Philipp Fink, Regime Readjustments in Ireland in:

Philipp Fink

Late Development in Hungary and Ireland, page 138 - 154

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
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). 139 dissent grew, eventually leading to the development regime’s readjustment in the 1980s and 1990s. The Golden Age of Irish Economic Growth (1955-1973) The initial phase (1955-1973) of Ireland’s FDI-led development regime brought the first fruits of success in form of increased inflows of export-oriented FDI and renewed economic growth. The new foreign-owned firms, seeking efficiency gains for their export operations into European markets and originating mainly from the European mainland, invested in the manufacturing branches of basic metals and chemicals (O’Hearn 1987: 182). Foreign-owned firms took advantage of the generous tax subsidies, employment and investment grants offered by the Irish state (O’Hearn 2001: 142). The majority of TNC investments were characterised by low technology export processing, employing mainly semi-skilled and low wage labour (O’Malley 1989:164). As a result, the Irish Republic managed to benefit from the increasing internationalisation of the global economy. The country’s GNP grew on average by more than four percent per year between 1960 and 1970. Export sales increased by a yearly average of 17% between 1964 and 1974. Accordingly, emigration levels had dropped substantially, falling to 50% of the 1950s level. Economic recovery was mainly due to FDI inflows. TNCs were responsible for 80% of new private manufacturing investment, 90% of new employment in this sector between 1954 and 1971. Between 1960 and 1966, 92% of the increase in exports was attributable to TNCs (Jacobsen 1994: 85). In total, TNCs were responsible for almost 27% of manufacturing exports by 1964 (Foley 1991: 108). It is estimated that TNC investments grew from a tenth to a third of fixed capital investments during the 1960s. In preparation of the Irish Republic’s accession to the EEC in 1973, FDI inflows increased even more rapidly (O’Hearn 2001: 142). Accordingly, the share of TNC manufacturing employment grew from under two percent in 1960, to almost eight percent in 1966 and doubling to 16% by 1972 (O’Hearn 1987: 184). The upturn in economic growth led Lemass to attempt to further increase the state’s capacity by improving its economic steering capabilities. These policies were closely aligned to uphold the level of popular consent to the development strategy. Popular consent was not only attained by the return of economic growth after the dismal 1950s, but was also a result of expansionist policies, which increased social citizenship in Ireland (Ó Riain 2004a: 176). This double goal was to be attained by institutionalising social dialogue and implementing economic planning involving the social partners (Jacobsen 1994: 92-93). Essentially, Lemass attempted to base the export-oriented development strategy on a broad societal consensual base through the establishment of neo-corporatist institutions. Moreover, corporatism was also seen as an instrument to bind wage rises to the economic projections stated in detailed economic plans. It aimed, therefore, to 140 cater for the cost sensitivity of the development strategy by controlling negative internal demand effects on the trade balance, and inflation (Lee 1989: 402). A total of three socioeconomic plans were introduced (Breen et al. 1990: 40). The first plan (1958-1963) emphasised the need to increase agricultural exports through improvements in agricultural production. The second plan (1963-1967) underlined the need for industrial upgrading in the run up to a possible membership in the EEC. The third plan (1967-1971) propagated the need to increase FDI inflows (Jacobsen 1994: 74). Whilst, the first plan was prepared solely by the Department of Finance, the other plans displayed increasing input from societal actors (Jacobsen 1994: ibid). A direct influence of the Irish attempts at indicative economic planning on economic growth is questionable (Lee 1989: 354). Instead, the FDI attraction instruments and the export promotion schemes are seen to have enabled the favourable reaction of the Irish economy to the improvement in international demand (Lee 1989: 358). Furthermore, domestic demand in Ireland was supported by increased state expenditure, even though fiscal policy remained on the same orthodox lines as throughout the 1950s (Lee 1989: 359).127 However, the exercise in economic planning presented an important step towards institutionalised corporatist relations (Murphy 2003: 106). A number of corporatist institutions were established, concerned with specific aspects of long-term economic and development policy. The Committee on Industrial Organisation was established in 1961, encompassing unions and organised business interests. This body was charged with assessing indigenous industry in view of trade liberalisation in the light of a possible Irish membership in the EEC (Murphy 2003: 112). The Employer Labour Council followed the aim of setting wage rises. The social partners were also officially involved in the economic planning process with their membership in the National Industrial and Economic Council founded in 1963 (Murphy 2003: 113).128 Even though these institutions were successful in modernising industrial relations by persuading the social partners to broaden their horizon, they continuously suffered from the inability of both Irish capital and labour to form consensual relations. Ongoing social strife was the result of the fragmented and marginalised nature of the unions in a still predominately agrarian society and economy, the legacy of conflictive Irish industrial relations and the reluctance of Irish capital to adapt to the new development strategy (Lee 1989: 403). Although moderate wages were theoretically approved by the Irish Congress of Trade Unions (ICTU) within the corporatist institutions (Jacobsen 1994: 86), the individual unions, following their particularistic traditions, ignored the recommenda- 127 Current government expenditure rose from 21% in 1958 to 24% of GNP 1966. Foreign borrowing was only slight. The deficit in the balance of payments remained at 2.3% of GNP throughout the period (Lee 1989: 359). 128 The NIEC was succeeded in 1973 by the National Economic and Social Council, which encompassed next to labour and capital peek bodies also organised farming interests (Hardiman 1992: 348). 