The Economy of Ireland
TWELFTH EDITION
National and Sectoral
Policy Issues
Edited by
GILL & MACMILLAN
Contents
Cover
Title Page
Preface
Section I
POLICY CONTEXT
Chapter 1 Historical Background
Jonathan Haughton
1 Why Economic History?
2 From the Battle of the Boyne to 1815
3 From 1815 to Independence
4 From Independence to 1960
5 From 1960 to 2012
6 Concluding Observations
Chapter 2 Policy Objectives and Competitiveness for a Regional Economy
Dermot McAleese
1 Introduction
2 Growth and Employment
3 GNP Growth and Human Welfare
4 Equity, Income Distribution and Happiness
5 Economic Stability
6 Competitiveness
7 Conclusion
Section II
POLICY IMPLEMENTATION
Chapter 3 Role of Government: Rationale and Issues
Philip R. Lane
1 Introduction
2 Rationale for Government Intervention
3 Levels of Government
4 Public Expenditure and Taxation
5 Other Policy Instruments
6 Size of Government: Economic and Political Factors
7 Conclusion
Chapter 4 Taxation
Micheál Collins
1 Introduction
2 Principles of a Good Taxation System
3 The Irish Taxation System
4 Evaluation: Taxes on Income
5 Evaluation: Indirect Taxes, Corporation Taxes and Property Taxes
6 Deferred Taxation: Public Debt
7 Conclusion
Chapter 5 Regulation and Competition
Francis O’Toole
1 Introduction
2 Regulation: Principles and Issues
3 Regulatory Failure Case Study: Irish Banking
4 Competition Policy
5 Regulation of Natural Monopoly and Networks
6 Concluding Comments
Section III
POLICY ISSUES AT A NATIONAL LEVEL
Chapter 6 Population, Employment and Unemployment
John O’Hagan and Tara McIndoe-Calder
1 Introduction
2 Population
3 Labour Supply
4 Employment: Growth and Composition
5 Unemployment: Extent and Features
6 Adapting to New Technology, and Increased Trade and Migration
7 Flexibility in the Labour Market
8 Conclusion
Chapter 7 Growth in Living Standards and Output
Jonathan Haughton
1 The Celtic Tiger
2 How Affluent is Ireland?
3 Irish Growth Experience
4 Explaining Growth in Output per Worker
5 The Employment Enigma
6 Will Growth Continue?
Chapter 8 Social Justice: Distribution, Poverty and Policy Responses
Michael King
1 Introduction
2 Causes of Inequality and Poverty
3 Arguments for and against Reducing Inequality and Poverty
4 Inequality and Poverty in Ireland
5 Political Economy of Poverty and Inequality Reduction
6 Policy Efforts and Challenges
7 Conclusion
Section IV
POLICY ISSUES IN THE MARKET SECTOR
Chapter 9 Manufacturing and Internationally Traded Services
Carol Newman
1 Introduction
2 Role and Evolution of Industrial Policy
3 Nature and Importance of the Manufacturing Sector
4 Internationally Traded Services
5 Foreign Direct Investment
6 Concluding Comments
Chapter 10 Energy Sector and Environmental Issues
Eleanor Denny
1 Introduction
2 Energy Sector: Importance and Provision
3 Energy Supply: Performance and Policy Issues
4 End-User Energy Prices and Competition
5 Environmental Issues
6 Conclusion
Chapter 11 The Agri-Food Sector
Alan Matthews
1 Introduction
2 The Agricultural Sector
3 Agricultural Policy
4 Food Processing and Distribution
5 Food Policy
6 Conclusions
Section V
POLICY ISSUES IN THE NON-MARKET SECTOR
Chapter 12 Health: Funding, Access and Efficiency
Anne Nolan
1 Introduction
2 Why Government Intervention?
3 Key Features of the Irish Health Service
4 The Irish Health System in Comparative Context
5 Health Sector Finance and Access
6 Control of Healthcare Expenditure
7 Concluding Comments
Chapter 13 Education: Market Failure and Government Interventions
Carol Newman
1 Introduction
2 Economic Perspectives on Education
3 Education Policy in Ireland
4 Delivery and Effectiveness of Education Services
5 Conclusion
Contributors
Copyright
About the Editors
About Gill & Macmillan
Preface
When the last edition of this book was going to print in April 2011 the economy of Ireland was still reeling from a tumultuous three years of economic setback. Output had declined on a scale almost never seen in peacetime anywhere, unemployment had trebled, employment had declined by almost 300,000 and large-scale net emigration had resumed for the first time in almost 25 years.
The country had been hit by a property crash of unprecedented scale with house prices falling by over 50 per cent and some commercial property by much more. Huge private and public sector debt problems ensued and the banking system almost collapsed. Part of these problems could be linked without question to the international banking collapse and the subsequent large and sustained recession in the developed world. The fact that the institutional structures of the euro zone were ill equipped to cope with this financial crisis greatly exacerbated the problems.
