1989: 125, 127). Lee (1989:125), however, also points to a blatant lack of social conscience on the side of policy makers. Reminiscent of Malthusian economics, emigration was accepted as a fact of Irish life and integrated into the Free State’s economic policy. Exit lowered the unemployment rate and, hence, reduced the sum of unemployment 80 In 1926, 97% of exports went to British markets and 76% of imports came from the UK (Haughton 1995: 28). 94 benefits (Breen et al. 1990: 25). Accordingly, the government aimed to have lower social welfare levels than those available in the UK. Furthermore, the government relied on non-state actors to bridge the void. Education was the traditional domain of the Catholic Church, which also had an important role in the provision of health services. Social welfare and educational policies strictly followed the requirements of Catholic social teaching (Foster 1989: 534; Breen et al. 1990: 26). Health functions, as far as they were seen to lie within the responsibility of the state, were consolidated in decentralised and multipurpose local authorities in form of county health boards (Breen et al. 1990: 25). State action in the few areas requiring intervention was undertaken only after private and public investment schemes had failed. Semi-state bodies were established not as an explicit part of policy, but through necessity. They performed autonomously mainly in the areas of regulation, promotion, the provision of services and utilities. 81 A notable exception to the rule was electrification, where the government funded the hydro-electric Ardnacrusha damn in the River Shannon (Foster 1989: 521). 82 Furthermore, the Ardnacrusha project and the establishment of a sugar refinery remained the only examples of public investment in industrialisation (Lee 1989: 120). In line with the predominance of agricultural exports as the main developmental input and the state’s non-interventionist stance, industrialisation was given a low priority (Lee 1989: 119). However, the government did experiment with limited industrial protectionism in the area of light manufacturing, accounting for a slight increase of the labour force in these protected sectors (O’Malley 1989: 57).83 Nevertheless, the protectionist experiments remained only dabblings, as priority was given to the maintenance of the farming structure and any revenues were used to finance low direct taxes (Foster 1989: 523). In contrast to restrained capacity, the state’s internal autonomy was great. The Free State enjoyed a wide scope of internal autonomy in the definition of its developmental goals. The basis of this internal autonomy was the ideological cohesion of the relevant political actors. The ruling party faced weak opposition. The former anti-Treaty opponents only entered the Dáil after the 1927 general election as Fianna Fáil84 under the leadership of Eamon de Valera. The party had previously abstained from constitutional politics following the end of the Civil War (Foster 1989: 525- 526). 81 The most important state sponsored body to be created was the Electricity Supply Board (ESB) in 1927, which led to the electrification of the Free State. Further bodies included the Sugar Company, which extracted sugar from native beet and the Agricultural Credit Corporation (ACC), which supplied credit to framers. These semi-state agencies became role models for later created bodies (Breen et al. 1990: 26). 82 The Ardnacrusha Damn was built with foreign assistance by the German firm Siemens. For a detailed account of this project, see McCarthy (2004). 83 The size of the industrial labour force in the protected sectors of light manufacturing grew from 105,000 in 1926 to 111,000 in 1931 (Lee 1989: 120). 84 Meaning “soldiers of destiny” (Foster 1989: 525). 95 Furthermore, organised labour was paralysed, giving the state apparatus further room to manoeuvre unchallenged. This was in part the result of the continued marginal role of industry in the Free State’s economy and the rise in unemployment (Lee 1989: 126).85 In part it was also caused by the issue of nationalism transcending the socioeconomic labour-capital cleavage, leading to a rift in the union movement. Socialist aspirations were displaced by conservative nationalist convictions (Foster 1989: 520). Moreover, the Free State government showed a complete disdain not only in its economic policies for labour issues, additionally contributing to organised labour’s political irrelevance (Lee 1989: 127). A further element allowing a strong degree of autonomy was the civil service based on the completely impartial and highly professional administrative system inherited from the UK (Lee 1989: 89). However, the policies of fiscal austerity and non-interventionism were not undisputed within the government. Expansionist factions supporting increased state engagement for industrialisation, FDI attraction and industrial subsidies were indeed present and their numbers were rising within the Department of Commerce and Industry (Lee 1989: 120). However, within the institutional nexus, the Department of Finance soon became the most influential body within the Government (Foster 1989: 521). It firmly supported the strict deflationist adherence to the liberal industrialisation policies in the form of a non-interventionist free trade oriented development path. Hence, fiscal prudence and incumbent conservative beliefs thwarted attempts at expanding the role of the state in the development process (Lee 1989: 123-124). The autonomy of the state was further enlarged by a high level of popular consent. The economic policies benefited the supporters of the ruling party, large landholders and entrepreneurs