141 tions. They were more content on “maximising their individual gains” (Jacobsen 1994: 90), resulting in the high levels of industrial dispute throughout the 1960s. Furthermore, despite an increasing amount of valuable input, the inability of labour and employers to find a consensual path on income and employment issues as well as the reluctance of the state to take the body’s findings into serious consideration effectively caused the social partnership bodies to be increasingly sidelined by the state (Jacobsen 1994: 93-94). Consequently, Lemass’ ambitious aims to establish a neo-corporatist Irish society in emulation of European developments fell far short of “continental” styles of consensual politics. The Scandinavian corporatist institutions were based on the consensus of attaining economic growth through increased equality in incomes and social mobilisation with state intervention in cases of market failure. In contrast, in Ireland social progress was secondary to economic growth, which was centred on productivity increases and low state intervention (Breen et al. 1990: 41). This seems paradoxical in the face of state expansionism with civil service employment growing by almost 35% between 1961 and 1971 (Rottman/O’Connell 1992: 216). The rise in public employment was due to the foundation of many statesponsored agencies. However, their work was never undertaken in a coordinated and strategic manner, as their establishment was ad hoc, case oriented and therefore piecemeal (Lynch 2003: 24). Furthermore, the state shunned from establishing state industrial holdings to implement its developmental goals, such as in Italy and Sweden (Jacobsen 1994: 80). Hence, despite expansionism, economic orthodoxy remained and state capacity was de facto constrained. Additionally, the indicated performance goals were proving to be increasingly difficult to reach, resulting in economic planning to be eventually discarded by 1971. Performance requirements in agriculture and indigenous industry were simply not met. In part, this was due to the over-ambitious nature of the goals. Partly, failure also resulted from the opposition by indigenous capital to comply with the provisions. This effectively reduced the state’s internal autonomy and capacity. Furthermore, policy-makers realised that owing to Ireland’s status as a small and open economy the main factors effecting investment decisions and hence economic growth, inflation, monetary policy and export demand were beyond the control of the state. The ineffectiveness of policy making in these key issues aptly displayed the state’s low external autonomy (Lee 1989: 353-354). As a result, the state resorted to enlarging its internal autonomy in an attempt to compensate for its low capacity and external autonomy. Lemass had become increasingly frustrated with the inability of the civil service (Department of Industry) to induce performance improvements in Irish industry and with the unresponsiveness of indigenous capital to the instruments. This had led “indigenous development [to become] hyperpoliticised” (Ó Riain 2004a: 177). In favouring the increased role of semi-state agencies as drivers of industrialisation, Lemass transferred the indigenous assistance schemes to the IDA in 1966 (Ó Riain 2004a: 175). Finally, in 1969, Lemass’ successor, Jack Lynch, restructured the IDA outside the civil service as a semi-state body enriched with discretionary powers and fully in charge of formulat- 142 ing and implementing industrial policy under the remit of the Department of Industry (Ó Riain 2004a: 178). However, due to the prioritisation of FDI attraction amidst the continued underperformance of Irish enterprise and a lack of sufficient and coherent policies towards increasing indigenous competitiveness, the tradable sectors of the economy became dominated by TNCs successfully attracted by the IDA. In contrast, indigenous development remained retarded by politicisation and ineptitude. The indigenous sector continued to be defined by clientelism and was faced with detrimental import competition as a result of the Ireland’s turn to towards free trade and immanent EEC membership. Consequently, it retained a minor position within the development strategy and the regime (Ó Riain 2004a: 177; Kennedy et al. 1988: 72). The development strategy’s initial success continued to strengthen the role of the IDA within the institutional nexus of the development regime. It became the leading source for the country’s industrialisation and regional development strategy. Essentially, “what the IDA did not do was hardly worth mentioning.” (Jacobsen 1994: 106). Although the IDA was heavily scrutinised due to the sensitivity of its operations,129 it had the implicit function of depoliticising the FDI-led development strategy (Ó Riain 2004a: 177). The key area of industrial policy was, therefore, effectively shielded from outside influence. Industrial policy was protected from interministerial power struggles and social partnership feuding (Lee 1989: 473). Furthermore, the agency developed a high level of self-esteem by portraying itself and its operations as the outcome of technocratic rationality and expertise (Jacobsen 1994: 107). Turning to the issue of consent, the failure to pacify and professionalise social partnership left consent building to the expansion of the Irish welfare-state. Universalism was guaranteed by unconditional access to health and education services. In fact, the largest progress was made in these two sectors throughout this period. More importantly the “hegemonic role of the Catholic Church” (Lee 1989: 362) in the provision of education and health services was at last weakened. Although the standard of health services was still low, access to treatment was improved. Following a widely publicised OECD review on the Irish education system, secondary education was made universally available and third level education was reformed and expanded (Lee 1989: 361-363). However, the policies followed the rationalities of political efficacy in a political system dominated by two catch-all parties. Although social citizenship was drastically improved during this period, it had a distinct Irish touch to it. The expansion of the welfare-state focused on increasing solidarity within society without combating social inequality. The expansion of education was not necessarily seen as a means to increase social mobility (Ó Riain 2004a: 176). Rather, human capital improvements 129 The IDA finally managed to win the hearts and minds of its opponents by defusing the politically highly contentious problem of regional development. This issue had previously proven to be a hotbed of contention between the government and the Dáil. Consequently, IDA operations were closely scrutinised by Dáil members (Ó Riain 2004a: 179). 