A model of success

What central Europe can learn from Ireland

THERE is something alluring about a model, especially one that works. If you find one, you can hope simply to copy it - and instantly enjoy similar success. That explains why all the eight countries of central Europe that joined the European Union in May, from Estonia to Slovenia, appear so fascinated by Ireland. They each hope that generous dollops of EU money, eased down with judiciously low corporate taxes, will mean that they can follow in the tracks of the “Celtic tiger ” - -and get rich quick.

There is no denying Ireland's success over the past 15 years. Between 1987 and 2003, its GDP per person rose from 69% of the EU-15 average to 136%. On this measure, Ireland is now the third-richest member of the club. Even when measured by GNP, which is usually more appropriate for Ireland because of its heavy dependence on foreign investment, it has caught up with the EU average. The country has become the prize exhibit for those who wish to advertise the huge benefits that flow from membership of the EU.

And yet, as our survey of Ireland in this issue argues, the roots of its economic success lie a lot deeper. For one thing, it was mainly a matter of catching up, after several decades of poor performance. Ireland largely missed out on Europe's post-war boom, and it also suffered after the oil shocks in the 1970s. By the late 1980s its economy had done so badly that it was poised for an economic spurt, with a young and growing population and plenty of scope to raise employment. All it took was a period of stable and sensible macroeconomic policies, something that Ireland had avoided for most of its history, to unleash its potential.

Money from the EU helped, of course. But it had flowed in ever since Ireland joined in 1973, usually to little effect. Even when they were at their peak in the early 1990s, transfers from Brussels were worth less than 5% of GDP. The best estimates are that EU cash may have raised annual growth in the 1990s by about half a point: helpful, certainly, but still modest when measured against average growth of 7%. Access to the European single market and Irish success in attracting foreign investment counted for more than EU budget transfers. But it was the country's favourable demographics, plus a sharp rise in female participation in the workforce, that were the biggest contributors to Ireland's boom of the 1990s.

Eastward, ho!

This is not to say that central European countries have nothing to learn from Ireland. But they should be careful to draw the right lessons. One that they have understood is the value of low corporate taxes in helping to attract foreign investment. The new EU members are right to resist the pressure now being piled on them by France and Germany to raise their corporate tax rates. But an even bigger lesson is the need to cultivate their workforce skills and knowledge base. For now, the biggest lure for investors in central Europe is not low corporate taxes but low labour costs, just as it was in Ireland in the late 1980s. But after 15 years of boom, Ireland has lost most of its low-cost advantage; it now relies on its years of investment in education and training to produce a higher-skilled workforce that still appeals to foreign investors. The central Europeans need to think ahead and follow suit.

Unfortunately, they cannot copy Ireland's favourable demographics, as most of the countries of central Europe are ageing even faster than those of greying western Europe. Nor do they have the same scope as Ireland had to draw more women into the workforce or to cut unemployment, though they could be doing a bit more of both. For these two reasons alone, the countries of central Europe are unlikely, even if they get all else right, to match Ireland's dizzy growth of the 1990s.

The biggest lessons they should take from Ireland's experience apply in two areas they risk getting wrong: fiscal policy and labour-market flexibility. Since the late 1980s, Ireland has cut both its overall tax burden and its annual budget deficits; indeed, in most years it has repaid public debt, reducing its debt burden from one of the highest in western Europe to one of the lowest. If they are to act likewise, the central Europeans must be much tougher about cutting public spending, something that many governments in the region are finding politically tricky. And they also need to make their labour markets more flexible, instead of pursuing their current path of importing Europe's excessive regulation. For the central Europeans, in short, the road to prosperity is the same as it always was: freer markets, deregulation and smaller government.

Editorial considers what central Europe can learn from Ireland.

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