But Ireland’s difficulties were at the acute end of the range and at times it seemed that the political system could not survive intact in the face of widespread anger and with huge numbers facing large-scale financial problems arising from negative equity, lost jobs and a fear that the euro zone might implode.
Three years on, things look a lot brighter. As some populist commentators fuelled the flames of discontent, most of the Irish population got on with dealing with a crisis that was largely of our own making. There is only so long one can lament events and attempt to blame others, be it at a personal or societal level, but ultimately we must move on, try to make good the damage and plan for a better future.
Many of those most affected in fact complained least; the newly unemployed, the people trapped in negative equity and the young who took the brunt of the pain. Very often it was those least affected who complained the most; those in secure, pensionable jobs and many of the elderly who were largely protected from the effects of the recession.
ANOTHER REMARKABLE TURNAROUND
The year 2013 now appears to have seen a major turning point. The economy, after flatlining in 2011 and 2012, expanded in GNP terms (see Chapter 7 for a discussion of this) by over three per cent and employment increased by 60,000+. Predictions from independent sources suggest a further increase of 50,000+ jobs in 2014 with possibly a similar increase in 2015. If this turns out to be the case, then a remarkable recovery in employment will have taken place in just three years, again, as in 2007, with no agency predicting this major turning point.
Property prices, in particular in Dublin, have risen again, in some cases quite significantly; not to the unsustainable levels of 2007, of course, but back to long-term norms. The loss in competitiveness that had taken place between 2002 and 2007 has been largely reversed. The euro crisis has abated, at least in terms of bond yields and the value of the euro. Few are betting on its break-up now, at least not in the foreseeable future.
As argued throughout this book, though, one should not be deflected from the medium- to long-term focus, by short-term gyrations of financial markets or predictions of imminent doom or boom. The world is a much more complex place. Things come in cycles; and how easily people forget the past, even the immediate past. That is the real danger that confronts Ireland in the years ahead.
WHERE NOW? THE WIDER CONTEXT
This book is not and never was concerned primarily with shorter-term economic issues. It generally takes a much longer-term historical perspective, a perspective that is salutary in reminding us that booms come to an end and, in the recent context, that the ‘bad times’ do not last for ever. Indeed, in some cases they can end much more rapidly than expected, as in the mid 1970s or early 2000s, or last much longer than is necessary, as was the case in the 1950s and 1980s (see Chapter 1).
This book is also much more about general policy issues, thereby providing the context for debate, be it in the short, medium or long term.
There is no reason why Ireland cannot prosper in years to come and remain one of the high-income countries of the world (see Chapters 1, 6, 7 and 9). The country has a healthy, stable democracy and a well-established rule of law. Its people and its level of human capital are the same as they were prior to 2008 (see Chapter 13). There is an openness to competition and entrepreneurship that simply did not exist in the 1980s. Ireland has the security of membership of the euro zone and a strong commitment to the EU and thus to free trade, international competition, a cleaner environment, and all that the EU stands for on the world stage (see Chapter 3).
All democracies are flawed to some extent and economic debates are often fraught and misinformed, Ireland over the last four years being no exception. Predictions of economic decline or success can be altered within months. And it is also worth remembering that economic policy is exercised in the political marketplace. Economists may have forgotten their history up to recent times but they also often forget that economic policy and politics are inseparable. Having a good solution to an economic problem is of little benefit if the political system cannot be assured of delivering on it.
The euro crisis is proof positive of this: too often the political difficulties of responding to the crisis were overlooked by many economists. Very often the same people who were criticising policymakers for not responding firmly and quickly enough to the crisis were at the same time castigating them for lack of democratic accountability.
The equity issues of the crisis of the last six years, though, will be played out for some years to come (see Chapter 8). The most important antidote to inequity is to create employment; as mentioned, this is happening now in Ireland on a large scale. But there are still very high unemployment levels, almost three times those in the mid 2000s.
There is also a strong intergenerational inequity resulting from the crisis. It is the younger age groups who almost certainly bought houses at the top of the boom, with most of the older generation having long paid in full for their properties, purchased at times of much lower real prices. Besides, to pay for the debt the burden will again continue to fall mostly on the younger generation, through reduced incomes for those starting out at work, fewer promotional opportunities, particularly in the public sector, and longer working lives. A disturbing reflection of this is the exercise of ‘grey power’ in recent years, as a result of which payments to the over-65s, regardless of their circumstances, have been largely protected while those to other, younger groups have been cut (see Chapter 8).
There are potential disasters that should continue to concern us, such as the threat of a major terrorist attack, especially if it involved the use of biological or nuclear weapons, or indeed a war initiated by the aggression of a nation state. Events in Ukraine in recent months have been a stark reminder of this. The possibility of a major military confrontation in some part of the world, but particularly in Europe, would have quite catastrophic consequences for the economy of Europe upon which Ireland depends so heavily.