143 were regarded predominantly as a locational asset (O’Hearn 2000: 83). Consequently, educational inequalities persisted as the middle class disproportionately benefited from these measures (Rottman and O’Connell 2003: 46). Furthermore, the increase in civil service employment additionally supported middleclass incomes (Rottman/O’Connell 1992: 216). Similarly, they were the main beneficiaries of the improved welfare measures. The introduced income-related social insurance and pension schemes combined both public and private components. The system allowed those with income advantages generated in the market to additionally supplement their welfare entitlements with their own resources (Rottman/O’Connell 1992: 224-225). Furthermore, lower incomes were mitigated by high indirect taxes, which were levied in order to finance state expenditure (Rottman/O’Connell 1992: 222). Finally, the problem of unemployment could only be insufficiently addressed. The creation of employment in manufacturing and the state never reached the scale necessary to absorb the numbers of displaced agricultural workers (Kennedy et al. 1988: 71). Although total net employment managed to achieve an annual rate of 0.2% between 1961 and 1968, unemployment still increased between 1968 and 1972. The dependency on FDI to create employment and to industrialise the economy became the dominant feature of the Irish Republic’s development strategy (Barry 1991: 87). As a result, the neglected groups within society left the country, preferring exit over voice (Rottman/O’Connell 2003: 50). To conclude the initial phase of the Irish FDI-led development regime, the attempt to increase the state’s capacity in the face of its low external autonomy failed. However, state capacity still remained weak, due to the uncoordinated nature of policy formulation and implementation and the state’s continued non-interventionist stance. Furthermore, the institutionalisation of social dialogue failed due to the incoherence of the involved actors. Decades of Crisis (1973-1987) Multiple exogenous shocks brought Ireland’s “Golden Age of Economic Growth” to an end in 1973/74. They aptly displayed the country’s low level of external autonomy towards international economic influences. The Irish economy was traumatised by the OPEC oil crisis in 1973 and 1979, which prompted a tenfold increase in the price of energy. Due to the inelasticity of energy demand, the oil price increases had a drastic inflationary impact (Kennedy et al. 1988: 76). Internal demand was depressed through the negative effects of inflation on real wages and the diversion of spending towards oil imports (Haughton 1995: 38). Finally, the UK currency crisis in 1976 additionally induced inflationary pressure due to the Stirling-Punt fixed exchange rate (Helleiner 1995: 325). These shocks and the attempts of the state to mitigate their detrimental influence had negative effects on 144 Ireland’s growth path by creating macroeconomic balances of hitherto unseen proportions (Honohan/Walsh 2002: 8). In terms of FDI attraction, Ireland initially continued to successfully locate TNC investments in the wake of Ireland’s EEC membership in 1973. Foreign capital investments grew at the pace of over 27% p.a. between 1974 and 1981 (O’Hearn 2001: 143). Accordingly, the proportion of TNC manufacturing employment increased from just under 27% in 1973 to almost 35% in 1980 (Paus 2005: 49). Consequently, grant-aided foreign subsidiaries exported 82% of their sales by 1983 (O’Malley 1989: 164). FDI-inflows originated largely from the US in view of benefiting from duty free access to EEC markets (O’Hearn 2001: 143). As a result, the TNC employment share of US manufacturing subsidiaries grew from 29% in 1971 to 61% in 1981, equalling 15% of total manufacturing employment (O’Hearn 2001: 144). TNC production in Ireland remained predominately concentrated in low technology. The majority of production processes were concerned with the manual assembly of final products for exports (O’Malley 1989: 166). However, the international economic recession in the wake of the 1979 oil crisis and the following interest rate hikes after 1981 severely depressed international demand. It unleashed corporate restructuring and reduced FDI flows. As a result, FDI inflows into Ireland declined. Whilst average net FDI inflows had equalled 1.7% of Irish GDP and were responsible for 6.4% of Gross Fixed Capital Formation throughout the 1970s, net inflows of FDI dropped to 0.7% and their share of total physical investment was only 2.8% in the 1980s (Paus 2005: 48). Consequently, labour intensive sectors experienced job losses and employment in capital-intensive branches such as chemicals, pharmaceuticals and office machinery grew (Ruane/McGibney 1991: 75-76). Although new foreign investments contributed to 20,000 new jobs between 1973 and 1988 (Ruane/McGibney 1991: 79), disinvestments and restructuring contributed to a 7% decrease in foreign-owned employment between 1980 and 1989 (Barry 1991: 91). Furthermore, employment gains through new investments were not sufficient enough to neutralise the loss in jobs resulting from disinvestments, restructuring and the continued demise of indigenous industry (Ruane/McGibney 1991: 79). EEC membership attained in 1973 brought complete trade liberalisation in 1977 propelling indigenous demise (Haughton 1995: 38). Premature trade integration, therefore, detrimentally affected the performance of indigenous industry. A total of 35,000 indigenous jobs were lost between 1973 and 1987, equalling almost 25% of indigenous employment in 1972 (O’Hearn 2001: 147). Hence, smaller FDI inflows, TNC restructuring and increased capital intensiveness coupled together with the substantial job losses in the indigenous sector resulted in the large rise in unemployment during the 1980s (O’Hearn 2001: ibid). Obviously, the underperformance of the regime’s economic actors severely reduced the state’s capacity to