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Philipp Fink, The 1958 Revolution? in:

Philipp Fink

Late Development in Hungary and Ireland, page 134 - 138

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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134 The political polarisation between left and right continued in a campaign which “was the most intense and bitterly contested since 1990” (Fowler 2002: 2). The two largest parties, FIDESZ and MSZP secured over 83% of the first round votes with the remaining votes distributed among their smaller respective coalition partners, MDF and SZDSZ (Fowler 2002: 4). The election campaign focused on welfare issues, whereby the largest parties attempted to outbid each other on spending promises and on issues of national identity (Fowler 2002: 2). It was the latter issue in combination with the collapse of Orbán’s junior coalition partner FGKP over corruption charges that led to the slim victory of the MSZP/SZDSZ coalition (Fowler 2002: 3). By following its programme of creating a historical conservative countermovement, FIDESZ had alienated potential voters by taking up increasingly extremist positions in an attempt to maximise its votes on the right fringe (Kovács 2002: 408). Hence, the third period of the Hungarian FDI-led development regime was again characterised by a further increase in state autonomy. Participatory possibilities were further constrained. The improved fiscal situation augmented state capacity allowed the government to increase its focus on indigenous enterprise. Nevertheless, economic reality and EU integration upheld the key role of FDI in the development strategy, displaying the low level of external autonomy. However, the increased focus on indigenous development as well as the government’s compensatory policies followed the lines of political clientelism and was aimed at establishing an affiliated conservative middleclass. 3.4 The Irish FDI-led Development Regime Breen et al. (1990: 37) as well as Smith (2005: 105) relate the switch in the Irish development strategy based on FDI-induced and export-oriented growth to “a revolution from above”. This perspective interprets the change in development regimes as a rational technocratic decision, which was first formulated in 1958 in the publication of a policy paper by T. K. Whitaker, Secretary of the Department of Finance. Although not completely obsolete, this popular position cannot entirely account for the change in development regimes. 122 In contrast, O’Hearn (2001: 127) argues that the construction of the Irish FDI-led export-oriented development regime was foremost the result of pressure from USled international capital interests. However, this dependency-driven assessment is again only part of the story. Rather, the development regime reorientation in Ireland was attributable to a culmination of several factors of internal and external nature, which had created an institutional space to create a development regime centred on an alliance with foreign capital (Ó Riain 2004a: 173). 122 The popular view on the change in Irish development regimes can be found in Mac Sharry and White (2000) and Sweeny (1998). 135 3.4.1 The 1958 Revolution? Certainly, a change in civil service elites and their thinking towards economic policy is an important internal factor in explaining the change of development regimes. Whitaker personified a younger generation of civil servants that had entered the public administration during the 1950s. Better educated and endowed with a wider intellectual horizon, going beyond the British Isles (Lee 1989: 341-342), they favoured a redirection of economic policies towards export-orientation and FDI attraction (Breen et al. 1990: 36-37). This was especially the case of the all-powerful Department of Finance, whose change of departmental heads led to a redirection of preferred economic policies. It is important to note that a change in development regimes could not have been possible without having been endorsed by this government department (Lee 1989: 345). Furthermore, Lee (1989: 343) also shows that the publication of Whitaker’s “Economic Development” coincided with a change in the political guard, as the proindustrial Séan Lemass succeeded de Valera as Irish Taoiseach in 1957. The ascent of the advocate of “expansionism” forced the traditional “deflationist” faction within the state apparatus to realign their position on economic policy in order to avert a loss in their influence on the policy making process. This realignment allowed the state to expand its role in the development process not only by paying grants and subsidies to export industries and investing TNCs, but also in increasing state investment in infrastructure and education (O’Malley 1989: 83). Hence, Whitaker’s manifesto did contribute to a strategic refocusing on the development strategy. His publication was endorsed by the government in view of the dismal economic situation of the late 1950s (Kennedy et al. 1988: 65).123 The continuous decline of agricultural export prices was the result of the post-WWII resumption of European agricultural production. A rise in consumer imports and import prices resulted in a chronic balance of payments deficit. The official reaction was the introduction of deflationary measures aimed at curbing private consumption, exacerbating the situation. This policy had come into severe disrepute by the end of the 1950s (O’Hearn 2001: 131). This panic reaction, however, resulted in a further depression of the economy, leading emigration to rise to levels comparable with the 1890s (Kennedy et al. 1988: 61-63; Ó Gráda 1997: 25- 27). Rising dissent to the handling of the recession resulted in a succession of defeats for incumbent governments. The election victory of Fianna Fáil led by Lemass in 1957 signalled a new period of political stability, as Fianna Fáil was to remain in office until 1973 (O’Malley 1989: 80). 