There is also the possibility of a major environmental disaster leading to the loss of hundreds of millions of lives and the danger of major water shortages for tens of millions of others: events in Japan in 2011 reminded the world starkly of this (see Chapter 10). There is also the possibility of severe energy shortages, either because the world runs short of the exploitable natural resources required or because of the actions of some states in cutting off supply. Again events in Ukraine have brought home a timely reminder of this threat. On all of these issues Irish interests and concerns are best voiced at an EU level and through the EU on the global ‘stage’ (see below).
As urgent and pressing as some of the economic decisions of the next few years are, they must be seen in this context. These global problems are outside the control of Irish policymakers acting on their own and yet could have catastrophic consequences for Ireland. The problems we face in the years ahead – resolution of the remaining problems of the banking sector, continued restoration of balance to the public finances and maintaining competitiveness – are all largely within our own remit and can be resolved, given the political will and an informed and realistic public debate. In relation to the former, the vociferous objections of special interest groups (and often those who suffered least in the recession) must be resisted, and in relation to the latter, alternatives must be presented, especially by those whose job it is to sift and present information/arguments in a balanced way, so that informed decisions can be made.
LONGER-TERM ECONOMIC POLICY FRAMEWORK
Ireland is now a region of the euro zone, with the euro having replaced Irish notes and coins in January 2002. As such, there are no chapters in this book on monetary policy or on balance of payments and exchange rate policy in Ireland.
The policy emphasis now at an Irish level, though, is almost exclusively on the competitiveness of the EU region, ‘Ireland Inc.’, and this is reflected in many chapters throughout the book (see in particular Chapters 2, 6, 7 and 9). Even in relation to this Ireland must operate within an agreed competition and regulatory environment determined, with Ireland as a voting member, at EU level (see Chapter 5). Competitiveness is a key determinant of our attractiveness to foreign direct investment: the scale of US investment has been such that Ireland might be viewed in an industrial sense as a region of the American economy (see Chapter 9), despite the fact that in a monetary sense the country is an integral part of the euro zone (see Chapter 3). International benchmarking in terms of competitiveness is now commonplace and the Annual Competitiveness Reports produced by the National Competitiveness Council each year since 1997 are some of the most talked-about reports published.
Despite the industrial connection with the USA and the economic, monetary and political links with the EU, the euro zone in particular, Ireland’s relationship with the UK is still very important, for a variety of reasons (see Chapter 1). While the nature of this relationship may have altered significantly, its substance has remained the same.
In terms of simple geography, Ireland is a tiny country, an island to the west of Britain, which in turn is a somewhat larger but much more densely populated island to the west of mainland Europe: its population is over 15 times that of Ireland. Ireland and the UK have a common labour market, a common language, and huge trade and tourism flows in both directions; by and large people in both jurisdictions watch the same TV programmes and follow similar key sports and cultural events. These are inescapable facts, which, as shall be seen throughout the book, are important for an understanding of the Irish economy, past and present.
Ireland’s relationship with its closest neighbour is crucial not just to its economic success but also to continued peace on the island. This is because the island of Ireland consists of two political units, the larger portion of which forms the Republic of Ireland and the smaller portion Northern Ireland, which is part of the UK. This too has had an impact on economic, social and political life in the Republic.
This book is about the economy of the Republic of Ireland, and henceforth the terms ‘economy of Ireland’ and ‘Irish economy’ refer to this economy, unless otherwise stated. Some reference is made to the Northern Ireland economy, but since Northern Ireland’s economic policy is largely determined in London, it is difficult to devote much attention to policy there without also reviewing British economic policy in general. There has been, though, as Chapter 3 points out, greatly increased cross-border co-operation on the economic front since the Good Friday Agreement of sixteen years ago.
The links, economic and cultural, to continental Europe are strengthening, something that low-cost air travel and the use of the euro has facilitated. Irish people are now much more familiar than they were even 25 years ago with political developments in Europe, and with European sporting and cultural events. Indeed as a result of the previous boom in incomes many own second homes there.
But Ireland and the EU have also to look at the wider world, as issues and problems that are truly global in nature must be addressed. Top of the list is the environment and the danger of serious global warming (see Chapter 10). Not far behind are a secure energy supply, terrorism, free trade, sharply increased world food prices resulting from new demands for food and land use (see Chapter 11), increased migration, legal and illegal, and international crime.
As Chapters 2 and 10 point out, concerns about environmental degradation must qualify any endorsement of economic growth as a policy objective. Chapter 3, though, highlights the governance difficulties faced when dealing with environmental issues that extend beyond national boundaries. This, as seen already, also applies to many financial issues. Later chapters discuss various policy measures being adopted to address such issues, both within Ireland and internationally.
The rise of China and India in particular is an economic reality that has affected not just small countries like Ireland but also the two largest trading blocs in the world, namely the EU and the USA. It has led to a huge increase in competition, for both goods and investment flows. It has also of course led to a huge increase in trade and investment opportunities.
