Philipp Fink, Protectionism (1932-1958) in:

Philipp Fink

Late Development in Hungary and Ireland, page 98 - 104

From Rags to Riches?

1. Edition 2009, ISBN print: 978-3-8329-4173-4, ISBN online: 978-3-8452-1720-8

Series: Nomos Universitätsschriften - Politik, vol. 168

Bibliographic information
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). 99 Essentially, upon taking office Fianna Fáil was faced with a restrained autonomy to formulate its policies. The government had to be wary of not only pro-Treaty sympathisers and disenchanted Republican militants, but also had to thwart rising dissent both left and right in the political spectrum (Jacobsen 19994: 57). De Valera transformed Fianna Fáil into a highly professional machine, which was invariably used to secure the party’s grip on political power and became a defining element of the later Irish Republic. The party redefined itself as a “national party”, appealing to all voters regardless of class (Mair 1992: 405-406). The Irish state’s autonomy to develop these goals was increased through wide ranging administrative reforms in 1932, centralising bureaucratic power. A general election in 1933 fought mainly on social and economic issues together with a rise in social benefits and the initiation of a vast housing scheme91 allowed Fianna Fáil to gain the absolute majority of seats in the Dáil, eliminating the constraint of coalitional compromise. The party managed to capture not only working class votes, but also to gain increasing numbers of middle class voters. Increasing action against Republican and rightwing radicals92 by the government appealed to the electorate, as Fianna Fáil was seen as guarantor of stability (Foster 1989: 457). The 1933 election was also won through the initial positive effects of the protectionist development strategy93 and the portrayal of the Anglo-Irish Economic War (1932-1938)94 as a Republican cause. This trade dispute had the affect of further weakening the position of ranchers due to British tariffs on cattle exports, as agricultural exports declined (Haughton 1995: 31). The ranchers were opposed to the government’s plans to increase tillage at the cost of graziers. Thus, the general position of the elites favouring free trade was weakened by the Anglo-Irish Economic War (O’Hearn 2001: 119).95 Furthermore, parliamentary opposition was weakened by inner party turmoil of the Ex-Pro-Treaty faction (Foster 1989: 549). Finally, emigration continued to play its stabilising role by reducing the level of dissent to the development strategy. Again the option of “exit” was integrated into the economic policies of the government. The propensity to defer the unemployment problem to predominately UK labour markets resulted in lower government expenditure and relieved political institutions 91 An average of 12,000 houses per year was built between 1932 and 1942; six times more than between 1923 and 1931 (Lee 1989: 193). 92 Fascist organisations “Blue Shirts” and the National Guard were both banned in 1934. The IRA was finally banned in 1936 by use of the Offences Against the State Act (Foster 1989: 547; Lee 1989: 178-180). 93 Between 1932 and 1938, industrial employment rose by 60.4%, industrial output increased by 40% (Jacobsen 1994: 58), rising by another 4.5% between 1936 and 1938 (Haughton 1995: 31). 94 The trade dispute was fought over two points of the Anglo-Irish Treaty of 192. The transfer of land annuities from the Irish Free State to cover the costs of pre-independence British loans made during the Land Acts and the return of the so-called “Treaty Ports”, which were British naval bases in the Irish Free State (Haughton 1995: 30). 95 Between 1933 and 1934, agricultural exports fell by 64% (O’Hearn 2001: 119). 100 from dissenting pressure (Lee 1989: 226). The outbreak of World War II and subsequent efforts of the Irish state to remain neutral also expanded state autonomy and caused the aim of self-sufficiency to become a necessity (Breen et al. 1990: 29). Although the internal and external autonomy of the Irish state had increased, its capacity still remained weak. In spite of a more activist role of the state, as portrayed in the increase of public expenditure, the use of tariffs to shield Irish enterprise, FDI restrictions, farming subsidies and industrial investment support (Haughton 1995: 30-31), the state still retained its subsidiary role. It continued to rely on non-state actors, such as the Catholic Church, to provide the majority of health and educational services (Breen et al. 1990: 30-31). The Irish state did not develop sufficient dirigiste capacities allowing the exploitation of the initial success of import-substitution. Capacity in economic policy implementation was further plagued by a lack of management skills and vision (Kennedy 1992: 21). This equally applied to the ill-defined role of state-sponsored bodies in the economy (Lynch 2003: 24-25). The introduction of tariffs was of maverick nature and was instrumented at the behest of business