ensure the functioning of the development strategy. The resulting drop in consent, as displayed by the increase in emigration and uncertain 145 parliamentary majorities, seriously infringed the state’s internal autonomy to formulate economic policy. Moreover, the policy reactions to the constrained developmental environment closely followed the logics of the political system defined by two competitive catchall parties. Incumbent parties moved towards regaining consent to the development strategy. Initially, the state resorted to increased spending by raising its borrowing on international financial markets awash with cheap petrodollars in order to cater for the slack in aggregate demand (Kennedy et al. 1988: 76). The aim was to generate an internal take off in economic growth (Breen et al. 1990: 46). Hence, the incoming Fine Gael/Labour coalition drastically raised state expenditure and foreign borrowing with the aim of increasing employment and stabilising domestic demand.130 In a further step, the government introduced timid wealth and capital gains taxes in an attempt to increase domestic investment. However, the result was growing state indebtedness, capital flight and an increase in import consumption, which heavily pressured the balance of payments (Jacobsen 1994: 134; Honohan/Walsh 2002: 16). Having won the 1977 election by capitalising on popular dissent towards the Fin Gael’s policies of austerity following economic stabilisation, Fianna Fáil implemented a lavish pro-cyclical spending programme.131 Economic growth had recovered and was built upon strong domestic demand and personal consumption resulting from agricultural windfall gains and substantial wage increases, especially in the public sector (Kennedy et al. 1988: 79). In view of the high propensity to import, higher consumption again translated into higher imports. The trade deficit soared by 30% between 1977 and 1978, as import consumption was fuelled by complete trade liberalisation between the EEC and the Irish Republic in 1977 (Jacobsen 1994: 135- 136; Haughton 1995: 38). Conversely, increased public expenditure, however, did not increase the state’s capacity in the development process. Instead, state expenditure was directed at creating additional public employment and at widening social welfare provisions (Breen et al. 1990: 45). Again welfare expansion followed the politics of efficacy. Whilst certainly the deprived benefited from the increased expenditure, the majority of the recipients were again members of the middleclass (Lee 1989: 490). The emphasis in industrial policy remained on the priority of private sector investment. The established state-sponsored bodies continued to operate in an uncoordinated fashion (Jacobsen 1994: 134). Hence, the state was unprepared, when the Second Oil Crisis of 1979 hit home. It coincided with the end of the agricultural 130 Between 1973 and 1975, the current budget deficit rose form 0.4% to 6.9% of GNP. The exchequer borrowing requirement (EBR) increased from 8.6% to 16% of GNP with 50% of loans coming from abroad (Kennedy et al. 1988: 76). 131 By 1979, the balance of payments deficit reached 13.5% of GNP. The EBR stood at more than 13% of GNP and 25% tax revenue went towards servicing the national debt, which grew to 85% of GNP (Kennedy et al. 1988: 78). 146 boom in 1978/1979 after the CAP transition payments ceased and transfers were cut to limit agricultural overproduction (Lee 1989: 491). By 1982 the wind had changed as the calls for austerity had mounted due to the international repercussions of the second oil crisis (Jacobsen 1994: 139). The following response of increased interest rates drastically increased the costs for Irish debt repayments and future loans. Furthermore, the international economy suffered a severe recession and consequently international demand dropped considerably, affecting Ireland’s export sales and FDI inflows (Kennedy et al. 1988: 78). As a result, the state’s capacity was severely crippled, as private investment fell by 25% between 1979 and 1982 (Kennedy et al. 1988: 79) and unemployment rose to 12% by 1981 (Jacobsen 1994: 140). The attempts of subsequent governments to stabilise the economy were again defined by the logic of the highly competitive political system. The two major parties now competed over deflationary policies in order to reduce the budget deficit. Essentially, the deflationary measures were again in view of the international economic recession pro-cyclical (Mjøset 1992: 380-381; Jacobsen 1994: 155). The measures were undertaken in an atmosphere of political instability with the Irish electorate called to the polls three times within 18 months. The world recession deprived the Irish population of traditional emigration possibilities in the US and the UK. Hence, rising public dissent erupted in slim parliamentary majorities and the voting out of the respective incumbent government (Mjøset 1992: 380). The rationale of deflationary policies followed regaining macroeconomic stabilisation and reducing the country’s growing indebtedness. By 1982, public expenditure equalled 64% of GNP, while revenues from taxes stood at 38% (Breen et al. 1990: 46). However, the state was faced with the dilemma of its spending commitments. With an unemployment rate exceeding 18%, a high dependency ratio in the population resulting from the increase in the population in the 1970s and with 30% of the adult population receiving social welfare, social service expenditure in 1982 equalled 22% of GNP (Breen et al. 1990: ibid). Furthermore, servicing the debt acquired by the expansionist drive in the late 1970s drastically reduced per head incomes and made further additional expenditure unthinkable. Finally, industrial development relied on government incentives and any reduction in amities towards TNC investment were regarded as possible threats to the FDI-led development regime in general (Breen et al. 1990: 47). Hence, the chosen path of macroeconomic stabilisation and development sentenced the state to “passively [await] the upturn in the world economy” (Breen et al. 1990: 46). Economic stabilisation relied on curbing consumption in order to reduce inflation and the pressure for imports as well as on attempts to increase exports and entrepreneurial investment to create employment. Accordingly, the majority of tax revenues stemmed from employee income taxes (1985: 31%) and indirect taxes on the consumption of goods and services (1985: 44%). Corporate taxes only made up 3% of the total revenue in 1985 (Rottman/O’Connell 1992: 237). 