China hosted the Olympic Games in 2008, its military prowess is growing, and Mandarin is the mother tongue for by far the largest number of people in the world. As such, its influence will soon extend well beyond the economic to the cultural and military spheres. Ireland, as part of the larger EU, will have to learn to adapt to such seismic geopolitical changes in the global economy.
STRUCTURE OF BOOK AND ACKNOWLEDGEMENTS
This book has grown out of an earlier book, first published 39 years ago. The Irish Management Institute published the first six editions, Macmillan what in effect was the seventh edition and Gill & Macmillan the eighth and subsequent editions. The broad structure and purpose of the book have remained the same over the years, but in terms of content there have been sweeping changes, even since the last edition. Apart from updating, major changes have also been made to all chapters, including Chapter 1 on the historical background, to reflect the rapidly changing circumstances and policy issues facing the Irish economy.
As mentioned, the overall structure of the book has been unchanging over the years. Section I provides the key policy background, namely the historical evolution of the economy up to 2012 (Chapter 1) and a discussion of what are the key policy objectives and issues for a regional economy such as that of Ireland (Chapter 2). It is important to know what we want from the Irish economy before asking how to achieve these aims and how well we have done in so doing.
These are the questions looked at in Sections II and III. Chapter 3 sets out the role of the state, in terms of rationale, levels of government and size of the state sector. It also addresses in some detail the recent fiscal crisis in Ireland and the euro zone. Chapter 4 examines how state involvement is funded and the issues to which taxes give rise, including the use of borrowing to defer taxation decisions. Chapter 5 examines the issues of competition and regulation, drawing on recent findings from behavioural economics in this regard. State regulation permeates our lives to an extraordinary extent, for various valid reasons.
Section III comprises three quite lengthy discussions of Ireland’s success or otherwise in meeting the three objectives outlined in Chapter 2, and the policy issues to which this give rise, namely employment (Chapter 6), growth in living standards and output (Chapter 7) and equity and social justice (Chapter 8). Some of the key statistical material in the book is presented in these chapters.
Section IV contains a detailed discussion of policy issues and performance in the market sector and builds on much of the book’s earlier material. Chapter 9 examines the market sectors perhaps of most importance to the success of the future economy, namely manufacturing and internationally traded services. Chapter 10 looks at the vitally important energy sector, with its huge dependence on sources abroad and its major environmental impact. The latter is considered in the context of some wider environmental issues. Chapter 11 looks not only at the agricultural sector but also at the issues of food distribution and consumption and the rising concern over security of supply and food safety.
Section V concludes the book with an examination of two key areas of the public sector, namely health (Chapter 12) and education (Chapter 13). Both of these sectors are not only crucial to the well-being of the population at large but also to the future success of the economy. Both are also sectors of major economic significance in their own right, although assessing performance in either is fraught with difficulty. Both areas are also faced with the reality of possible sweeping technological change impacting significantly on the delivery of outputs.
There are many people we would like to thank who have facilitated the publication of the twelfth edition of this title. We would like to thank staff at Gill & Macmillan for their central role in bringing this book to publication. We would also especially like to thank our copy-editor Jane Rogers; she was a pleasure to work with.
The book would not of course exist without the contributed chapters. As always, it was most enjoyable work liaising with each of the contributors at each step of the process. In particular, it was rewarding seeing chapters take shape and mesh into the overall structure of the book following comments and suggestions. We very much appreciate the input and co-operation of each and every contributor.
We would also like to thank the many lecturers and students who have used this book over the years. This has made the book both financially viable, despite the small size of the potential market, and a very satisfying experience for us. The book is also read widely outside academia and, indeed, beyond these shores, and we hope that this will continue to be the case. This is the type of book, and related courses, which students seem to enjoy immensely and we are sure lecturers in other colleges have also found this to be the case. It does after all deal with the political economy of one of the most interesting case studies in world economics of recent decades!
John O’Hagan and Carol Newman
Trinity College Dublin
June 2014
SECTION I
POLICY CONTEXT
CHAPTER 1
Historical Background
Jonathan Haughton
1 WHY ECONOMIC HISTORY?
Why take the trouble to study history, and particularly the economic history of a minor European island? Six good reasons spring to mind.
History tests theory. The propositions of economics are often best tested by exposing them to historical evidence. Was Malthus right when he argued that population growth would inevitably outstrip food supply? Irish experience, even during the Great Famine, suggests not. Do farmers respond to changes in the prices they face? Evidence from late nineteenth-century Ireland confirms that they do. Does emigration serve to equalise wages between Ireland and Britain? Data for this century indicate that, broadly speaking, it does. Cicero took this view of history, writing that ‘the causes of events are even more interesting than the events themselves’ – surely a view espoused by most academic economists!
History gives perspective. Standard economics textbooks typically provide a short-run and partial approach to economic problems. While this may be appropriate for tracing the immediate effects of a shift in demand, or a monetary expansion, it provides fewer insights into the fundamental determinants of economic growth or of income distribution, since these may only be observed over long periods of time. The historian Joe Lee has made the point forcibly, writing that ‘while contemporary Irish economics can be impressive in accounting for short-term movements, it has contributed relatively little to understanding the long-term development of the Irish economy’. He argues that most economists are ‘blind to either long-term perspective or lateral linkage’ and that ‘with the exception of a handful of superior intelligences, Irish economists are far more impressive as technicians than as thinkers’.