123 The country’s main export sector, agriculture, was suffering from poor international prices and the prices of the countries imports were rising creating a balance of payments deficit. Furthermore, new export sectors, such as manufacturing, had been expanding, but from a low base, hence their impact was negligible. Matters were made worse when a short consumption boom, which led to increased imports, coincided with a further fall in agricultural export process (Kennedy et al. 1988: 61). 136 Nevertheless, the previous Fine Gael and Fianna Fáil coalition governments laid the foundations of the current development regime prior to Whitaker’s publication. Hence, the new development policy could be assured of a wide majority within the political system (O’Malley 1989: 77). There was, therefore, a general acceptance amongst policy makers and relevant political actors across the party divides, that exports were the key to economic development (Foster 1989: 578). A diversification of Irish export markets was recognised as a vital necessity. The dominance of agricultural exports to British markets was seen to have caused a detrimental developmental lock-in. The close economic ties to the UK were a growing liability. The Irish Republic had become an involuntary free-rider on British decline (Lee 1989: 359). Moreover, the majority of the policy instruments and actors identified with Whitaker’s publication were established before 1958. Therefore, it can be said that the elite preferences were adjusting to the institutional reality. The most important incentive, the Export Profit Tax Relief had been introduced in 1956. 124 The EPTR offered a 100% tax relief for an initial ten-year period on export earnings (Mjøset 1992: 270). The most important institutional actor, the Industrial Development (IDA) had been founded in 1949 (Kennedy et al. 1988: 62). The restrictions concerning FDI had been repeatedly eased, hollowing out the discriminatory Control of Manufactures Act of 1932 (O’Malley 1989: 73). As a result, despite the restrictive provisions on FDI and the official Republican rhetoric of self-sufficiency, foreign firms were already present in Ireland prior to the official change in policy (O’Malley 1989: 63).125 However, despite the apparent consensus across all party divides, the common ground stopped over the issue of how to perform the necessary turnaround. On the one hand, the “expansionist” faction, personified by Séan Lemass, favoured utilising the state for development (Girvin 1989: 178). This was greeted with hostility by “deflationist” factions within government and the civil service. They favoured conservative fiscal monetary policies as a macroeconomic tool and were staunchly against any state intervention in the microeconomic running of the economy. On the other hand, export-orientation and the proposed dismantlement of trade protectionism were faced with fierce opposition from hitherto protected indigenous industry (Ó Riain 2004a: 175; O’Hearn 1990: 132). It was clear that the ailing Irish industry was not in the position to fulfil the task of economic recovery. This disrepute of national economic elites represents a further internal factor, which enabled the transformation of the development regime from protectionism to exportorientation based on FDI-attraction (O’Hearn 2001: 132). 124 Furthermore, generous depreciation allowances were made available. The Trade Promotion Board (Córas Tráchtála) was founded in 1951 to assist in export marketing. The Shannon Airport had been decreed a customs free area by 1947. The Underdeveloped Areas Board (An Foras Tionscail) had been established in 1949 to promote investment in the poorer Western and South-western areas of the country (Kennedy et al. 1988: 62-63). 125 O’Malley (1989: 63) quotes research evidence that showed that of the total of 310 British affiliates present in Ireland at the beginning of the 1970s, 70 were founded before the 1950s. 137 Previous attempts by the state to nudge and prod indigenous industry towards exports had been unsuccessful. In part, Irish firms could not and in part they would not adapt to the business environment defined by an increasingly open economy. They faced barriers to entry. Indigenous firms lacked the necessary export niches, management and marketing skills as well as the necessary size to produce efficiently for export markets. Additionally, they were facing vast competitive pressure through imports due to the dismantling of import protection (O’Malley 1989: 70-71). Furthermore, they lacked the cultural stamina to move on from following the emigration related “possessor’s principle” to adhering to a “performer’s ethic” (Lee 1989: 400, 403). Pro-protectionists were content with their orientation towards the small Irish home market, which allowed them to reap the rents stemming from low competition. This latter conviction essentially led to the increased alienation of indigenous capital from the state and its subsequent substitution through foreign capital (O’Hearn 1990: 29-30). Hence, Irish industrial capital, being the prime developmental