147 Consequently, despite domestic demand falling by an average of 11% each year between 1980 and 1985, Ireland became one of the most profitable locations for US TNCs in Europe, achieving a 24% real rate of return on their investments in 1984 with rising export and manufacturing output (Jacobsen 1994: 156). Hence, the investment climate for export-oriented firms was undoubtedly favourable, but employment creation remained negative due to the continued demise of indigenous industry. 132 The recession of the 1980s, which had detrimentally affected internal demand and consumption, gave indigenous industry the final blow. The dependency on increased FDI inflows to take up the slack created by indigenous demise grew (Paus 2005: 47; Ó Riain/O’Connell 2000: 318). Furthermore, the state was not able to base its policies on a broad level of popular consent. Although this situation presented the state with an increase in internal autonomy, effectively it lost control over the social partners. Its main vehicle, corporatism, had suffered from the inconsistencies of state policies, the incoherence of the involved actors and the belligerent nature of Irish industrial relations (Jacobsen 1994: 140). Attempts to increase tripartism in the 1970s had failed. Despite having been offered increased influence, the social partners were not able to abridge their differences (Hardiman 1992: 338-339). They were unable and unwilling to find a consensus on employment creation and continued to follow the “possessor principles” (Lee 1989: 490) of maximising their own benefits regardless of the broad context. Hence, by 1987, the state and the development regime were faced “with a legitimation crisis of huge proportions” (Ó Riain 2004a: 166). Capital and labour were fleeing the country, as improved economic prospects in the US and the UK had caused emigration to rise again from the mid-1980s at an average rate of 25,000 people per year (Jacobsen 1994: 161). However, during the 1980s high skilled labour emigrated at alarming proportions with up to 50% of electronic engineers and over 25% of computer scientists leaving the country within a year of university graduation (Ó Riain 2004a: 128). The crisis years of the 1970s and 1980s aptly displayed the development strategy’s shortcomings. Exogenous economic shocks portrayed the low level external autonomy of the state. The state was ill-prepared to deal with the crisis due to its low level of capacity, which was further crippled by the poor performance of the economy. The decision to embark on foreign borrowing was not aimed to increase capacity, but was driven by the desire to regain popular consent within the logic of a competitive de facto two-party political system. However, this policy option conflicted with the development strategy’s spending constraints. Furthermore, the development strategy could not rely on a broad level of social consent due to the continued conflictive nature of Irish industrial relations. 132 Between 1973 and 1986, 44% indigenous manufacturing firms, 75% of the Irish clothing industry, 66% of the indigenous textile companies as well as 50% of Irish metal/engineering enterprises closed down (Paus 2005: 47). 148 The Rise of the “Network State” The Fianna Fáil minority government introduced harsh austerity measures 1987. Real public consumption expenditure relative to GDP fell in 1987 by –4.8% and in 1988, by a further -5.0% (OECD 1999c: 224). Between 1987 and 1989, current spending fell by 11% and transfers by 3.6% (Leddin/Walsh 1997: 6). In total, state investment relative to GDP fell from 5.7% in 1980 to 1.8% in 1989 (Walsh 1996: 77). Economic growth recovered, real GDP grew between 1987 and 1990 by an annual average of 6% (OECD 1999c: 221), enabling the ratio of debt to GDP to fall below 100% in 1992 (Haughton 1995: 40). The implementation of fiscal austerity has been seen as responsible for the recovery in economic growth by the majority of neo-classical economic literature, as the Government policies are deemed to have caused an expansionary fiscal contraction (McAleese 1990; Giavazzi/Pagano 1990). Proponents of this view argue that the decline in government borrowing had increased capital supply and prompting a reduction in interest rates. The decline in interest rates was further assisted by a fall in inflation due to moderate wage agreements as well as a currency appreciation after the 11% devaluation of 1986 (Haughton 1995: 40). This in turn led private actors to ease the cash flow constraints due to the reduction of Government transfers through increased borrowing in order to resume their spending. However, there is more to the story than just fiscal prudence. Growth did recover with real GDP growing by 4.7% in 1987 compared to its contraction of –0.4% in 1986 (OECD 1999c: 221). Nevertheless, recovery was not a result of increased internal demand. The fall in the public deficit in late 1980s was accompanied by a similar decline in private sector saving.133 Households saved less of their disposable income, although real total domestic demand grew by only 0.8% in 1987 and 2.8% in 1988 (OECD 1999c: 228). More importantly, austerity measures coincided with an increase in international demand for Irish exports following the renewed growth of the international economy (Honohan 1999: 88). Growing international demand for Irish exports was answered by TNC subsidiaries located in the Irish economy. Benefiting from the boom in global demand for Information and Communication Technology (ICT) products, FDI inflows increased dramatically during the 1990s with the average yearly sum rising from US$ 141 million for the 1980s to US$ 4.2 billion, equalling 5.2% of Irish GDP and representing almost a quarter of Gross Capital Formation (Paus 2005: 48). In total, Ireland managed to attract 10% of all manufacturing greenfield investments in the EU throughout the 1990s (Forfás 2002: 32). 133 Between 1979 and 1987, the public sector deficit averaged 7.3% of GDP and the private sector saving ratio stood at 15.3%. In contrast, the public deficit averaged 1.7% of GDP and the private sector saving ratio fell to 9.8% between 1988 and 1995, (Walsh 1996: 77-78). Investment fell in 1987 by 5.5% of GDP and in 1988 by a further 4% (Honohan 1999: 88). 