A peace dividend is just the start: One land; two small, subsidised economies. Hamish McRae assesses the prospects for Ireland

WHAT MIGHT peace mean for the two Irish economies? While there has been, unsurprisingly, much talk of a 'peace dividend' in the last few days, this may, in fact, be very small. Yet the possible impact of political change on the two economies is both more complicated and more interesting, and could be enormous.

Two economies? Yes, and they are very different. They always were, even a century ago, when the South was agriculture and administration and the North was heavy industry. Over the last 30 years the differences have become vastly exaggerated.

You can feel something of this simply by walking through the cities of Dublin and Belfast. Go down one of the glitzier streets of Dublin, say Grafton Street, and you can sense that while you are clearly in Europe (and the buildings tell you that you are in the British Isles) you are not in Britain. Irish people talk of Dublin as having become more 'European', and there certainly is a continental feeling. On a warm evening the streets are full of people parading, swish and stylish, in much the same way as they might in Madrid or Copenhagen. The pubs are floodlit, the restaurants bulging.

Go to the centre of Belfast and money is evident there, too. The cars are new and there is a sprinkling of fashionable restaurants at the top of Great Victoria Street. But the thing that strikes the visitor from Britain is that the money has not been spent in a glitzy way. Aside from the little matter of security, of which more in a moment, it is going on making the place neat and ordered, on transport infrastructure, on schools and other public facilities.

This is all very different from a generation ago. Then, Dublin was scruffy (delightfully so - I was brought up there), while Belfast was seriously dour.

The change, in both cases, has been brought about in large measure by other people's money, for both economies are heavily subsidised by taxpayers elsewhere. The South will receive approaching 6 per cent of its GDP from the European Union each year for the next five years, which means taxpayers in Germany and Britain, the two big net contributors. This money, initially paid in agricultural or 'structural' support, feeds its way through the economy, helps to finance the explosive growth of the south Dublin suburbs, and manifests itself, among other things, in wonderful food.

Of course the economy of the South has made great strides in attracting foreign investment, in particular in pharmaceuticals, electronics and most recently, financial services. But the thing that has really made the difference is the year in, year out, European subsidy.

If, however, the South is dependent in fair measure on other people's generosity, the transfer of wealth there pales into insignificance when one looks at the North. Two figures: the GDP of the North is about pounds 12bn; the 'subvention' - that is, the net amount of money that flows into the north from British (actually English) taxpayers - is pounds 3.3bn. In other words, more than a quarter of the income of Northern Ireland comes in subsidy. Knock off the cost of security and the subvention is still pounds 2.4bn, or 20 per cent of GDP.

This is an astounding figure. Aside from the rather special case of East Germany, and the much smaller example of Newfoundland, it is hard to think of any other region of similar size (the population of Northern Ireland is 1.6 million) that is subsidised on this scale. To say that is not to make any moral or political judgement: one could argue that the money is well spent. But it is a fact that this is a very unusual arrangement.

Some money goes in supporting a very high level of unemployment. But a lot goes on providing good schools (the best A-level results in the UK), excellent health care, and innovative work on rehabilitation, for example, the Industrial Therapy Organisation, which helps to get people with mental illness back into the job market.

In one sense this public spending continues a long tradition in Belfast. There always was a sense of civic responsibility to the place: a century ago it pioneered public health care. But then the bill was paid by the might of the shipbuilding and linen industries; now it is paid for by the English taxpayer.

The scale of this subsidy raises some obvious questions. The supposed peace dividend turns on whether Northern Ireland keeps some of the money it now receives for security. There have been suggestions from the Secretary of State for Northern Ireland, Patrick Mayhew, that it will, but who is to say in five years' time what might happen? A crude calculation would suggest that 20,000 security jobs will be lost, but the province will gain the same number, 10,000 from more tourism and the rest from additional inward investment.

But this sort of calculation ignores the dynamics of the situation. The much more interesting question is, surely, how resilient might the Northern Irish be under a range of different political outcomes - from being part of a united Ireland to being (with doubtless some redrawing of boundaries) an independent state?

IT IS hard to see the South as anything other than a modest winner under most outcomes. It already has a trade surplus with the North. Half of its shipping exports go through the port of Larne, which is vastly more efficient than Dublin. The big issue for the South is whether it can use the opportunity granted by the EU subsidies to create a larger self- sustaining economic sector, for it is always an unsafe strategy to rely on other countries' taxpayers.

For the North, the issue is the same, writ even larger. The economy has been greatly distorted by the Troubles. The public sector is enormous, accounting for 35 per cent of employment - double that of the UK as a whole. Under any outcome that is going to fall. People will have to find other employment. What else can they do?

The manfacturing sector cannot help much. It is perfectly competitive, a fact not widely appreciated in Britain. The two giant Belfast companies, Shorts, and Harland & Wolff, are both now well run. There is a successful clothing industry, including major suppliers to Marks & Spencer. There are successful local pharmaceutical and electronics companies. But the scale of the whole sector is small - only 16 per cent of GDP - and manufacturing is in decline throughout the developed world.

Agriculture is even smaller, 6 per cent of GDP, and also in decline. Construction? Small again. No, the growth in employment will have to come from private sector services, just as it does elsewhere in the developed world. Here, there is a problem. Exports of private sector services are tiny. Tourism is small for obvious reasons, but Belfast has completely failed, unlike Dublin (or Leeds or Edinburgh), to build up its financial services sector.

The North has had enormous amounts of money poured into it to try to foster economic development, but one of the effects of this has been to ossify its economic structure. It has been impossible to attract much new outside investment, so money tended to go into existing firms. Some have done very well, but the North does not have the vibrant (albeit tax- driven) export industries of the South.

How might the North develop a more vibrant service sector? There is no easy answer. Tourism will help a bit, but if the experience of south-west Scotland is any guide, the weather will always limit its potential. Good telecommunications will help more, for these make it possible to export clerical, accounting and software services, indeed any screen-based activity. Telecommunications make distance irrelevant, so the peripheral location matters little: education matters far more. But this is becoming a tough and competitive business and margins are small.

The key to the North's future prosperity - making the big assumption that the peace will hold - seems to me to turn on whether it can undo the economic damage of the last 30 years in the same way as it must undo the political damage. Small size and peripheral location can only be turned into an advantage by the very nimble. Are there enough entrepreneurs? Can they think international, not just UK? They will have to; for the North, like the South, will always be a tiny, open economy. The whole of Ireland accounts for only 1 per cent of the EU's GDP. There again, the North alone has five times the population of perfectly prosperous Iceland.

(Photographs omitted)