interests (O’Hearn 2001: 117). Protectionism had adversely created powerful monopolies due to low competition in the small home market (Lee 1989: 191). Similarly, the vast housing scheme had the side effect of creating huge profits for construction companies and created a collusive link between Fianna Fáil and the building industry (Lee 1989: 193; Breathnach 2005: 4). Protectionism had created a powerful lobby of Irish industrialists in the form of the Federation of Irish Manufacturers (FIM). This lobby group, comprising Irish business, opposed any government actions, which could possibly jeopardise their members’ interests. The FIM was extremely successful in moulding economic policy in their favour (O’Hearn 2001: 120). It repeatedly thwarted attempts by the Department of Industry to introduce educational tariffs, which, systematically used, could have enabled an improvement in the international competitiveness of Irish industry (Jacobsen 1994: 58-60). Moreover, the government was increasingly internally divided in the course of rising economic difficulties. This additionally crippled the internal autonomy and the capacity of the state to formulate and implement coherent economic policies. On the one hand, “expansionists”, personified by Sean Lemass, the Minister of Industry and Commerce, favoured increased direct intervention by the State. On the other hand, the “deflationists”, centred in the powerful Department of Finance and the Central Bank of Ireland (CBI), adhered to orthodox liberal economic policies, propagating a minimalist interventionism and upholding the values of private enterprise as the key to economic development (Lee 1989: 191). Both groups tried to convince de Valera of their policies, who, however, was more inclined to follow his Machiavellian political instincts, thus favouring one or the other position in accordance with his own political aims (Lee 1989: 226). This policy dichotomy was co-responsible for the ultimately poor performance of the industrialisation strategy. Heavily protected Irish manufacturing oriented solely to the small Irish home market became complacent. 101 As O’Malley (1989: 61) notes, indigenous industry was initially successful in reaping the benefits from home market protection, but made little progress in developing more technologically advanced activities and searching for export markets. The years of protection had caused a lack of productive investment and inhibited the development of scale economies due to the orientation to the small Irish home market. Low capital intensive sectors such as light industry (textiles and foot ware) and food processing flourished, but capital intensive production lay dormant. Due to the policy dichotomy, the state did not have the capacity or the autonomy to induce sufficient change within industry to foster export-orientation or technological upgrading. Instead the lack of competition and growth possibilities led to increased inefficiency and profiteering. Profits were invested abroad, where the rate of return was higher (O’Hearn 2001: 119). As a result, the volume of Irish assets held abroad rose during the protectionist period. Capital flight was also supported by the strict refusal to impose capital restraints by the Department of Finance and the CBI. Although expansionist-minded Lemass repeatedly attempted to introduce legislation aimed towards greater efficiency in Irish industry and the creation of an industrial efficiency bureau, his proposals were thwarted by the unlikely coalition encompassing the protectionist minded FIM and adherents of non-interventionism and fiscal conservatism of the “deflationists” within the state apparatus (Jacobsen 1994: 59; O’Hearn 1990: 11-13). The Results of Protectionism Initially, the policy of ISI showed some signs of success. As a result of home market protection, indigenous industrial output grew by 40% between 1931 and 1936. O’Malley (1989: 60-61) sees this as proof that indigenous industry was benefiting from the early “easy” stage of protectionism. Protected industries were able to profit from the introduction of tariffs. These acted as a launch pad for indigenous industry to overcome the barriers of entry, resulting from trade competition with superior British imports. Still, this rise in industrial employment, indexed at 150 in 1938 compared to 1931 levels (Mjøset 1992: 263), was too low to offset the effects of the decline in agricultural production and agrarian exports resulting from the Anglo-Irish Trade Dispute. Furthermore, increased tillage farming and industrial output could not absorb the ensuing displacement of labour, which continued unabated due to the sustained concentration of farmland (Breen et al. 1990: 35).96 Reduced emigration possibilities to US and UK labour markets due to rising protectionism in both countries, caused Irish unemployment to rise fivefold between 1936 and 1937, reaching 14% of the labour force (Haughton 1995: 31). 96 Between 1921 and 1956, medium and small sized farms decreased by a third (O’Hearn 2001: 120). 