149 The greatest proportion of FDI originated from the US, with Ireland displaying the largest US FDI per capita stock in the EU. The US share of fixed industrial investments rose from 32.5% in 1990 to 65.7% in 1998 (Forfás 2002: 33). The majority of US employment is situated in the electronics branches of the manufacturing sector with US firms accounting for 66% of the branches’ employees in 1999 (Paus 2005: 49). As a result of increased US electronics investments, the Irish Republic evolved to become the main manufacturing base for European markets. Almost 40% of US electronics FDI in Europe was sourced to Ireland and ca. 30% of all personal computers sold in the EU in the 1990s were produced in the Irish Republic (Gunnigle/McGuire 2001: 46). The improvement of economic performance and the stark increase in FDI inflows was the result of a longer ongoing process of reorientation of the development strategy as well as the preparations for the introduction of the Single European Market in 1992. The events of the 1980s and 1970s displayed the crisis of the development strategy. Even though the general presumptions of the FDI-led and export oriented development regime were left unchanged, the legitimation crisis had unleashed a process of institutional realignment. Similar to the shift in development policies in the 1950s, the crisis decades of the 1970s and 1980s had created an “institutional space” (Ó Riain 2004a: 192) from which new actors and development policies emerged. The first elements of the readjustment of the development strategy can be traced to the 1970s. The autonomous IDA undertook a quiet shift in its attraction policies. Despite the overabundance of labour in Ireland at the time, the IDA moved from sourcing labour-intensive investments to targeting capital-intensive high-technology FDI from chemical and pharmaceutical companies. More importantly, the agency also started sourcing inward investment from electronics and the nascent computer and software industry (Paus 2005: 48). The move was justified by the belief that it would render Ireland a competitive advantage over other industrialising countries competing for FDI (O’Sullivan 1995: 367). The firms were not only lured to invest in Ireland by the prospects of duty free entry to the Single European Market and high profit margins owing to the low corporate tax rate, but also by the increasing availability of skilled labour. As despite the economic turmoil of the 1970s, the state continued with expanding third-level education and prioritised engineering and computer science skills (Ó Riain 2004a: 74-75). Secondly, the catastrophic economic situation of the 1980s led to the external review of the development strategy, which put indigenous development on the agenda. The social partnership advisory body, National Economic and Social Council (NESC), commissioned a review of industrial policy by the US consulting group Telesis in 1980. Finally published in 1982, the review was a damaging critique of the Irish Republic’s development strategy. The Telesis Report argued that the overreliance on FDI to create employment and to induce industrialisation was too shortsighted (Lee 1989: 531). 150 The overemphasis of policy towards TNCs had left indigenous firms more or less ignored. Furthermore, the multinational sector was in a situation of relative autarky, as there were little or no backward or forward linkages between the two industrial sectors. The indigenous sector was far short of attaining international competitiveness in the international tradable sectors of the economy. It was found to be lacking substantial management and marketing skills, internationally competitive products and modern production methods. Instead, the remnants of indigenous capital were primarily involved in the low skill production of non-tradable goods with low value added content (Lee 1989: 531). The report recommended a more pro-active role of state agencies and a review of the grant system in the multinational sector. TNCs should be motivated to establish substantial R&D facilities employing high skilled Irish labour and to expand its linkages with indigenous firms. Furthermore, Telesis advocated a stronger concentration of public resources on the development of the indigenous sector (Lee 1989: 532). Controversially, the report also supported the creation of a holding company responsible for the support of indigenous companies and pleaded for an increased role of central government in economic policy planning, thereby reducing the importance of the IDA. The aim should be the creation of strong indigenous companies via state aid. Instead of “picking winners”, the goal ought to be “creating winners” (Lee 1989: 536). Although the government put introduced new Industrial Development Act (1986), little was changed. Stronger coordination between the state agencies involved in industrial development took place. The IDA was internally reorganised in two separate divisions. One remained in charge of TNCs and the other was made responsible for indigenous firms. Furthermore, a linkage programme was set up to create a competitive sub-supply base between TNCs and Irish firms. In total, the proportion of funding allocated to Irish firms was raised to 50% by 1988 (DETE 2003: 36). Nevertheless, the plight of the Irish firms had reached the agenda and stayed there. The second industrial policy review report, the Culliton Report of 1992, came to the conclusion that little progress had been made. It recommended the partition of the IDA into an indigenous enterprise development agency and one body responsible for FDI (O’Sullivan 1995: 372). The report also called for further measures to augment physical infrastructure in view of reducing operating costs and to improve skill attainment levels of the workforce. It criticised the continued overemphasis on FDI attraction via grant-aid and recommended a substantial tax reform to lower the burden on income and consumption taxes as well as to include a greater taxation of TNC profits. Furthermore, the report also advocated a tightening of public funding for indigenous capital in order to reduce indigenous rent-seeking mentality by introducing repayable loans and a stronger emphasis on equity support. (DETE 2003: 37). Finally, it recommended “a general shift in the focus of industrial policy” (O’Sullivan 1995: 372) towards the promotion of clusters around existing strengths and niches in order to reduce the dependency on TNC developmental inputs. 