An important lesson from economic history is that it provides a sense of the fragility of economic growth, and of its intermittent nature. For instance, many look back to the 1960s as a golden era of Irish economic growth. Yet Kennedy, Giblin and McHugh, in their interesting study of Irish economic development in the twentieth century, argue that ‘a sense of historical perspective would have encouraged greater modesty about the achievements of the 1960s by recognising that they depended heavily on a combination of uniquely favourable external and internal circumstances’. Yet not everyone is convinced that history is good at giving perspective: in the view of Aristotle, ‘poetry tends to express the universal, history the particular.’
History fascinates. While the study of any subject may be justified on the grounds of its intrinsic worth, economic history is particularly interesting. The visible remains of the past are everywhere – ports, houses, crooked streets, abandoned fields and ruined cottages. It is natural to wonder about their origins. Less visibly, our view of history informs our view of who we are, and what our culture stands for. These roots merit exploration. History also has its share of intellectual puzzles: Why was economic growth in the 1950s so anaemic? How did per capita incomes rise faster in Ireland between 1850 and 1920 than anywhere else in Europe? Was the tariff regime of the 1930s a failure?
History debunks. Ideologues of all stripes invoke history to bolster their claims. When John Mitchel argued that ‘The Almighty, indeed, sent the potato blight, but the English created the famine’ he was revisiting history to support his nationalist position. Marxists turn to the land question as evidence of class conflict. An appreciation of history is essential if one is to make an informed judgement about the solidity of such ideas. Once again, Lee states it well, arguing that ‘the modern Irish, contrary to popular impression, have little sense of history. What they have is a sense of grievance, which they choose to dignify by christening it history.’ He concludes, ‘it is central to my argument that the Irish of the late twentieth century have still to learn how to learn from their recent history.’ Although written only a few years ago, this view may already be outdated, prey to what F.S.L. Lyons refers to as the dilemma of the contemporary historian – recent events may still be too close in time to allow for enough historical perspective. On the other hand, there is no such thing as a single correct historical perspective, which is surely the idea behind Oscar Wilde’s quip that ‘the one duty we owe to history is to rewrite it.’
History instructs policy. Ireland has tried laissez faire (1815–45); import substitution (1930–58); export promotion with foreign direct investment (1958– 80). It has had budgetary discipline and chronic deficits, fixed exchange rates and floating, price controls, incomes policies, free trade zones, and public and private enterprise. Out of this varied experience there are lessons. While, in Santayana’s famous words, ‘those who ignore history are condemned to repeat it’, the study of history is not merely to avoid making mistakes, but also to learn what works well and merits copying.
An interesting example of the relevance of history for policy is the 2011 book by Reinhart and Rogoff entitled This Time is Different: Eight Centuries of Financial Folly. Their exhaustive review of financial collapses in scores of countries over many decades shows that time and again governments, bankers and others simply ignored the lessons of the past, rationalising their actions with the thought that no two situations are the same, things had changed, and this time was different. The Irish housing bubble that began in 2000 and collapsed in 2008, bringing down the country’s entire banking system, is a case in point.
The Irish case has served as a positive role model too. Ireland’s torrid economic growth in the late 1990s interested many in less developed countries, which too are typically small open economies with a colonial past. Ireland in the twentieth century was a tardy bloomer, and a major theme of this chapter, indeed of this book, is to try to understand why.
History can be misused. Interpretations of history can have real consequences, for good or for bad, because they help form the world view of subsequent generations. George Orwell famously wrote, ‘who controls the past controls the future: who controls the present controls the past.’ The different versions of history taught in Protestant and Catholic schools in Northern Ireland, for instance, have contributed to an enduring communitarian divide. Nazi teachings on racial purity contributed to the horrors of the Holocaust, but Hitler wrote, ‘the victor will never be asked if he told the truth.’ The antidote to the misuse of history is to inform oneself, to apply an enquiring mind even to received wisdom, in short to develop some knowledge of history.
The main focus of this chapter is on how Ireland has developed economically. Crotty defines such development as ‘a situation where (a) more people are better off than formerly and (b) fewer people are as badly off’. By this yardstick it is necessary to look at population growth, since an economy whose development is accompanied by massive emigration has in some sense failed. This parallels the suggestion of the 1948 Emigration Commission, which proposed that ‘a steadily increasing population should occupy a high place among the criteria by which the success of national policy should be judged.’
Economic development also requires that incomes rise (growth), including, or especially, those of the least well off (equality), and this is presumably facilitated by an efficient use of resources (notably full employment).
