ADDRESS BY MARY HARNEY IRELAND'S DEPUTY PRIME MINISTER AND MINISTER FOR ENTERPRISE, TRADE AND EMPLOYMENT TO THE FRANKFURT EUROPEAN BANKING CONFERENCE ON FRIDAY 20TH NOVEMBER, 1997

Most of you will be aware of the very strong performance of the Irish economy in recent years and the references to the Celtic Tiger which have become commonplace in the international business press. It may nonetheless be useful to look at Ireland's performance in the 1990s and to compare it with the wider European experience. By any standards Ireland has enjoyed remarkable economic and employment growth over the past decade.

Ireland's Gross Domestic Product (GDP) grew at an annual average rate of just under 7% between 1990 and 1997, compared with annual growth of less than 2% in the EU overall. Of the other countries in the Union, only Luxembourg had a growth rate of more than 2.4% over this period.

For a country with Ireland's history of unemployment and emigration, a particularly heartening feature of this period is that economic growth has been translated into rapid expansion in employment. Numbers employed have grown by just under 3% per annum in the 1990s overall, and by more than 4% per annum over the last three years.

Unemployment, which peaked at almost 16% in 1993, has fallen sharply and is now below 9% and still falling.

Ireland's performance in the 1990's has been exceptional on a number of fronts. However, it is important to stress, that overall European performance in recent years is quite positive. For example in 1997/1998 the EU made up half the job losses incurred in the period 1991-1996 and the overall EU unemployment rate is expected to stand at 10% by the end of the year.

However, taking a longer, comparative view, employment in the EU grew by 8.5 million in the 25 year period 1970 to 1995, while in the USA, with a smaller population employment grew by 46 million over the same period.

Clearly, Ireland's performance in the 1990's has been counter cyclical when compared to the broader European experience. There is a considerable consensus among economists that Ireland has been in "catch up" mode, in that recent policy changes have released a hitherto suppressed potential in the economy.

That "catch up" relative to historical performance can be seen on both the output and the employment front. In the fifteen years from 1975 to 1990, for example, we barely matched the EU overall in economic growth, and our employment performance lagged behind that of most other Member States. Indeed, Irish employment levels were actually falling for much of the 1980s, and unemployment and emigration had reached critical levels by 1987-88.

Fiscal rectitude Beginning in 1987, decisive steps were taken to correct major imbalances in the government finances; stability-oriented fiscal and monetary policies have been followed with conviction since then. Our success in meeting the criteria for Monetary Union is tangible evidence of the outcome of this process.

Again beginning in 1987, previously excessive costs in the domestic economy were brought under control. Wage developments, in particular, have been moderate since the late 1980s. This moderation owes much to a series of multi-annual agreements concluded between government and the social partners, and to policies which have tended to reduce previously high taxation levels on labour.

The extreme openness of the Irish economy is well known. A long period of high tariffs and general economic isolation which lasted from the foundation of the State to the 1960's was followed by increasing openness in the lead up and subsequent to our accession to the EEC in 1973. In recent years, we have capitalised on the openness of our economy through our foreign direct investment (FDI) and trade policies. We have positioned ourselves as "hub", if you will, between Europe and the global marketplace and this is reflected in the fact that we trade 153 percent of our GNP.

Another manifestation of openness can be seen in Ireland's changing approach to competition policy. Strengthened domestic competition legislation has been put in place, aimed at facilitating a much more proactive opening up of hitherto protected activities. In tandem, developments in EU competition law have had a significant and growing impact in the public utilities area. The result has been positive for both private and business consumers.

Central to the success of the Irish economy has been our recognition of the incentive power of taxation.

Cutting tax rates stimulates economic activity and makes things happen. For years it was argued that there was a choice between cutting taxes and improving social services. I would like to think that we in Ireland have shown that this is a false choice.

Consider the Irish experience over the last ten years. We have cut the standard rate of corporation tax by 18%. We have cut the standard rate of capital gains tax by 20%. We have cut the basic rate of income tax by 8%. We have cut the top rate of income tax by 12%.

What has been the effect of this ? Have tax revenues fallen sharply ? Have our social services suffered ? In fact, quite the opposite has happened. Tax revenues have doubled in ten years. But state spending on social services have doubled also.

Lower tax rates have generated additional economic activity. That economic activity leads to the creation of new companies and new employment opportunities for workers. In turn, those companies and those workers produce the tax revenues needed to fund additional government expenditure on essential social services.

