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Europe: The Celtic Economic Tiger And Its Lessons For New EU Members

Prague, 20 August 1997 (RFE/RL) -- The Republic of Ireland, a small land facing the Atlantic Ocean on the periphery of Europe, has undergone a remarkable change in the last two decades.

From being a poverty-stricken, almost forgotten backwater scarred by centuries of civil conflict with its bigger neighbour Britain, Ireland has emerged as one of the world's strongest-growing developed economies -- the "Celtic Tiger" as it is now being called by foreign investors.

During these two decades of change, the Republic of Ireland has been a member of the European Union. So what are the ingredients to Ireland's success, and how much do they depend on EU membership? What lessons can be learned by the post-communist states of Europe, now eager to join the European Union in the hope of climbing similar ladders to prosperity?

The message from economic analysts is that success goes to those who themselves take the right decisions -- and who then also have help from powerful friends. As such, it's a formula which can also fit those lands now crowding to enter the EU.

Let's first look at the Irish domestic situation. The Republic gained full independence from Britain after World War II, and has since been characterised by stable government and a violence-free atmosphere. The province of Northern Ireland, still under British rule, continues to suffer interminable sectarian squabbles.

Since the late 1950's, the policy of the Republic has been to attract investment by offering itself to multi-national companies as a base for service, distribution or manufacturing. That at first achieved limited success, because the Republic has a domestic market of only about 3 million people, and external transport costs are high. But in 1973 came EU membership, and with that, major companies began to realise Ireland was offering big advantages as a gateway to a market of hundreds of millions of consumers.

Dublin economic analyst Tim Walsh, director of research at AIB Investment Funds, explains that Ireland has managed to create what he calls a "circle of virtue." By that he means the government has taken a series of key steps to ensure attractiveness to investors. The Republic offers especially low taxes -- 10 percent -- on manufacturing profits. It offers capital grants to companies wanting to establish themselves in the Republic. Because of decades of emphasis on schooling, it has an educated work force -- in addition English-speaking. That's important because English is the dominant language of the new technologies. And the population is predominantly young, also a big plus in adapting to new technologies.

Further, wage costs have been kept under control by means of centralised pay agreements with workers, running for three years at a time. Wage restraint has helped keep inflation low, and the general perception of economic health has helped keep the national currency, the Punt, high. That in turn has helped keep the bill for imports low, also assisting in curbing inflation.

And as an "ace in the pack," governments have followed such tight fiscal policies that this year's national budget is likely to be evenly balanced, and may even be in surplus next year. Ireland is therefore one of the very few EU members which meets without struggle the terms for introduction of the new Euro currency in January 1999. Balanced budgets in turn allow for tax cuts to the population, thus increasing average take-home pay.

Walsh says the result of all this is continued heavy investment and annual growth rates around 6 or 7 percent -- more than double the norm for developed economies. And this is coupled with inflation running last year at only 1.6 per cent. This is such an unusual combination -- high growth without inflationary strains -- that it has captured the imagination of economists around the world.

Another leading Irish analyst, Robbie Kellaher of Davy Stockbrokers, told RFE/RL that another essential EU contribution, apart from offering its vast market, has been the pumping into Ireland of many millions of dollars in development funds, particularly in later years through structural funds. These structural funds have allowed intensive and extensive modernisation of the country's communications and transport infrastructure, so that it can offer yet another drawcard to incoming high-tech companies.

Ireland has already expressed willingness to see its own share of such EU funding diminished, in favor of similar EU spending for prospective new East European members. EU Social Affairs commissioner Padraig Flynn said in Brussels recently that Ireland welcomes new members because of the enlargement of the market they offer, even if that means Ireland loses its structural funds.

Analyst Kellaher goes on to list industry sectors in which Ireland has achieved prominence. These include computers, both software and hardware, and pharmaceuticals, as well as financial management services, and a growing service sector called telesales.

Many of the incoming companies opening in Ireland of course are not from the EU itself. Major U.S. companies, seeking a stepping stone into the EU, are among the biggest contributers to the Irish economy, and these are being increasingly joined by Japanese and Southeast Asian corporations. And Irish companies themselves are beginning to take their own place in the economy.

In all, Ireland is an example of what prudent national governments can do when allied with big financial muscle. For the prospective members of the EU, that's a message of hope for the future.