Ireland's peaceful revolution

While British interest has focused on Irish politics, the Republic has undergone an economic miracle
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Imagine a small country with a population of 3 million or so, with a growth rate last year and this of around 7 per cent, with a current account surplus of 6 per cent of Gross National Product, and with inflation at 2.5 per cent. It is a country second only to Japan in the proportion of young workers with a scientific or engineering degree. And this country will, if present growth rates continue, have a higher GNP per head than the UK within a decade.

Now, where is it? It sounds a bit like Singapore five years ago. It is presumably somewhere in East Asia, because that is the only part of the world where there are those growth rates and (sometimes) reasonably low inflation. It could not be Latin America or Eastern Europe because though there are bursts of growth in some countries there, these are invariably associated with sharply rising prices. Obviously the country could not be in Western Europe because the European economy is in trouble.

Wrong. It is the Republic of Ireland. If our minds were not so dominated by political stories about Ireland we would be seeking the reasons behind this economic story. There would be headlines not about the prospect of another 25 years of the Troubles, but rather about the economic tiger of Europe. A brief visit to Dublin this week has made me ponder why this should be happening, what implications there might be for other countries on the periphery of Europe, and inevitably, what implications economic success in the Republic might have for Ireland as a whole.

The answer to the "why?" starts with a caveat. The figures above are quite correct but they are incomplete. One of the principal reasons for this success story is the large transfer of funds across the exchanges each year from other European Union countries, in practice (since they are the main net contributors) Germany and Britain. This is about pounds 2bn a year, or nearly 4 per cent of GDP - the equivalent of Britain getting pounds 30bn a year from taxpayers in other countries.

These funds are by no means the whole explanation of the higher growth rate, but they do affect the Irish economy in two ways: they lift GDP, and insofar as they are sensibly invested they kick-start the economy into higher growth.

Thus Ireland looks and feels richer than it otherwise would be, were this transfer not taking place: anyone who knows Dublin but has not been there for a few years would be astounded by the swish feel the place has now: clean buildings, stylish people, even better restaurants than before - and Dubliners always ate well. The country's infrastructure has benefited enormously from this inflow of funds and indirectly this money has flowed through the economy into the evident increase in consumption. But from a long-term economic point of view the greater motor of growth has been the attraction of foreign investment. This has boosted exports and it is export growth that is driving the economy.

There is some debate within Ireland as to just how wise the country has been to "buy" foreign jobs with lavish tax holidays and the like. The criticism has been that Irish companies have been penalised in order to bring in foreign ones. Personal taxation remains burdensome and unemployment at nearly 14 per cent is high even by European standards. But the country has created a new economy based on high-technology manufacturing and financial services which it did not have 15 years ago.

With this type of economy distance is irrelevant. If you export electronic goods the transport costs are tiny in relation to everything else. If you export financial services the transport costs are nil. What you need is young, well-educated people.

Ireland is the youngest country in Europe, with 28 per cent of its population under the age of 16 (the average is 19 per cent). This puts a burden on the educational system, but Ireland has pumped resources into education. The proportion of young people entering higher education has risen from less than 20 per cent in 1980 to 40 per cent now and on present trends will pass 50 per cent by the end of the century.

In the short-term some of this has been "wasted" in the sense that many of these people have been unable to find jobs in Ireland and have emigrated. It has not been wasted as far as the individuals are concerned, but from a national point of view a relatively poor country by European standards has paid to improve the labour stock of other, richer ones. But in the longer run all the evidence is that the higher the levels of education, the greater the potential for job creation: looking ahead, Ireland shows one of the highest rates of increase in the stock of human capital anywhere in the world.

So Ireland is very well placed to gather a larger share of the new on- screen service jobs - things like handling insurance claims for North American insurance companies or running unit trusts for London fund managers. (A friend in that industry told me that it took a quarter of the time to get approval for a new unit trust in Dublin compared to the DTI in London. Result: frequently Dublin got the business.)

This is tremendously important. In a world where trade is carried out in bytes shot across the fibre-optic cables, comparative advantage lies in human capital. It does not matter where those people are, except in the sense that good people are more easily attracted to pleasant places with decent schools and some cultural life. If the fringe can offer that, then the fringe ceases to be at a disadvantage to the core. Ireland's location, which undoubtedly has been an economic handicap in the past, might even become an advantage, for it a offers quality of life that for many people is immensely attractive.

You hear quite a lot of this economic triumphalism in Ireland these days and anyone meeting it should remember that there is still a big economic question mark. It is whether the base is secure enough to withstand the inevitable erosion of the EU subsidy. As Ireland becomes richer it will no longer qualify for such assistance, the EU agricultural subsidies will in any case tend to decline, and as the EU itself expands Ireland will find that there are other countries in eastern Europe that have a stronger claim for whatever funds are available.

Still, 7 per cent growth is not to be sneezed at. Rapid growth is likely to continue. UBS, the Swiss-owned London investment bank reckons that growth will continue at around 5 per cent through to the end of 1998. And I think this may create a dynamic of its own.

The point is obvious. Thanks largely to the British taxpayer, Northern Ireland has experienced higher living standards than the Republic. The more the south is an economic success, the smaller that particular barrier to a closer relationship between the two.

Of course the conflict is not about economics. Nevertheless wealth is a balm, and it seems very much in the interest of both of these islands that this success story should continue.