The starting point, arbitrarily chosen, is 1690, with the consolidation of the Protestant ascendancy. The subsequent years are divided into sub-periods: growth and early industrialisation during 1690 and 1815; rural crisis between 1815 and 1850; the population decline that accompanied increasing prosperity from 1850 to 1921; and the intermittent economic development between independence and about 1960, when the story of modern Irish economic growth begins – as discussed in more detail in Chapter 6.
2 FROM THE BATTLE OF THE BOYNE TO 1815
The Eighteenth Century
At the time of the Battle of the Boyne the Irish economy was predominantly rural, although it was no longer a woodland society. Population stood at a little under two million, roughly double the level of a century before, and was growing at an historically high rate of at least half a per cent per year. With the spread of population the forest cover was rapidly disappearing, giving way to both grazing and tillage. The largest town, Dublin, had about 60,000 inhabitants.
The country was an important exporter, especially of grain, beef, butter, wool and, to a lesser extent, linen. Presaging the situation of three centuries later, almost half of all exports went to continental Europe, notably to France. Earnings from these exports were spent on items such as coal and tobacco, and a surplus on current account amounting to perhaps 10 per cent of exports allowed for the remittance of rents to absentee landlords. Petty, visiting the country in 1672, commented on the large number of people who rode horses, and the high standard of clothing relative to France and most of Europe. He also noted the shabbiness of the houses, of which he reckoned only a fifth had chimneys. The implication was that Ireland was not significantly poorer, and was possibly better off, than most of continental Europe at that time, although less affluent than most of England.
Income was distributed unevenly. Land was owned by perhaps 10,000 landlords, and six-sevenths of the land was held by Protestants. Much of this was let out to farmers, who in turn frequently sublet small plots to cottiers, or hired casual labour. By one estimate, a little over half of the population constituted a rural proletariat, with minimal access to land and close to the margin of subsistence. The potato had been introduced early in the seventeenth century, but was only an important part of the diet of the poor, although its spread allowed for rapid population growth throughout the eighteenth century.
Growth and Structural Change
The essential features of economic growth during the period 1690 to 1815 were: a rapid recovery from the war; a period of relative stagnation (1700–20); 25 years of crisis that included two famines (1720–45); and a long wave of sustained and relatively rapid economic growth (1745–1815). The evidence for these is indirect, since few economic statistics were collected at the time, but trade data show a steady increase in exports, with relatively rapid growth between 1740 (£1.2 million) and 1816 (£7.08 million). The structure of exports changed, as shipments of cattle and sheep gave way to beef, butter, grain and linen.
These changes were driven in part by policy. In 1667 the Cattle Act excluded Irish cattle, sheep, beef and pork from England. The country responded by exporting wool rather than sheep, and by searching for new markets for meat, notably the important provision trade serving transatlantic ships and the West Indies, and the extensive French market. It also shifted resources from dry cattle to dairying, and butter exports grew rapidly. This process was speeded by the Woollen Acts, passed in 1699, which prohibited the export of wool from Ireland or England to other countries, and imposed a stiff duty on Irish wool entering England. More positively, the granting of duty-free access to England for linen helped that industry.
The significance of English laws for Irish economic growth is a matter of controversy. Writers in the nationalist vein have stressed the ways in which English law handicapped Irish growth, for instance by hampering the development of the woollen industry. However, Cullen has argued that the negative effects were minimal, as producers shifted rapidly and effectively into new lines of production.
The changes in the structure of production during the eighteenth century also occurred in response to an increase in the relative price of agricultural commodities, especially grain. Increasing urbanisation in Britain raised the demand for food, and Ireland was favoured as a source of supply during the Napoleonic wars. The most important effect of this improvement in Ireland’s terms of trade (price of exports relative to imports) was to raise the incomes of farmers. Ireland continued to export grain until the late 1860s, when the falling costs of shipping, coupled with the opening up of the American midwest, brought cheaper grain to Europe.
Agricultural structure was also influenced by the diffusion of the potato. An acre of potatoes could support twice as many people as an acre of grain. Moreover, potato cultivation does not reduce soil fertility, and potatoes contain substantial amounts of protein and essential minerals. Cullen argues that as the eighteenth century progressed, cottiers increasingly ate potatoes instead of butter or oats, and sold these instead, using their earnings to buy other goods; thus the shift towards the potato is seen as ‘related to commercialisation and the urge to increase cash incomes … for luxuries’.
The expansion of potato cultivation contributed to the dramatic expansion of Ireland’s population, from a little more than a million people in 1600 to over eight million by 1841. It was checked briefly by a severe famine in 1740–1, which was caused by a cold summer and led to as many as a quarter of a million deaths. But population growth accelerated after 1750: better nutrition reduced the death rate, and the availability of conacre may have contributed to a reduction in the marriage age. The population rose despite substantial emigration from the northeast, which began early in the eighteenth century and became self-sustaining, and may have been as high as 12,000 annually in the difficult years of the 1770s.
