Economics: Common Sense and Cash from Europe

The success of the 1990s is in stark contrast to the Irish economic situation during the preceding decade . A potential foreign investor contemplating the financial position of the Republic of Ireland in the early 1980s would have had serious reservations about the economic viability of the state, and in particular the colossal national debt that by 1987 had soared to $25 billion, or 129% of GNP.

Servicing that debt swallowed up 35% of tax revenues and accounted for 25% of government spending. The free state that had broken the link with the United Kingdom in 1922 and declared itself a republic in 1949 was on the verge of bankruptcy. Ireland was an economic disaster!

Selling Ireland as an investment location to foreign corporations was, to put it mildly, a Herculean task, made possible by the consistently positive approach of successive Irish governments to business development in general, and foreign direct investment in particular, since the mid 1980s.

The turning point in Ireland's economic fortunes came when the government adopted the tough supply-side economic policy recommended in the National Economic and Social Council's (NESC) Strategy for Development 1986 “1990 . The central message in this report was that Ireland could only survive as a viable economic entity if the national debt was stabilized through cuts in public spending. Ray McSharry, then minister for finance, gives a gripping account of the radical policy turnaround in The Making of the Celtic Tiger . The success of the government's management of the economy that made the boom possible is reflected in some key indicators:

Table 5-2. Comparison of Ireland's Economic Benchmarks, 1986 and 2000

	1986 [*]	2000 [*]
Budget (deficit)/ surplus	($1.6 billion)	$2.25 billion
Growth in GNP	-0.7%	10.4%
Unemployment	17%	3.6%
Source: Central Statistics Office, Ireland, www.eirestat.cso.ie.

^[*] Actual GNP in 1986 at 1995 constant prices = 23,037.

Actual GNP in 2000 at 1995 constant prices = 55,772.

As the government initiated drastic cuts in public spending to stabilize and then reduce the debt, Ireland benefited from a huge injection of aid from the European Union ” $11 billion in financial transfers between 1989 and 1999. This cash was deployed wisely to upgrade transportation infrastructure, raise the skills base of the work force, and support local urban and rural development.