102 However, the Irish Republic’s protectionist strategy suffered a severe set-back during WWII, due to the inability of Irish industry to substitute import goods from the UK. Accordingly, the capacity of the state was gravely weakened by acute shortages in energy and vital imports from the country’s main trade partners, the UK and the US. Subsequently, the more than 50% decline in imports gravely disrupted industrial production (Ó Gráda 1997: 16). The Irish government resorted to strong measures to curb consumption and production. Essentially, the economy was turned into a war economy, whereby the government rationed supplies and curbed wages (Ó Gráda 1997: 17). As a result, consumption and investment fell dramatically. As the rise in bank deposits shows, this was not due to a shortage in capital, rather due to the lack in the supply of goods and low profit possibilities in the constrained Irish market (Ó Gráda 1997: 15).97 Irish experiences with import-substitution during WWII contrasted significantly with those of Latin American countries, implementing a similar strategy. Whilst similar to Ireland, the WWII-related drop in trade had acted as a quasi-protectionist instrument in Latin America, the abundance in resources and population in the Latin American economies allowed them to follow an initially successful economic growth path (Mahon 1992: 241). In contrast, Ireland’s continued strong dependence on English imports during WWII caused serious supply bottlenecks (Mjøset 1992: 264).98 The dependency on UK markets for Irish exports grew to be a further liability when the Irish Republic turned to US and Canadian imports to bridge the void left by the decline in UK imports (O’Hearn 2001: 119).99 The Irish economy was faced with increasing payment difficulties, as the majority of its exports went to the UK. The generated US$ revenue was insufficient to settle the transatlantic demands, as Irish Sterling export earnings were unconvertible at the time (O’Hearn 2001: 120). Increasing balance of payment deficits ensued and was further deepened by a return of aggregate demand from its low levels during the war.100 The post-WWII recovery was consumption-led. However, owing to indigenous industry’s inability to produce the required goods, the trade balance and subsequently the balance of payments were additionally under pressure, as 30% of US imports were consumer goods (Ó Gráda 1997: 23). The government moved towards dismantling trade barriers, but indigenous industry failed to respond to the new policy environment. Towards the end of the 1950s, exports were still dominated by agricultural exports and manufacturing only had a 97 Irish assets held abroad increased from £ 250 million in 1939 to £ 400 million by 1949. Irish commercial banks more than doubled their holdings in the UK (O’Hearn 2001: 119). 98 Between 1938 and 1943, industrial output fell by 27%, exports and imports dropped by 50%, industrial employment fell from 167,000 to 144,000 employees (Haughton 1995: 33). 99 US imports into the Irish economy accounted for more than 13% of all Irish imports between 1949 and 1951, compared to less than 5% between 1932 and 1937 (Ó Gráda 1997: 23). 100 Personnel expenditure rose by almost 25% between 1945 and 1950. Real investment doubled between 1944 and 1945 and again in 1950. Industrial output increased by 66% between 1946 and 1951 (Ó Gráda 1997: 22). 103 meagre percentage of trade. Exports were too few to generate sufficient dollar revenues to meet the import requirements. In turn, inflation rose due to the strong Sterling link and increased government expenditures on social welfare and housing and the balance of payments deficit grew. The deflationary countermeasures further weakened the capacity of the state to generate prosperity and developmental inputs. Consisting of expenditure cut backs, import restrictions, wage restraints and high interest rates, the austerity measures repeatedly depressed internal demand and investment, thus further exasperating industrial output and employment. As a result, emigration rose to 19th Century levels and capital fled the country (Ó Gráda 1997: 27-29; O’Hearn 2001: 130-132). 101 The dire situation at the end of the 1950s forced the political elites to review the development regime. In the absence of sufficient indigenous capital to support export-orientation under the changed policy environment of trade liberalisation meant that the only viable option to induce industrialisation was seen to lie with foreign capital as the provider of the main developmental inputs (O’Hearn 2001: 131). To conclude the era of Irish protectionism, both Irish development regimes are characterised by continuity amid change. Despite the obvious change in the constitution and the trajectory of the two Irish development regimes, the high degree of autonomy and the restrained role of the state in the economy and society, i.e. state capacity, were similar. Developmental inputs were to be provided by indigenous