benefiting from trade with the UK (Breen et al. 1990: 24). Additionally, popular consent was based on the sympathy of the majority of population regardless of class, explaining the victory of Cumann na nGaedheal in the 1927 elections despite its harsh social policies.86 On the one hand, this is linked to the strong influence of the Catholic Church in a deeply religious and rural society. Although officially church and state were separated, the Catholic Church presided over large informal powers of persuasion not only through its role in the provision of health and welfare services, but also by regular consultations on constitutional and political matters (Foster 1989: 534). On the other hand, popular consent resulted from Irish statehood per se. Despite the Free State being based on the Anglo-Irish Treaty and on its membership in the Commonwealth, its government was seen to be a factor of stability. After the bloody turbulences of the War of Independence and the Civil War, the population yearned for stability and consolidation. Finally, the high level of emigration at the time, resulting from rising unemployment and low social welfare benefits reduced the num- 85 In 1926, only 8% of labour force was employed in industry (Mjøset 1992: 227). 86 An example of these was the decision in 1924 to lower the old age pensions to 10% under the UK level in an attempt to gain further cost competitiveness in its tradable sectors (Breen et al. 1990: 24). 96 ber of opponents willing to “voice” their dissent. In effect, dissent was exported (Breen et al. 1990: 24; Haughton 1995: 29). The Results of Laissez-Faire The results of the development regime were meagre. The restriction of developmental policy on the generation of export revenues via cattle exports to the UK did not lead to the anticipated effects. On the one hand, international economic events hindered sufficient national development, illustrating the low level of external autonomy. The resulting underperformance of the developmental agent detrimentally affected the capacity of the state. Between 1922 and 1924, agricultural prices fell by 44% (Haughton 1995: 29) prompting the decline of export earnings. The reduced export income contributed to further agricultural restructuring to the detriment of small farmers, as productivity gains and scale economies in pastoral farming led to a further concentration of farmlands. The disastrous attempt of the UK to return to the gold standard in 1925 caused a recession further dampening the demand for Irish products. The ensuing world recession after 1929 and increased worldwide protectionism further reduced demand for Irish export goods (Haughton 1995: 29). On the other hand, internal distortions impeded effective development. The noninterventionist free trade strategy did little to foster industrialisation. Employment in manufacturing grew only by 1.6% and virtually no productivity gains were made between 1926 and 1931. The unemployment rate averaged officially around six percent (Jacobsen 1994: 51-52).87 As a result of the continued preference for pastoral exports, the consolidation of farmland continued. Consequently, the number of displaced agrarian workers was too high compared to the number of jobs available.88 Surplus labour was forced to emigrate. This not only reduced fiscal pressure on the state budget, but also enabled the state to avoid a balance of payments crisis, as emigrant remittances contributed to the financing of imports (Foster 1989: 522-523).89 The industrialisation strategy was further weakened by high indirect taxes to compensate for low income taxation. Together with high agricultural prices, this suppressed internal demand (Mjøset 1992: 261). The policy of low income taxation together with the lack of an effective land tax on agriculture holdings provoked a rent-seeking mentality. Contrary to the envisaged results of increased investment, the affluent classes behaved as rent-seekers. The gains from exports were largely invested abroad. Incentives for productive investment in the Irish Free State were largely negligible due to a lack of state invest- 87 Census results reported an average of 11.9% (Lee 1989: 126). 88 Between 1911 and 1936, agricultural labourers declined by 50% (Lee 1989: 159). 89 Even at the peak of export sales, export incomes could only cover for 77% of imports. The residual was covered by transfers from abroad, which were in the majority emigrant remittances (Foster 1989: 523). 97 ment incentives, which could have mobilised investment capital. Moreover, the continued high level of British imports and the small size of the Irish home market constrained profit possibilities for indigenous industry. British imports continued to resemble barriers of entry to the Irish home market for indigenous firms (O’Malley 1989: 58). As a result, abundant capital was exported instead of being invested at home. Hence, the independent Irish state did not suffer under a shortage of capital; rather it was missing risk capital, due to a lack of entrepreneurship and adequate productive investment possibilities (Lee 1989: 109).90 The need for productive investment impelled the overtly anti-dirigiste government to create a number of state-sponsored bodies in order to fill the entrepreneurial investment void in key economic areas such as infrastructure, services and credit provision (Breen at al. 1990: 26; Lee 1989: 109-110). The worldwide post-1929 economic depression was responsible for the ensuing demise of the laissez-faire development regime. In the face of decreasing export earnings, rising production costs and rising protectionism, the prevailing free trade orientation was no longer politically and economically