Industry
Industrial change was dominated by the rise of the linen industry, which Cullen calls ‘perhaps the most remarkable instance in Europe of an export-based advance in the eighteenth century’. From a low base in the 1690s linen exports rose rapidly, accounting for a quarter of all exports by 1731. The first linen weavers were mainly skilled immigrants, especially Huguenots who had fled France after 1685. Duty-free access to the English market helped, and in 1711 the Irish Parliament set up the Linen Board to regulate the industry, spread information and subsidise projects. Based solidly in the rural areas, an elaborate network of merchants bought the raw linen and undertook the more capital-intensive activities of bleaching and finishing. By the early nineteenth century linen was increasingly spun and woven under the ‘putting-out’ system; cottiers would be provided with raw materials, and paid in cash for the amount they spun or wove.
Even as late as 1841 an astonishing one person in five stated their occupation as being in textiles, and most of these lived in rural areas. Fully a third of all counties reported in 1821 that more individuals were occupied in ‘manufacture, trade and handicrafts’ than in agriculture. It has been argued that this type of ‘proto-industrialisation’ is usually a prelude to full (i.e. factory-based) industrialisation, fostering as it does entrepreneurial skills, monetisation of the economy, and commercial links. In the Irish case no such evolution occurred, although it is not clear why.
Other industries also expanded and modernised, notably those based on the processing of agricultural products, such as brewing, flour milling, and distilling. After 1800 the cotton industry flourished, albeit relatively briefly.
It is important to realise that the Industrial Revolution did in fact come to Ireland, initially. The organisation of many industries was radically changed, with the establishment of breweries, textile factories and glass works large enough to reap economies of scale. At first these factories were located where water power was available, but steam power was introduced early too. In the eighteenth century the road network was greatly improved and expanded, at first by private turnpikes and later by local government (the ‘Grand Juries’). The first canals were built.
By 1785 Pitt and others saw Ireland as a viable competitor to English industry. But by 1800 this was not the view in Ireland, and it is ironic that the areas that most favoured union were Cork and the south, with their strong agricultural base; opposition was strongest in Dublin and the north.
Distribution of Income and Wealth
The benefits of economic growth in the late eighteenth century were not spread equally. The most evident rift was that between landowners and the large rural proletariat. Rents of a third of the gross output were probably normal. In 1687 Petty estimated rent payments at £1.2 million, of which £0.1 million was remitted to absentee landlords abroad. Rents thus came to approximately double the level of exports, or almost as much as a quarter of national income. It was this surplus, and tithes paid to the Church of Ireland, that financed the magnificent country houses, churches, Dublin squares, university buildings, paintings and follies that stand as monuments to the eighteenth century.
Most farmers were tenants of large landlords, and in turn rented out land to cottiers. Frequently such plots were confined to conacre (potato land), whose quality improved as they were planted in potatoes. Cottiers also performed work for the farmers to which they were attached. Labourers did not have even the security implied by access to a plot of land. The position of these groups did not improve in the 50 years prior to 1745. There then appears to have been a period of rising real wages, which probably ended in the 1770s, and may never have resumed.
A second divide was between Catholic and Protestant. The Penal Laws placed restrictions on the right of Catholics to purchase land, to worship, to run schools, to vote, to take public office, to enter the professions, to take long leases, and to bequeath property. Barred from the professions and politics, able Catholics often turned their energies towards commerce, and the expansion of trade helped create a significant Catholic middle class. By 1800 the wealthiest Dubliner was Edward Byrne, a Catholic businessman. Presbyterians and Quakers, faced with similar restrictions, also turned to commerce and industry, with some success. Over time most of the restrictions were removed or fell into disuse, and by 1793 Catholics could vote and attend Trinity College, but could not stand for office or fill certain government positions. At times friction boiled over, as reflected in the strong sectarian component of the insurrection of 1798.
The third divide was between town and country. Dublin grew to be the second town of the UK by 1800, with a population of about 200,000. Cork, basing its role on the profitable provision trade, had 80,000 inhabitants, or approximately the same population as a century later. Third came Limerick, with a population of 20,000; Belfast was still a minor town. That the country was able to support such a significant urban population, and to export increasing quantities of food, reflected a growing agricultural surplus and rising agricultural productivity.
3 FROM 1815 TO INDEPENDENCE
1815 to 1850
The period 1815 to 1850 was one of rural crisis, culminating in the disaster of the Famine. The crisis was reflected in rising emigration. This was also the period when Ireland most clearly failed to participate in the Industrial Revolution that was then in full spate in Britain.
The census of 1841 enumerated 8.2 million people in Ireland, a higher level than any measured before or since, and over half the level of Britain. Since 1750 the population had risen at an average rate of 1.3 per cent per year, which was well above the annual rates recorded in England (+1 per cent) or France (+0.4 per cent).
Yet by the 1830s the growth rate had fallen to 0.6 per cent, due almost entirely to massive emigration, mainly to North America; this accounted for a third of the free transatlantic migration of the period. Without emigration, the pre-Famine population would have grown at a rapid 1.7 per cent per annum, due in part to a very high rate of marital fertility. Life expectancy at birth was 37–38 years, lower than in Britain or Scandinavia, but higher than in most of the rest of Europe.