We have consistently pursued a policy of low corporate taxation on manufacturing industry. We are now strengthening and deepening that policy with the planned introduction of a 12.5 percent rate applicable to all sectors from 2003. It is quite evident that low corporate taxation is a significant boost to FDI. In Ireland the tax take from corporations is 12 percent of the total tax take, compared with 5 percent in Europe where corporate tax levels are three times higher on average.

Our experience has also shown that reductions in corporate and capital gains taxes have a very positive impact on the non traded sector also. In a word, low taxes create jobs, and they can be achieved without damaging the State's revenue base.

All of these developments have greatly enhanced the business environment. Profitability has improved - both for existing firms and for potential inward investors. Equally important, the consistency of macro-policy, and the predictability of future cost developments provided by the multi-annual partnership agreements, has greatly reduced the level of uncertainty surrounding investment decisions.

The net result has been a significant growth in sales driven by both exports and domestic demand. This has resulted in Ireland's manufacturing sector achieving significant employment growth at a time when the phenomenon of jobless growth appeared to be the norm. In addition, Ireland's services sector employment growth has been exceptionally strong as domestic consumer's net incomes have grown.

Of course, an economy can only grow provided all the necessary factor inputs are available. Paul Krugman has talked about the lightening of the global economy, as the industrial paradigm of coal and steel is increasingly replaced by one of silicon and software. Largely through the influence of FDI, Ireland has been at the forefront of this paradigm shift.

As the standard factors of production become lighter and, therefore, more mobile, labour supply becomes absolutely critical among factor inputs. We have been fortunate that Ireland's labour supply has been remarkably flexible in response to rapid growth in demand. Historically, Ireland has had very high potential labour force growth. The tragic factor was that the sustained absence of the various positive features which I have just described saw that potential dissipated through emigration, through women's absence from the labour force and through a general lack of opportunity.

When growth provided the opportunities in the 1990s, that potential was unleashed - young people who would have emigrated stayed in Ireland; former emigrants returned; women's participation in the labour force began to rise rapidly. As a result, the labour force has grown by 2œ% per annum since 1990.

The quality of labour supply has also risen rapidly. While many other aspects of our economy were, quite frankly, dysfunctional during the preceding two decades, major investments in up-grading education and training did continue through that period.

Ireland has clearly made tremendous strides during this decade. However, in terms of accumulated wealth and depth of infrastructure we still lag significantly behind the most developed member states of the EU. The Structural Funds have played a very important role in accelerating Irish growth. And in that regard, we believe that Ireland's prudent and productive use of the funds is a vindication of the EU's regional development strategy.

The Structural Funds had beneficial short-run macroeconomic effects by providing a boost to demand in the economy. Moreover, the availability of these funds, particularly at the beginning of the 1990s, eased some of the pain of the fiscal corrections we were making at that time.

But, important as they were, I would not want overstate the contribution of the Structural Funds to Irish growth. The most comprehensive assessment, carried out as part of the EU's own Structural Funds monitoring process, suggests that the impact of the transfers received over the period 1987-1999 has been to increase the level of Gross National Product in the late 1990s by about 4% above what it would have reached without them. This must be seen in the context of the cumulative growth of over 60% in GNP actually achieved between 1990 and 1998. Looking ahead to the future, considerable challenges remain ahead of us. As I have said, our prosperity is relatively newly found and much needs to be done to consolidate the progress that has been made in recent years.

In terms of our industrial base, we need to continue the transformation which has been underway in moving away from high volume low value added industries to those which are increasingly knowledge driven;

In our infrastructure we need to press ahead, not just to replace the obsolete elements, but to provide the additional capacity which will allow the country to continue to grow;

We need to continue to open up previously sheltered areas of the economy to competition;

We need to guard against the threat of inflation, and control public expenditure in the new environment of EMU.

We also need to continue to work hard to strive achieve the central goal of our employment policy: that of full employment.

We have a two pronged strategy in pursuit of this goal:

Firstly, to increase the number of sustainable jobs overall. This is being achieved through the various economic and industrial policy measures which I have outlined.

Secondly, we aim to bring back into the mainstream of the labour market those who are currently excluded. This is being achieved through:

Taxation and welfare reforms designed to make it more attractive for an employer to offer a job and for a potential recruit to accept a job.

Targeted interventions under an affirmative action programme for priority categories to bring persons back into the mainstream of the labour market.

I think it will be apparent that the problems which we have faced in Ireland and which we have worked hard to overcome, are fundamentally no different to those faced by the nations of Europe generally. In that context, I would like to draw out some lessons from the Irish experience which have a particular resonance with the theme of this part of the conference, that is Jobs in Europe.