industrial capital instead of agrarian capital. Import-substitution replaced the trajectory of agrarian exports. Although the level of internal autonomy was high during the protectionist era, state capacity remained constrained. In part, this was the result of the continued belief in the doctrine of a restrained role of the state in social and economic affairs. In part, it was also the result of the dichotomy of the political elites, leading to incoherencies in policy formulation (autonomy) and implementation (capacity). Furthermore, vital non-state actors, such as the Catholic Church and the development regime’s favoured actors, indigenous industrial capital, opposed increased state interventionism. Constrained capacity resulted in ineffective industrial policies, as the ailing and unresponsive indigenous industrial sector was confronted with international trade without having attained sufficient competitiveness. However, although it is commonplace to discredit the era of protectionism as a failure,102 it should be noted that despite its shortcomings, the era of ISI still provided Irish entrepreneurship the possibility gain business experience and created the albeit narrow base for later indigenous industry (FitzGerald 2003: 13). Furthermore, as O’Malley (1989: 71) observes, 101 Between 1955 and 1956, following four consecutive years of fiscal austerity industrial production fell by 3%, agricultural production decreased 7%, GNP declined by 1.3% and total employment was reduced by 2%. Employment declined by almost 10% between 1951 and 1956 (O’Hearn 2001: 131). Consequently, emigration rose to 50,000 in 1955 and capital flight ensued, as an estimated IR£ 12 million left the country (Haughton 1995: 35). 102 See Barry (1991, 1999b), Bradley (2000), Haughton (1995) and Kennedy et al. (1988). 104 the era “created greater economic growth than would have occurred under continuing free trade and reliance on foreign markets”. 2.4 Autonomy, Capacity and Consent To conclude this analysis on the development regimes prior to the current development regime of FDI-led export-orientation, despite the obvious differences, both countries show similarities. In both cases, the previous development regimes failed to produce an internationally competitive indigenous sector. They both remained backward peripheral economies upon resorting to the development strategy of FDI attraction. Both countries were constrained in regards to their external autonomy, although to different degrees. On the one hand, Hungary formulated its policies in accordance with the principles of the regional hegemonic power. On the other, the Irish Free State and the later Irish Republic was able to contend with less direct interference. Irish external autonomy was defined by international economic events. Irish economic policies had to be formulated to take the country’s economic dependency on UK markets and imports into account. Initially, the internal autonomy was high. In Hungary, authoritarianism and the undemocratic structure of the political system insulated the state apparatus from interference, enabling the predominance of the incumbent elites. The high level of internal autonomy in the Irish case was provided by the locally focused political system, the strongly centralised bureaucracy and the existence of two catch-all parties and the export of dissent. However, internal autonomy in Ireland during its phase of protectionism and in the later phase of Hungarian state-socialism was eroded by the evolution of different interest groups within the political elites. These factions followed dissimilar agendas in regard to the economic policies and the role of the state in the modernisation and development process. In terms of capacity, both countries differed substantially. Hungary’s response to international economic repercussions was to increase the capacity of the state to generate economic growth. Instead of accommodating and adapting to international economic events, the economy was increasingly shielded from external influences in order to preserve the incomes of its major economic actors. The era of statesocialism was an extreme form. The centrally administered economy resulted in over-capacity, causing the malfunctioning of the Hungarian economy and resulting in the development regime’s eventual demise. In contrast, state capacity throughout Ireland’s past development regimes was restrained and low. On the one hand, this continuity displayed the predominance of those interests within the Irish state which favoured fiscal conservatism and non-interventionism. On the other hand, low capacity also reflected the traditionalist notions regarding the restrained role of the Irish state in the society and economy. Turning to the issue of consent/dissent, again the picture differs for both countries. The erosion of the state’s capacity to deliver the required goods of prosperity

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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.