151 In short, the industrial review process certified that the development strategy, relying on the developmental inputs form attracted FDI, had failed to develop an internationally viable indigenous industrial sector (DETE 2003: 37). The evaluations unleashed an institutional readjustment of historic proportions. The IDA was reformed and the indigenous sector was formed into a semiautonomous agency, Forbairt [Development] in 1994. Furthermore, Forfás [Growth] was established in 1993 as a strategic industrial policy advisory agency to coordinate the work of both Forbairt and IDA. Forfás in turn created a number of advisory bodies in charge with reviewing certain strategic aspects of industrial policies, science and technology issues. Industrial development was therefore placed under a constant review process in order to attempt to ensure policy coherence (DETE 2003: 39-40). The inputs from theses organisations also determined the creation of further important agencies. Forbairt was amalgamated with a number of different institutions in charge with various aspects of indigenous development to form Enterprise Ireland in 1998 (Ó Riain 2004a: 148). Science Foundation Ireland was established in 2000 in order to fund joint university and industry research (Ó Riain 2004a: 121). However, despite these changes, the IDA remains the lead agency, as it continues to function as a recruitment pool for the other agencies. Hence, industrial policy continues to be defined by the “unquestioned hegemony of a view of industrial development as the promotion of competitiveness within international markets using all the agencies and resources of the state” (Ó Riain 2004a: 163). The process of institutional readjustment was also the result of the various corruption scandals in the 1980s, which highlighted the need to depoliticise the indigenous sector by reducing the clientelistic ties between politics and capital (Ó Riain 2004a: 180). Hence, technocratic rationality was extended to the indigenous sector. This ensured the acceptance of the policies by all relevant political actors, thereby creating consent to the development strategy. Essentially, the readjustments led to a distinct widening of the state’s autonomy in the formulation of development policy. The new institutional architecture for development further insulated the area of industrial policy from political and external interference (Ó Riain 2004a: 163). However, as Ó Riain (2004a: 152-154) shows, state autonomy was embedded within a network of social ties and constituencies, constituting a “Network Development State”. On the one hand, the agencies are linked to each other via memberships in the various influential boards controlling the agencies and by reporting relationships. On the other hand, the responsiveness of the agencies is guaranteed by close ties to their respective “clients”, members of private business also present on the boards and the various specialised advisory commissions. However, unions and civil society organisations are comparatively underrepresented. The ICTU can only participate in general strategy formulation and is involved institutionally in the social partnership process. Hence, the state’s embeddedness is biased towards to technocratic and business interests. 152 Furthermore, the work of the development agencies underlies an additional external review process. The OECD is regularly invited to undertake highly publicised external reviews on certain policy areas.134 More importantly, the EU has been the main source of financing for indigenous development (Ó Riain 2004a: 149). With the creation of the SEM in 1992, Ireland was awarded substantial transfers for structural adjustment measures. Between 1989 and 1999, a total of IR£ 8.1 billion was transferred by Brussels (Paus 2005: 65). The majority of which was used for investment support to indigenous firms, improvements in human capital and physical infrastructure (Paus 2005: ibid). Essentially, EU funding provided the necessary capital for indigenous development. This not only alleviated the chronically indebted state from additional expenditure, but also bypassed distributional conflicts within the state apparatus. Additionally, the reporting and monitoring process for EU funds thwarted any attempt of creating corrupt clientelistic networks between the state and indigenous capital. EU transfers also revitalised the planning process, as funds are granted upon coherent documentation of their proposed uses in National Development Plans (Ó Riain 2004a: 165-166). Furthermore, Ó Riain (2004b: 44) argues that the above-mentioned developments created institutional spaces out of which an indigenous development agenda arose. An alliance was forged between the state and high skilled indigenous labour predominately in the software engineering sector, financed externally and therefore independent of the FDI-led development regime (Ó Riain 2004a: 182). In effect, this alliance constituted a second development regime with which Ireland could finally build an autocentric mode of development centred upon national resources (Ó Riain 2004a: 61-62). Certainly, increasing numbers of indigenous firms were exporting in the 1990s compared to the previous periods (Barry et al. 1999b: 21-22) and promising indigenous high-tech sectors had evolved. Nevertheless, increasing economic growth even during the boom phase of the 1990s was heavily dependent on TNCs and on further FDI inflows (O’Hearn 2000: 76). While the process of institutional realignment did increase the professionalism of the state in the development process, there was no radical switch in the state’s non-interventionist stance. Hence, the state’s capacity effectively remained constrained. In contrast to the East Asian examples of development, the Irish state was still not engaged in “husbandry”, thereby creating and moulding firms for international competition by using carrots as well as sticks (O’Hearn 2000: 82). Instead, the role of the state is more fittingly described as that of a “midwife”. Via grants and equity participation the state nurtures and advises fledgling firms. It finances, investigates and communicates entrepreneurial possibilities to established firms. Once again, the success of the 134 Due to the diplomatic process of OECD reviews, member states are heavily involved in vetting the OECD reports. In the Irish case, Ó Riain (2004a: 185) repeatedly mentions examples, where the OECD was used as an instrument by opposing interests within the state to enforce policy changes. 