It is astonishing to think that IBM only unveiled its first personal computer in 1982. The application of microprocessors to desktop computing and telecommunications in the years since have fundamentally and irrevocably altered the course of world affairs. We are now living in a very real embodiment of Marshall McLuhan's global village and our policies must reflect this.

The progressive creation of the single market, which will have its ultimate expression in EMU, has given Europe with a bulwark against the global economic turbulence which we are currently experiencing. However, in the long run, Europe can only prosper and grow through a combination of internal market dynamism and a demonstrable ability to achieve a sustainable competitive advantage in the wider global marketplace.

And if Europe is to achieve competitive advantage it must do so across a broad base. We must ensure that the costs of doing business in Europe are not excessive. We must therefore strike the right balance between wage costs, taxation and other State imposed costs, and productivity.

This in turn has an impact on the types of industries we compete in, and the nature of that competition. Europe still holds strong position in many of the more traditional industries. These positions can only be maintained through investment in innovation, through flexibility and through an overall "lean" approach to the entire value chain.

Key political decisions need to be made if Europe as a whole and the individual nations that comprise euroland are to become more competitive as we cross the threshold of the new millennium.

Governments must ensure that the conditions exist for maximum flexibility in labour markets. We must not bind ourselves with ever more regulation. Flexibility will not be facilitated by more legislation. It will not be facilitated by a "fortress Europe" attitude of - we do it our way, they do it theirs. We must learn the lessons of others and adapt and adopt them. Flexibility will, I believe, be facilitated by encouraging a change in attitudes and behaviour. Legislation of itself will not change attitudes or behaviour. Ireland has one of the lightest regulated labour markets in Europe and this allows us the flexibility to respond to changing circumstances very quickly. It is one of the reasons that has made us especially attractive as a prime location for foreign direct investment.

As European legislators we must constantly look at our domestic and European laws to see if they meet the needs of the modern global market place. If they do not support the overall goal of improving our capacity to compete against the rest of the world then they must be seriously questioned, whether they are proposals for new laws or existing legislation.

Flexibility will be underpinned by constant upgrading of national education and training systems. The relative success of the Irish economy over the past decade could not have happened without the high levels of investment we made in education in particular. Now average qualification levels in the workforce are rising more rapidly in Ireland than elsewhere in the developed world. This in turn is helping drive the migration from traditional industries and from the land to more knowledge intensive, value added industries and services.

The advent of EMU from 1st January next will also test traditional approaches to flexibility. Government's traditional approach of averting or easing a crisis was to increase spending and borrowing. But this approach is now significantly curtailed by the Maastricht Treaty and our obligations under the growth and stability pact.

All of this means that in times of difficulty different flexibilities will be required but ones from now on that are more likely to have a more immediate visible impact. It is vital therefore that competitive markets for goods and services operate within the euro zone. Transparent pricing from the introduction of the new currency will not only help achieve price stability, but also contribute to competitive cost curtailment. This in turn will assist in the development of a dynamic internal market and boost Europe's competitive position vis a vis outside countries.

In comparing a long period of economic stagnation to one of exceptional growth, we learned valuable lessons: some negative and some positive. We have learned that:

Protectionism fails to protect;

That free and fair competition and trade stimulate demand and economic growth;

We have learned that:

High taxes cost jobs, but that the employment market responds quickly and positively to a strategic approach to lowering tax;

That deficit budgeting creates a millstone of debt, dragging down economic growth and that prudent management of national budgets is a prerequisite for sustained growth;

We have learned that:

Investment in the nation's human resources is a key to success in a fast moving and increasingly knowledge-based and globalised economy.

And most of all, we have learned that these factors are systemic and interrelated. Like the apocryphal butterfly that flaps its wings in China and causes a hurricane on the other side of the globe, neglect of any one of them can cause seriously destructive knock on effects in other areas. On the other hand, when pursued in determined and concerted way it is possible to create a virtuous circle in which leads to growth and jobs.

In this era of unprecedented structural change, when huge tectonic shifts are taking place in the structure of industries and the global location's in which they choose to do business, there is an understandable tendency for individual economies to feel hard done by and to feel that some nations are gaining at the expense of others.

I would say to you that such emotions, though understandable, are misplaced. It is possible to create a win win situation:-

One in which the committed application of the policies I have outlined grows the total market, and,

One which allows advanced economies to pursue even higher order competitive advantages and thus makes room for less developed nations to improve the welfare of their citizens.

If we want to create jobs in Europe we must be positive, innovative and responsive. We must devote our energy to creating the future rather than attempting to preserve an unsustainable past.