agent within the protectionist development regime, was generally seen to have failed to produce the desired developmental inputs (Jacobsen 1994: 65-66; Mjøset 1992: 269-270). Consequently, Lemass used the IDA to confront opponents to his proposed developmental strategy, as he faced an unlikely coalition composed of “deflationists” in the civil service and “protectionists” in the form of indigenous capital (O’Hearn 1990: 132). Originally, the IDA was charged to act as a watchdog on indigenous performance and was confined to closely work under the remit of the Ministry for Industry and Commerce, which openly acted on behalf of indigenous capital. Upon coming into government, Lemass struck a compromise in 1959. The IDA was institutionalised, but the agency was given the sole responsibility for FDI attraction and to operate the investment incentive schemes (Ó Riain 2004a: 175; Mjøset 1992: 273). Although the export promotion programmes and investment incentives were officially open to all foreign and Irish firms, mainly TNCs availed of the instruments (Kennedy et al. 1988: 63). Furthermore, by 1963 protectionism was abolished subjecting Irish industry to import competition from the UK, which eventually decimated their opposition to the development strategy (Lee 1989: 353). Finally, opposition was whittled away by the institutional changes, which exploited the increasing rift in interests between those entrepreneurs willing to compete internationally and those oriented towards the Irish internal market (O’Hearn 2001: 124). Turning to the external factors, these contributed to a smaller extent to the change from import-substitution to FDI-led export-orientation. The end of the Irish project of self-sufficiency led to the country’s increased participation in international affairs. As a result, international influences on Irish policy making grew. Following Ireland’s accession to the Bretton Woods Treaty in 1957, the World Bank vetted and approved the country’s reorientation in economic policy (Foster 1989: 579). The accession to the OEEC and the subsequent acceptance of Marshall Fund aid was dependent on Ireland adhering to increased economic openness by reducing its tariff barriers (O’Malley 1989: 77). 138 Furthermore, by the mid 1950s, it was clear that with the establishment of the European integration process, the Irish Republic had to commence with similar liberalisation efforts in order to evade the country’s additional peripheralisation. Originally the decision to apply for membership in European Economic Community (EEC) in 1961 was based on the application of its main export market: the UK. More importantly, the Irish Republic hoped to gain from the access to EEC markets not just for its indigenous agricultural and industrial exports, but also to underline its appeal as a location for export-oriented FDI for exports into the EEC (Mjøset 1992: 271-273). Despite having experienced a set back in the country’s plan for EEC membership as a result of De Gaulle’s veto of the UK’s application in 1963, Ireland continued with its policy of trade liberalisation by unilaterally lowering its tariffs and signing a free trade agreement with the UK in 1965 (O’Malley 1989: 77). 126 Although external factors were of smaller importance, together with internal issues they created a policy space, which led to the creation of the FDI-led and exportoriented development regime (Ó Riain 2004a: 170). Internal constraints in the form of unresponsive indigenous capital as well as political opposition within the state on its role in the development process were responsible for the specific set-up of the development regime. The IDA eventually became the lead agency, protectionism was dismantled and the FDI incentive system was developed. Furthermore, the disrepute of indigenous capital as the state’s main developmental alliance partner caused its replacement by foreign capital. Export-oriented TNCs were seen to be the adequate developmental agents to foster investment, employment and exports. 3.4.2 Regime Readjustments in Ireland The evolution of the Irish FDI-led development regime can be distinguished by three periods. The success of the initial phase of the development regime, led the first period (1958-1973) to be coined as the “Golden Age of Irish Economic Growth” 1958. The second period (1973-1987) portrays the attempts at finding a way out of the economic crisis of the 1970s and 1980s. The final period is defined by the state’s subsequent readjustment of the development regime, which paved the way to the high growth of the 1990s. The readjustments were reactions to the constraints bred by the development strategy. The low level of Ireland’s external autonomy due to the export-dependency of economic growth left the economy vulnerable to exogenous shocks. However, the capacity of the state proved to be too low to effectively overcome the detrimental economic effects. Initial attempts at crisis management failed due to the spending constraints of the development model and the heavy import dependency of the economy. The ensuing socioeconomic crisis eroded the state’s internal autonomy as 126 Following the French veto of the British application for EEC membership, Ireland voluntarily withdrew its application, as it feared economic repercussions resulting from a possible Irish EEC membership without its main trading partner the UK (O’Hearn 2001: 134).

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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.