Living Standards
On the eve of the Famine, Ireland was one of the poorest countries in Europe, as the comparative figures in Table 1.1 show. Per capita income was about 40 per cent of the British level, and contemporary visitors were particularly struck by the shabbiness of clothing and the poor state of rural houses.
Yet if the country was poor, it was also well fed, on grain, potatoes and dairy products. Peter Solar estimates that in the early 1840s potatoes and grain alone provided a substantial 2,500 calories per person for direct consumption, two-thirds of it from potatoes. Observers at the time generally thought that the Irish were healthy and strong; they grew taller than the typical Englishman or Belgian. Also compensating for low incomes was the wide availability of cheap fuel, in the form of peat.
Table 1.1 Real Product per Capita (UK=100)
Sources: Adapted by the author from K. Kennedy, T. Giblin and D. McHugh, The Economic Development of Ireland in the Twentieth Century, Routledge, London 1988, pp. 14–15; J. Lee, Ireland 1912–1985, Cambridge University Press, Cambridge 1989; and R. Summers and A. Heston, Penn World Tables Version 5.1, National Bureau of Economic Research, Cambridge MA 1995.
1 GB only
2 1841, all Ireland
3 1926
4 1841
5 1984
Industry and Agriculture
It has become common to consider the 1815 to 1850 period as one of ‘deindustrialisation’, during which the importance of industry in the economy fell. This is only partly correct. For the island as a whole industrial output appears to have increased. Large-scale and more efficient production methods were applied to milling, brewing, shipbuilding, rope making and the manufacture of linen, iron, paper and glass; the road system was improved and reached a good standard; banks were organised along joint-stock lines. But rural industry declined. Thus, for instance, while Bandon boasted over 1,500 handloom weavers in 1829, the number had shrunk to 150 by 1839.
The first cause of rural deindustrialisation was that the woollen and cotton industries wilted in the face of competition from Britain. This prompted Karl Marx to write that, ‘what the Irish need is … protective tariffs against England.’ On the other hand, Ireland was not denuded of purchasing power or exports, for otherwise it could not have afforded to buy British textiles.
A second blow to rural industry was the invention of a method for mechanically spinning flax, which made hand-spinning redundant. It also led to a concentration of the linen industry in the northeast. The weaving of linen was still done by hand, and was boosted by the development. In 1841 Armagh was the most densely populated county in Ireland, testimony to the importance of cottage-based textiles as a source of income.
Despite the rapid fall in prices after 1815, agricultural exports continued to rise, notably livestock and butter and, most dramatically, grain and flour. By the 1830s Ireland exported enough grain to feed about two million people annually, testimony to the dynamism of the agricultural sector, which increasingly used new technologies such as improved seeds, crop rotations, better ploughs, and carts.
The Famine
The most traumatic event of the period was the Famine. After a wet summer, blight arrived in September 1845 and spread over almost half the country, especially the east. Famine was largely avoided at first, mainly thanks to adequate government relief. But the potato crop failed completely in 1846, and by December about half a million people were working on relief works, at which stage they were ended. The winter was harsh. By August 1847 an estimated three million people were being supported by soup kitchens, including almost three-quarters of the population of some western counties. The 1847 harvest was not severely harmed, but it was small because of a lack of seed. The blight returned in 1848, and in 1849 over 900,000 people were in workhouses at some time or another. After 1847 the responsibility for supporting the poor had increasingly been shifted from the government to the local landowners who, by and large, did not have sufficient resources to cope. Noting that a few years later Britain spent £69 million on the (futile) Crimean war, Mokyr argues that for half this sum ‘there is no doubt that Britain could have saved Ireland.’ It is also unlikely that an independent Ireland, with a gross national product (GNP) of £85 million, could have done so without outside support.
As a direct result of the Famine about one million people died, representing an excess mortality of about 3 per cent per annum during the Famine years (and 4 per cent in the north-western counties). Ireland was not the only country hit by the potato blight – excess mortality was comparable in the Scottish Highlands, and the excess mortality rates were 2 per cent in the Netherlands and 1 per cent in Belgium – but given its high dependence on the potato, Ireland was especially vulnerable, particularly its poorer and remoter districts. Three-fifths of those who died were young (under 10) or old (over 60), and labourers and small farmers were hit most severely. These unequal effects have led Cullen to argue, controversially, that ‘the Famine was less a national disaster than a social and regional one.’
In the course of the Famine, the output of potatoes fell by about three-quarters, the use of potatoes for animal fodder ceased, and food imports rose very rapidly. As a result the amount of calories available for direct consumption barely fell, on a per capita basis. This gives credence to Amartya Sen’s contention that famines are rarely caused by an absolute lack of food, but rather by a change in the food entitlements of major groups in society. So, for instance, labourers were unable to find employment when blight reduced the need for harvesting and planting potatoes; without income they could not buy food, and so became destitute.
Distribution