feasible. Although the government had tried to counteract the negative effects by raising tariffs bringing the free trade orientation to an end in 1931, these measures could not sustain its political power. The post-Civil War ideological consent had fallen apart due to the failure of the state to fulfil its developmental goals (Breen et al. 1990: 27). The decline in living standards and the decline in export earnings had worn away the traditional support base for the Cumann na nGaedheal government. More stringent immigration regulations as well as rising unemployment in the major emigration countries, the US and the UK, had narrowed the “exit” possibilities. As a result, rising unemployment in the Irish Free State increased public dissent. Consequently, a transfer of power took place. Fianna Fáil with its charismatic leader Eamon de Valera won the 1932 general election by capturing the votes of the disgruntled: small farmers, small businessmen, farm labourers and the urban working class. It formed a coalition government with Labour as its junior partner (Jacobsen 1994: 53). As shown, the Free State government presided over a considerable degree of internal autonomy to formulate its economic policies. The state’s capacity however never matched its range of internal autonomy. This was mainly out of choice and not circumstance. The forged development regime was based on the developmental inputs stemming from agricultural exports and therefore was dependent on free trade. State capacity was voluntarily restrained, as the government followed a stringent ideology of non-intervention and fiscal prudence. The Irish economy malfunctioned due to the over-reliance on export earnings in the face of the Great Depression of 1929, which severely affected Ireland’s export incomes. Hence, the capacity of the state was reduced to attain the desired developmental goals. The reduced 90 For example, between 1926 and 1927, IR£ 195 million were invested abroad by Free State residents, whereas IR£ 73 million were invested by non-Free State residents (Lee 1989: 109). 98 possibility of emigration then increased popular dissent, leading to the government’s downfall and the development regime’s replacement. 2.3.2 Protectionism (1932-1958) The new government quickly began to construct a new ideological consent within Irish society. The acceptance of Fianna Fáil by the working class through its coalition with Labour worked against the surfacing of class antagonisms such as in other European countries at the time. By contrast to the preceding development regime, the Fianna Fáil government centred its policies on nation building. Policies were developed in order to pursue the creation of an Irish identity defined as Catholic and self-sufficient, whereby self-sufficiency was defined as economic independence from the UK (Lee 1989: 184). De Valera’s aim was to construct “an Irish identity entirely from native cultural resources” (Breen et al. 1990: 28). Upon returning to constitutional politics and coming into office, de Valera was faced with the task of transforming his nationalist agenda into practical policies. This entailed the search for an optimal relationship with the UK, which could first pacify militant Republicanism; secondly, secure a stable power base for his government; and, third, steer the country clear of rising international hostilities (Foster 1989: 546-547; Jacobsen 1994: 57). The chosen path was self-sufficiency via protectionism. However, as will be shown, in stark contrast to Hungarian experiences the Irish version of import-substitution did not encompass an expansionist state. Protectionist Autonomy and Restrained Capacity The central economic element of this mission was the implementation of an industrialisation strategy based on import substitution. The goal was to achieve selfsufficiency in agriculture, industry and investment (Barry 1991: 87). As O’Malley (1989: 58) points out, the Irish aim of self-sufficiency was more than the mere emulation of international models of development. Rather, the chosen path of importsubstitution expressed the nationalist and isolationist view of Irish Republicanism. Simultaneously, the policies also reflected the interests of Fianna Fáil’s voters (working class and smallholders), who were perceived to be the losers of the previous development regime based on agricultural exports. The subsequent development regime sought to reserve the home market for tillage farming and indigenous industrial goods (Ó Gráda 1997: 5). The latter implied the creation of a national industrial class, which would be the base of Irish development through the provision of industrialisation, employment and investment. Thus, the protectionist development regime was characterised through the alliance of the state with local industrial capital, thus displacing agrarian capital as the key development agent (O’Hearn: 1990: 9).

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Zusammenfassung

Irland und Ungarn verfolgen eine Entwicklungsstrategie, die in bewusster Abhängigkeit von Globalisierungsprozessen in Form von ausländischen Direktinvestitionen steht und sich als Paradigma in der Peripherie durchgesetzt hat. Doch dieser Entwicklungspfad hat zu einer ungleichen und abhängigen Entwicklung geführt. Dies ist laut dem Autor das Resultat des mangelnden Gestaltungswillens beider Staaten, für einen gleichgewichtigen Wachstumsprozess zu sorgen. Die historische Analyse zeigt, dass eine auf ausländische Firmen fußende Entwicklungsstrategie nicht ausreicht, um traditionelle Peripheralität zu überwinden. Der Autor fordert eine Reform des Entwicklungsparadigmas, um eine gleichgewichtige Entwicklung zu ermöglichen.