153 development strategy relies on the local entrepreneur to sufficiently identify and exploit these possibilities (O’Hearn 2000: 81-82). Finally, a further element, which contributed to the readjustment of the development regime, was the attainment of popular consent. The development strategy was based on a broad level of social and political consent, additionally widening the state’s autonomy. First, the so-called Tallaght Accord of 1987 established political consensus amongst the two major political parties. The oppositional Fine Gael essentially supported the Fianna Fáil minority government’s austerity package. Secondly, consent was attained through a revitalisation of the social partnership process, which simultaneously embedded the state within a tripartite process of social partnership. Labour and employer peek organisations went back to the tripartite negotiation table in 1987. As Hardiman (1992: 348) points out, the return to corporatist negotiations was motivated by a common perspective on the economic problems of the country. Both social partners were lured to the negotiation table by the possibility of influencing domestic policy making. The employers were interested in striking national deals and averting the two-tier agreements of the 1970s, which had rendered the national wage agreements effectively obsolete (Hardiman 2000a: 291). Especially the ICTU welcomed the initiative. Similar to the employers, who were weakened by the recession, the union movement were faced with a drastic weakening of their power base. It had been decimated by emigration, falling unionisation rates and high unemployment. Moreover, organised labour was afraid of its further marginalisation through the possible initiation of anti-union policies as in the UK under Margaret Thatcher during the first half of the 1980s (Hardiman 1992: 347). Thus, by comparison to the 1970s, union and employer weakness had lowered particularistic tendencies and increased their congruence. The state was motivated to participate through the desire to ensure the sustainability of the austerity package with wage constraint in order to further reduce inflationary pressure, curb consumption-driven imports and to contribute to employment creation (Hardiman 2000a: 290). A succession of national wage agreements was reached, beginning with the Programme for National Recovery in 1987.135 Initially, the agreements centred on moderate long-term wage rises in exchange for income tax relief in order to increase net incomes. The national wage agreements have increasingly included other spheres of economic and social policy as well as an increased input by civil society actors. High net employment and strong economic growth of the 1990s were seen as positive results allowing the acceptance of wage moderation and increased workplace flexibility. The success of the agreements led to the continued commitment to the 135 Successive agreements have been Programme for Economic and Social Progress (PESP) (1990 to 1993), Programme for Competitiveness and Work (PCW) (1994 to 1996), Partnership 2000 (1997 to 2000), Programme for Prosperity and Fairness (PPF) (2000 to 2003), Sustaining Progress (2003 to 2005), Towards 2016 (2006 to 2015) ( Accessed: 20/10/2006). 154 social partnership process by the social partners and the state (Hardiman 2000a: 292- 293). Hence, the Irish state reacted to the economic turbulences of the 1970s and 1980s by widening its autonomy through institutional readjustment; however it retained its reduced capacity. A stronger impetus was placed on indigenous development, leading to its de-politicisation, contributing to the state’s internal autonomy. The state’s widened autonomy was also embedded within a network defined by international links and relationships with client constituencies. Similarly, political and social consensus to the development strategy was reached through a revitalisation of the social partnership process, enabling macroeconomic stability. 3.5 Complementarity and Divergence Although the evolution of the Hungarian and Irish FDI-led development regimes displays a number of differences, there are similarities, resulting from the common trajectory of the development strategy. Beginning with the foundations of the development regimes, the scope for alternative development strategies was almost non-existent owing to the influence of international actors for Hungary. In Ireland internal factors were of more importance. Aside from economic malaise, the decision to attract FDI was also the result of specific socioeconomic and political issues, i.e. internal factors. Due to the disrepute of local entrepreneurial elites, both countries lacked a capable development agent to fulfil the task of generating the required developmental inputs. Accordingly, foreign capital replaced national capital in the new development regime. Initially FDI was used in the Hungarian privatisation process as an instrument to secure the process of democratisation and economic transition, as potentially harmful post-socialist elite networks were dismantled. In Ireland, FDI and trade liberalisation was a measure to reduce opposition from indigenous capital towards restructuring as well as to strike a compromise between conflicting “expansionist” and “deflationist” interests within the state. In both cases, the issue of development policy was highly politicised. Both states reacted to a malfunctioning of the development regime, resulting from the low level of external autonomy, by widening the state’s internal autonomy, thereby effectively shielding the policy area from outside influences. However, the respective institutionalisation was different. In Ireland, the continued failure to develop an internationally viable indigenous sector led to the disembodiment of industrial policymaking and its implementation from the political system. The policy area was transferred to semi-autonomous state agencies and hence was depoliticised. The Irish state managed to embed its autonomy in industrial and development policy within a mesh of social and institutional ties. However, the state’s embeddedness is biased towards industrial and technocratic interests.

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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.